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Need some help making decisions for Dad's investments
Old 02-14-2014, 01:25 PM   #1
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Need some help making decisions for Dad's investments

As my Dadís dementia continues to get worse, Iím finding it necessary to manage more of his personal affairs. Iím trying to make some decisions regarding his finances and I could use some advice on how to handle things for him. Here is a summary of his situation:

His total net worth is about $225K, all held at Fidelity. $120K in cash, $5K in index funds, $34K in Franklin Income Class A (FKINX), and $65K in Exxon stock. The Franklin fund is a balanced fund with about 2/3 stock 1/3 bonds. It had a front load of 4.25%, presumably because he bought it from a greedy broker many years ago. It looks like I could sell it with only a small brokerage transaction fee, but it's probably not a bad fund at this point given that the up front fee is now a sunk cost.

He purchased the Exxon stock many years ago. I need to research the exact cost basis, but Iím assuming it will be about $32K in capital gains on the sale of $62.5K in stock. Intuitively, I know it makes no sense for him to have such a high concentration of his wealth in one individual stock. However, if I sell the stock now, he would have to pay 15% CG tax, or about $4,800. There is no state tax where he resides. If I were to sell the Exxon stock, I would put some of it back into index funds, likely by dollar cost averaging the purchases.

However, if I leave the stock in place, I have the potential to inherit it at the stepped up basis and avoid the CG taxes completely. So Iím trying to balance the risk of being so heavily concentrated in one stock, the CG taxes associated with selling, and the benefit of the stepped up basis if I were to leave it alone and eventually inherit it.

While his dementia is worsening, his physical condition is OK, so itís possible he could live for many years this way. He needs about $1,000 per month on top of his social security and pension to cover his bills, so he is not using that much of his savings at this point.

Can I get some feedback on whether it makes sense to sell the Exxon stock and reinvest it in low cost index funds or just leave it alone and wait until I inherit it at the stepped up basis.

Thanks!
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Old 02-14-2014, 01:43 PM   #2
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As my Dadís dementia continues to get worse, Iím finding it necessary to manage more of his personal affairs. Iím trying to make some decisions regarding his finances and I could use some advice on how to handle things for him. Here is a summary of his situation:

His total net worth is about $225K, all held at Fidelity. $120K in cash, $5K in index funds, $34K in Franklin Income Class A (FKINX), and $65K in Exxon stock. The Franklin fund is a balanced fund with about 2/3 stock 1/3 bonds. It had a front load of 4.25%, presumably because he bought it from a greedy broker many years ago. It looks like I could sell it with only a small brokerage transaction fee, but it's probably not a bad fund at this point given that the up front fee is now a sunk cost.

He purchased the Exxon stock many years ago. I need to research the exact cost basis, but Iím assuming it will be about $32K in capital gains on the sale of $62.5K in stock. Intuitively, I know it makes no sense for him to have such a high concentration of his wealth in one individual stock. However, if I sell the stock now, he would have to pay 15% CG tax, or about $4,800. There is no state tax where he resides. If I were to sell the Exxon stock, I would put some of it back into index funds, likely by dollar cost averaging the purchases.

However, if I leave the stock in place, I have the potential to inherit it at the stepped up basis and avoid the CG taxes completely. So Iím trying to balance the risk of being so heavily concentrated in one stock, the CG taxes associated with selling, and the benefit of the stepped up basis if I were to leave it alone and eventually inherit it.

While his dementia is worsening, his physical condition is OK, so itís possible he could live for many years this way. He needs about $1,000 per month on top of his social security and pension to cover his bills, so he is not using that much of his savings at this point.

Can I get some feedback on whether it makes sense to sell the Exxon stock and reinvest it in low cost index funds or just leave it alone and wait until I inherit it at the stepped up basis.

Thanks!
If you think he is too heavily invested in Exxon, you could sell some of it. You don't have to sell it all at once. It really depends on where you think Exxon is going.

Sorry to hear about your dad. He is lucky to have you by his side.

