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The Inheritance
Richard_Dastardly
Registered User regular
Registered User regular
My grandpa passed away last week. Bad news... I loved and respected the old guy, and I'm gonna miss him.
He has, however, left me a sizeable inheritance. As a rule I'm keeping the exact amount secret from everyone but direct family, but I don't know anyone here so... as of right now I know he left me $50,000 and his house (not sure how much we might get for it. Haven't talked to a realtor yet). There are investments and bonds and stuff that we don't know about, so we're having an estate attorney go through everything. Right now, with the money and the house (when it's eventually sold), I'm thinking we'll have something a bit above $100,000.
Basically, my wife and I are unsure of what to do with the money. We thought, at first, that paying off our house is the best idea. We owe ~$90,000 with 6.25% interest. Is that necessarily the best thing to do? Are there perhaps other investment options that might earn us more money than paying off our house would save us? My wife and I, together, earn ~$30k a year so we're already in a pretty low tax bracket thing.
Any advice would be fantastic. We're speaking to a financial advisor on Monday, but I'd like other opinions as well.
Additional infos:
I have no debt other than my house.
My grandfather's house was paid off long ago. And it's about a twenty minute drive from my house.
We already have about 10k in savings for emergencies.
I live in Ohio
I'm 29.
He has, however, left me a sizeable inheritance. As a rule I'm keeping the exact amount secret from everyone but direct family, but I don't know anyone here so... as of right now I know he left me $50,000 and his house (not sure how much we might get for it. Haven't talked to a realtor yet). There are investments and bonds and stuff that we don't know about, so we're having an estate attorney go through everything. Right now, with the money and the house (when it's eventually sold), I'm thinking we'll have something a bit above $100,000.
Basically, my wife and I are unsure of what to do with the money. We thought, at first, that paying off our house is the best idea. We owe ~$90,000 with 6.25% interest. Is that necessarily the best thing to do? Are there perhaps other investment options that might earn us more money than paying off our house would save us? My wife and I, together, earn ~$30k a year so we're already in a pretty low tax bracket thing.
Any advice would be fantastic. We're speaking to a financial advisor on Monday, but I'd like other opinions as well.
Additional infos:
I have no debt other than my house.
My grandfather's house was paid off long ago. And it's about a twenty minute drive from my house.
We already have about 10k in savings for emergencies.
I live in Ohio
I'm 29.
Richard_Dastardly on
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Getting the mortgage paid would allow for immense financial security in the future. Even paying down a portion off the back of the loan would lighten your monthly financial burden and build equity in the property. When you pay off the back you're actually saving a large bit of cash that would have gone to interest payments.
That being said, the advice my family always gave was that if you ever come into a large amount of money, put the majority into a 6 or 12 month CD and allow a bit of interest to accrue while you determine the best course of action.
For example, most CDs are 2.75%; an ING savings account earns you 2.5% and it only takes 2 days to transfer money from that to your normal bank account. If your car dies, or you get in an accident, can you buy a new one with your current savings? If you end up in the hospital and have to go w/o pay for a week, does that break the bank?
Those are depressing things to think about, but that's why many financial people will recommend that you have 3-6 months worth of expenses in a highly-accessible account. For you, it might be easy to just think of keeping $10k in an interest-bearing account (like one from ING) so you can access it while still earning interest.
Paying off the house is a similar investment to a retirement account for most people, and depending on the market where you live it may be more sound than sacking it into a retirement account. However, with such a large chunk taken out of your principal, have you considered refinancing? You could probably get a better loan right now, which would drastically reduce your monthly payment.
If you are trying to maximally utilize his largesse, paying off the note may not be the best thing to do. Yes it's debt, but it's low-interest tax deductible debt, plus with rates going as they are you might look into a re-fi.
Also selling his house into this market will probably yield substantially less return then waiting several years for the value to rebound. You could mitigate the expense of keeping the house by renting it out.
