Do you have a question about investing, how it fits into your overall financial plan and what strategies can help you make the most of your money? You can write to me on beth.pinsker@marketwatch.com. Please put Fix My Portfolio in the subject line.
Dear Fix My Wallet,
I am a 73 year old retired federal employee and my 53 year old bride is 72 years old. She doesn't have an IRA, but mine is worth about $150,000. We have some loose silver and the rest in cash. We also have a stock brokerage account worth about $80,000. We have six months of emergency funds and some bank savings. We've been keeping busy with our at-home art education business for the past 10 years, which has led to some nice write-offs.
Don't get the idea that we are rich. My 10th grade American history teacher told us that you can't get rich working for the Fed, but you won't starve either. I think he was right.
I inherited a brokerage account from my father and would like to pass it on to my daughters. To that end, I'm thinking of making some moves in my accounts by taking some P&Ls and then putting most of them in cash and CDs. I was going to wait for the market to crash, then put everything in an index fund to make things easier for my daughters and my wife to manage, should I start first, based on some advice from Warren Buffett.
Our tax person gave us some good advice, such as registering our house and vehicles in my daughter's name. I don't have a financial advisor and I'm not sure who to trust. what do you think?
Steve
Dear Steve,
Normally you can't go wrong listening to investing advice from Warren Buffett, but the way you're laying it out here, I think you're probably doing it wrong.
If you're talking about the much-touted 90/10 allocation strategy — which was his trust's instructions to organize his wife's inheritance 90% in a low-cost index fund and 10% in government bonds — that wouldn't require starting from scratch, all in cash. What you're talking about by cashing out and waiting for a big stock to drop is called timing the market, but that's an impossible task for the individual investor. Most of them end up on the losing end of this bet, buying high and selling low, which is exactly the opposite of what you want to do.
If your money is invested in a brokerage account now but you're not satisfied with the money you have, you can buy and sell what you think is best without having to wait for a downturn. Because what if it doesn't come? The S&P 500 SPX is up just over 24% in 2023, and will rise in 2024. If you move to cash, you'll gain 5% in a flat or potentially low interest rate environment.
Think larger
The most important thing you can do if you're worried about passing over your accounts is to make sure you have proper beneficiary designations on all of them.
Next, you should consider creating a plan for the rest of your assets — not with an accountant, but with an estate attorney. One way to find a reputable one in your area is to search through the National Academy of Elder Lawyers.
You may not think you're wealthy, but even if you are, the account balance and allowances aren't the primary concern of an inheritance. When it comes time to handle the paperwork, your wife and daughters won't care much about whether the investments are in this or that index or mutual fund, but how the accounts are named will matter a lot. They will want to avoid the expense and hassle of probate, and have easy access to the funds they may need.
This goes double for homes and cars. Passing the house on to your daughters before you die may actually be less financially beneficial than if you inherited it after you and your spouse died, assuming the house belongs to both of you. “As a general rule, I would strongly recommend against taking such action,” says John Ross, a senior attorney at Ross & Schollmeyer, based in Texas. The difference is the basis, which is what the government links to the value of the asset for tax purposes.
If you deed the home now to your children in some capacity, they miss out on the opportunity to apply based on fair market value upon your death. You will also have to draft some type of trust or other legal agreement about your use of the home while you are alive.
You may find it more effective to place the house in a trust now – in your and your spouse's names – and let the children inherit it after you both die. Then, they will receive a basis increase for the value of the home at the time of inheritance and will be less likely to owe capital gains tax if they sell it.
As for cars, it will depend on the rules of the state you live in, but many will fall under the small estate limit. If you take the step to start a living trust, you can give the car title to the trust, which will make the road easier with both the DMV and any loans that may be involved.
So, Steve, don't sit on the sidelines here and hope for a rainy day. Instead, make a long-term plan and spend your days painting beautiful landscapes.
More fixing my wallet