I also wouldn't liquidate any investments until deciding what was going to be done with the money garnered as you may be incurring additional tax liability. If you were going to keep some of the estate as investments to fund retirement/education and if the investments look good, I'd leave them where they were until they needed to be adjusted as investments.
Not knowing what your goals are I'd first pay down any high-interest debt (credit cards and cars).
Edit: You might want to talk to an accountant about tax liability of the inheritance. Assuming the will is executed in '09 there will likely be a tax liability on your '09 taxes, not sure if you have to make payment as part of the execution of the will or when you file. As far as any investments go once the inheritance tax has been levied, I'd assume your new cost basis would be set at the value when the investments are transferred into your name, but not sure. So yeah, ask the probate attorney to recommend an accountant maybe.
Well, we have no debt other than our house. We're pretty careful with our finances and spend only what we can pay off at the end of the month. And, one of my major goals is to make sure we'll have a nice retirement seperate from whatever future inheritences I'll receive from my parents.
Of course, I also want to have a fairly comfortable present.
Max out your IRA.
Max out your wife's IRA.
Repeat every year.
Pay off any non-mortgage debt.
Paying off your mortgage isn't really a great idea, as other people have said, that interest is tax deductible. Yeah, you'll save money by not having a mortgage payment, but your income tax liability will go up too, so you don't save as much as you expect.
On your residence, not on investment properties.
After inheritance tax, I would be surprised if you can afford to keep the house. You'll probably need to sell it to pay the tax.
Ba-da-bum funny or should I get teh bankruptcy papers ready?
Oh yeah, and the $50,000 was in my mom's name, so we avoided tax on that I think...
Wow. In the UK I believe the reverse is true. Mortgage interest can be considered an expense on a property you are renting out but as far as I'm aware there's no provision for off-setting mortgage on your residential property on your usual income tax unless you've taken out a mortgage on your own property to raise capital for a rental property. Or for other business investments, I guess.
No, deadly serious. Situation might be different in the US but property inheritance is a massive problem in the UK because the tax the inheritee is charged is based on the value of the property they receive. So if all dear old grandma leaves you is her holiday cottage in the lake district, unless you have a big chunk of change lying around you are probably going to have to sell that property to pay the tax man's bill.
Depends on the state, really.
Investments are a bit trickier because I'm not sure how different types of accounts are deal with in a probate situation. If net of inheritance, the cost basis gets set at the value at time of transfer, you may just want to liquidate investments so you have cash.
Even if the law may vary, this is a critical issue you have to deal with first. Be SURE of what you owe the state before making any plans with it or it's gonna bite you in the ass, real hard.
Also, my sincere condoleances to your loss. Having recently lost one of my relatives as well i know these are extremly trying times.
Best regards,
Don't pay off your mortgage--you're going to want to keep the tax deduction, particularly as you dump money into your Roth IRA. I need to know more about the house in the estate before advising you to keep it or sell it--how much equity do you own in the property, and how much does the bank hold? Depending on the answer, you may be better off holding onto it so you can leverage the equity if you need to in the future while renting it out in the near-to-medium term.
No but really, ask the probate lawyer for a recommendation for an accountant. Or find one through other means, you really want to find out what the tax liability is.
Szechuanosaurus: I'm not sure if mortgage interest could be considered a tax deduction of some sorts if it were a corporate filing of some sort. An owner of rental properties can see tax benefits as a result of scheduling depreciation on the property or somesuch, but an accountant could shine much more light on this subject than I.
If you decide to go the landlord route, make sure 1) his mortage (if not paid off) allows it and 2) read up on the local tenancy laws.
Honestly, I would sell the house, and pay off yours. Remaining money goes towards any debts you have, starting with the highest interest ones.
If you decide to keep the house, I'd still apply all your money to any outstanding debts first.
1st - Pay off all credit card and non-mortgage related debt (cars, boats, etc.)
2nd - Setup a sizeable amount in liquid assets as an emergency fund. Enough to cover Usually 6 months of living in case you or your other looses their jobs.
3rd - Pay off as much, if not all, of your current mortgage.
4th - Invest the rest...
(All this after finding out how much your going to be paying in taxes for the inheritance)
I think my grandpa paid cash for the house after he sold the house he had been living in to my parents. Whatever the case, it's been paid off decades ago.
The house is also in a pretty desireable school district, but there are still lots of homes for sale in the area.
As for the money, people have made some very good investment suggestions. Paying off non-mortgage debt it good. If you don’t have non-mortgage debt and aren’t getting a tax break on your mortgage anymore, it might make sense to pay it down.
And it you’re already very secure and well-invested, think about buying up some undervalued stocks in the bear market. There are plenty of blue chips whose value is currently in the tank but will pick up eventually. If you can afford to take the risk,buying a chunk of them to sit on for ten or fifteen years could be smart.
A quick sell in that environment is a race to the bottom. You will need to price the property below its comparables to get the interest of buyers. It's not good or bad, just a reality if you need to turn that house into cash.
The value of mortgage interest as a bonus is overplayed (no one thinks buying 8 cents for a buck is GoodDeal™). But if you're going to spend the buck on housing anyways, I'd rather get 8 cents back then not.
Whether or not to pay down the mortgage depends upon how much value you perceive in having $100K in the bank and an $1K liability for X years with attendant diminishing tax benefit (mortgage interest as a portion of the payment goes down the longer you are into the note) vs having $0 in the bank and no such liability.
Edit: and thing and thing.
Edit2: and I was harping upon talking to an accountant because both a financial adviser and the executor of the will (or probate attorney) might not know your tax liability though they might think they do.
I'd keep it, refinance it to help pay off the taxes if you absolutely must, and then rent it to pay off that mortgage while generating a little positive income and building equity. But that's just me.
Remember, too, that he will have to pay property tax on the property, as well. Well, all of the normal expenses of owning a property. Renting it can work, if it's a good property and there's a good market of renters in the area, but being a landlord is definitely a "job" and not something that everyone wishes to do.
The real answer is likely; Talk to a tax accountant and a flat fee financial advisor. The tax accountant will be there to help with tax liability and deduction issues. The flat fee financial advisor is there to help you determine investment options without the perverse incentive of commisions tainting his advice.
Okay. Thanks for the great advice. I never thought of talking to an accountant. I will do that, and I will also get a second opinion from a flat-fee financial advisor after I talk to the lady at the bank. Are there questions I should ask or things I should mention to try and mask the fact that I have no idea what I'm talking about?
Oh, and someone had mentioned earlier about companies that'll partner with me to rent out the house. Anyone have experience with them? I'm doing some googling right now about renting. And, anyone have any experience renting out a house? I don't think my grandpa's neighbors will be happy, but they might just have to deal with it until the market gets better.
Edit: Oh, and yeah... and I do doubt that paying off my house is suddenly gonna leave me paying higher taxes. But, are assets such as a second home, savings, IRAs, etc taken into consideration when figuring out how taxable I am? And, does that question make sense?
Edit II: Also, are there reasonable and relatively safe investments that could possibly earn a rate higher than what I'm paying into my mortgage? I'm paying 6.25, but I'll probably refinance and put some more (or most of) the money down.
Edit III: Should I avoid paying off the house if I believe I'll most likely move in the next ten years?
The point is that paying mortgage interest isn't all bad, as many people effectively knock a few points off their interest rate by owning a house. If you pay 10000 in interest, but get back 2000, you're paying 1/5 less interest.
Of course, on a 90k house at 6.25%, you may not be paying all that much anyway. In fact, if you're not paying enough interest to get beyond the standard deduction, you'd actually be stupid to NOT pay down the principal, because paying less interest is money in your pocket.
for edit 1: For taxes, they're based on income -- money going to you. They don't care about assets, as those are taxed differently (sales tax, property tax). If you receive rent, you'll pay tax on that, same with interest earned in a savings account, and stuff like that. Simply having the stuff isn't taxable, though -- if you earned 20 bucks in interest, you're taxed on the 20 bucks, not the 5000 that was in the bank earning interest.
If you pay off your house, you're not taxed more on it. Your property taxes would remain, but that's it, and that's also why a lot of older people can live on little money -- take your mortgage out of your budget and you suddenly have a lot more money.
edit 2: No, nothing will earn you more than 6.25% reliably right now. You would do better to pay off your mortgage, and use the surplus monthly funds to pay regularly into a retirement account. That way, anything that you *gain* from a retirement account is not automatically subtracted the 6.25% you lose on having a mortgage.
edit 3: The only reason it would be bad to pay off your house is if it was worth significantly less than what you paid for it. For example, if your house is worth 90k and you have 100k, but you can't sell your house for more than 80k, you would automatically lose 20k by paying off your mortgage.
Assuming your house price is stable, then paying down the mortgage is no different than paying off any other loan. Not paying interest is good, as with most things. If it's the only serious debt in your life, then getting rid of it early is fantastic. It's like living rent-free, only you own the place ;D
You would do well to start learning about investing, but that is completelly independant of going to the financial advisor. The reason to use a flat fee advisor is precisely so it won't matter if you are ignorant and there aren't any incentives for them to cheat you. You are essentially paying them for their knowledge, so your ignorance isn't a huge detriment except as a hedge against the advisor being wrong.
Asset transfers can be a taxable event (hence the whole blather about a 'death tax' on inheritence), but after that event, no they aren't taxable. If I own a 10 million dollar mansion free and clear and just sit around in it, I am only going to owe property taxes, not income taxes. Long term savings are often tax advantages in some aspect as an incentive for people to actually plan for their future well being. Obviously those incentives have mostly failed, but that is a different rant.
No, there isn't anything out there now that is going to be a) safe, b) relatively liquid and c) earn more than 6.25%. Long term horizon it isn't a bad idea to put the money in retirement accounts as has been suggested before, since you are young and on 30k a year you aren't likely to be putting much away currently in absolute terms.
No. You will be paying frictional costs relating to selling the house regardless. The amount of interest you pay in the interim isn't really going to change any calculations regarding the sale of the house.
Now, as far as my grandfather's house goes... he only lived about 20 minutes away. It's paid off. I'm leaning towards renting and, as someone said, asking lower than average rent until such a time as housing prices rebound. Does anyone have experience renting out a house?
First off, you really don't need to worry about the estate tax. There's a half-million dollar minimum before you even have to begin worrying about it on the federal level, and most states don't have them, and if they do, most, if not all of that is almost certainly going to be exempted. Your grandfather's probate lawyer should be able to tell you, but really, it's almost certainly a total non-issue.
Second, when you're earning $30,000 a year combined as a married couple, you're paying so little in taxes that the advantages of deducting mortgage interest are basically nil. With a 6.25% mortgage, that maybe knocks the interest rate down to a de facto 5.6%, but that's pretty optimistic. The thing to consider, however, is whether or not you think your income is going to increase in the future, R_D. If you were making $60,000 a year, for instance, that tax advantage would increase quite a bit. The more it increases, the bigger the advantage from having the mortgage around is. And I really wouldn't hold my breath about refinancing in this environment, even with a bunch of capital in the house.
As you said, there are a bunch of other homes in the neighborhood up for sale, so there's no way you're going to get a quick sale at a decent price. I would seriously recommend renting it out. My parents rent out my mom's childhood home, and it's a great source of income. It has the added bonus of anything you spend on the house (fixing it up, maintenance, gardening, whatever) is tax-deductible, provided you itemize (which, between the mortgage and the rental, is probably worth it for you). When you're ready to rent, talk to a real estate company. For the price of a month or two of rent, they will run background checks on all of your applicants for you--including income checks and credit checks--and make sure you meet with only quality candidates. My parents have done this for their past couple of renters, and have been very happy that they did (their fees are also tax-deductible). Plus, if you hold onto that house for a few years, it's probably going to climb in value substantially. Additionally, if anything happens where you or your wife lose your job or whatever, and can't afford to keep your current home, you'll still have that house you can move into. It's a good fallback. It's basically sacrificing $50,000 now for $500 a month for as long as you want (depending on rental prices in your area, property taxes, maintenance, insurance, etc.), with the option to get that $50,000 whenever you're ready to unload the house. And with that extra money comes extra tax deductions, so it is, in essence, more money than, say, a similar raise at your job would be.
Taking the cash and starting up a couple of Roth IRAs for you and your wife (at your income level, with a mortgage, you're definitely going to want a Roth IRA rather than a traditional IRA) would be a great way to invest some of that money you've got. Paying down the mortgage, if you think your income level is going to hold steady for awhile, is also a good way to do it. And putting away $10,000 or so into an ING savings account for a rainy day should be your first priority (assuming you don't have any savings at the moment). I'm sure the financial planner will go over all of this with you.
Definitely consider what your future financial situation is going to be, though. How much longer do you think you and your wife will be pulling in $30,000 a year combined? If it's going to go up significantly in the near future, that's going to change your strategy somewhat from what you'd want to do if it's going to hold steady at that level for awhile.
I would hope to god we're not making just 30k five years from now...
I'm graduating with a bachelor's in about a year-year 1/2. My wife just earned her associate's and is considering a bachelor's... the job market is terrible in Toledo, but we're both hoping things will improve in the coming years. We already have the house, so we're anchored here for the time being.
My parents have been renting a house for... well, I think before I was born. If you can find a person with steady income who pays reliably, it's the thing to do. Basically the renter pays off the mortgage/mortgage+tax for you and you keep the house.
That said, if you don't find the right kind of people, it can be pretty bad. My parents are lucky to have the same family since they started, which I think makes them look at it very positively.
Selling the house now is probably a bad idea. I know it's been said here before, but that's my opinion.
I was looking up property managers... but if I can find good renters via credit checks and junk, then I probably wouldn't need one. Plus, I have a fairly handy friend who has already offered to sell me his services. For maintaining the property, I mean. I'd definately have to check out Ohio's tenant laws. Since legal jargon = snooze, should I perhaps seek the assistance of an attorney for this? I'm sure I'd need one anyway for drawing up a rental contract.
So there's that.
You probably want to talk to a real estate company as Than mentioned, simply because you've never done that part before and we're working with almost pure profit with this house. They'll be able to sort out contracts and laws.
As for maintenance, most people who are not professional landlords get a property manager, or a maintenance company, as they are often busy with their own lives and cannot respond to emergencies in an appropriate time frame. For example, if the fridge breaks, you need to get a new fridge in there ASAP as a landlord. if a pipe bursts, or the toilet breaks, you need to have that shit done right away. That's hard if you're doing it yourself and you also have a regular job. So people will hire a property manager or mainenance company that's on call for all that stuff, so the tenants contact them with problems.
If your buddy can be called whenever and can get replacement appliances in there fast, and is also skilled with plumbing, electrical, and anything else that the guts of the house requires, sure. I know I can replace a toilet, hook up a dishwasher, and do basic stuff, but that's about the end of my plumbing skills.
You might be saying now "why would I want to do that, when I can pay down my house now, wait until I'm making more money, and maybe do it in 3-4 years?" So, let's say you instead wait 3-4 years, and you take that money and do it then. You make the same investment either way, get a very conservative average annual return of 8%, and begin to withdraw it when you turn 65. I'll assume you're 25 for purposes of this example. Doing it in 3-4 years means 8% interest per year, for 36 years, which means when you turn 65, that $20,000 will have become just under $320,000. Doing it now, instead of waiting the 4 years, means that $20,000 will have become just under $435,000. This is tax-free, and with a pretty conservative assumption of the interest rate. If you're younger than 25 and/or get a better than 8% annual average return on your money, the difference is even more pronounced.
Would that mean that I would be legally obligated to rent the house to three fratboys as long as they meet all criteria? One of the reasons renting seemed unattractive was because I know my grandpa's neighbors and I'd hate to see them stuck with jerky renters. Of course, I'm living next to renters and haven't had problems so far.