IP
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Old 02-14-2014, 03:00 PM   #3
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A key consideration that you did not mention is the possible, and what sounds likely to me, need for additional care. Dementia implies to me the inability to live alone. Depending on your care plan for your Dad, the taxes for Exxon could be a small price to pay vs.a dramatic market drop which may force you into an uncomfortable care path for your Dad. Since the upside for him is not very much and there maybe a need for caregivers, I would take a very conservative approach.
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Old 02-14-2014, 05:26 PM   #4
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Well, there is always risk in a single stock, but XOM is not particularity volatile. But Capital Gains tax are a certainty.

Let's see - $12K out of a $225K portfolio is only ~ 5%, which does not seem aggressive for someone of an advanced age. It sounds like you have to consider that he could either need a higher amount for care in the future, and/or could live longer than you may expect. The lower WR are for 30-35-40+ time frames. You'll get ~ 1% from divs, so you only need to pull ~ 4% ($10K) per year.

I'd look into a couple things - how much XOM can he sell each year and stay in a low tax bracket? So maybe sell a little each year, pull the rest from cash.

I don't follow CD rates, but I'm thinking a ladder of 1-2-3-5 year CDs would at least earn you something on the $120K.

Just a couple thoughts, tough situation.

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Old 02-14-2014, 05:54 PM   #5
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Just to back up a bit: I know you didn't ask about these things, but here are two things I wanted to throw in:
-- Is your mom still alive, and do you have siblings or anyone else who might second guess/take an interest in how you are managing this money? (e.g. if the market goes down: "Why did you keep Dad's money in the Stock Market!! He's lost thousands of dollars this year!) If this is a possible factor, you might want to consider investing according to a published method or use a Target Date fund, etc. You'd still pick the "expert", but at least you can point to a reason for the choices.
-- Dementia and LTC: Has Dad got LTCI or some other means to pay for his care? If you haven't consulted an elder law attorney in your state, you probably should. In many cases, getting his assets into a trust as soon as practical can be a wise move. IIRC, Medicaid has a 5 year lookback period in some cases, so getting that clock started will make him eligible for that benefit sooner, if you need it.

Okay, on to your post:
Can you get to the zero % CG rate if you sell the Exxon stock over a couple of years rather than all at once? I'd do that rather than hold it. If you can't sell it at very low tax rate, I'd be tempted to hold onto it--over 30years of dividend growth, a dividend yield of over 2.6%, and a leader in a mature industry--it's probably among the safer individual stocks he could own.
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Old 02-14-2014, 10:01 PM   #6
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Thanks for the feedback everyone. To answer a few questions and clarify things a bit:

The Exxon stock is $65K out of a total portfolio of $225K, so about 29% of his net worth is in one stock. This is why I'm concerned about the lack of diversification.

He is currently in a nursing home full time. His rent is completely covered by his pension and social security. The only extras he has to pay for are some prescriptions, doctor copays, and incidentals. They run about $1,000 per month. He can't walk without assistance never leaves the facility. He can't have a coherent conversation any more, so I can't really ask for his opinion on any of this.

He has no long term care insurance. However, he has been in this nursing home for over a year now, and will likely remain there as long as he is alive.

My mom is still alive. They are divorced, but she still checks in on him about once a week. My sister has no visibility to his money and won't get too involved in my investment choices. I manage my mother and sister's money and advise them on what to invest in, and they always go with my advice.

I like the idea of selling the stock in small amounts to avoid CG taxes. However, I'm having trouble understanding how to calculate these numbers. I'm using Taxcaster, and plugging in $16,488 for SS, and $19,394 for his pension. His AGI comes out after deductions to $10,713, well below the $36,250 figure. Taxes due show $1,163.

However, if I then add $10,000 in long term capital gains into the mix, his taxes increase from $1,163 to $2,100, or about an additional 9%. I can't figure out why he would be assessed federal taxes on these gains if his AGI is only $26,986. What am I doing wrong?
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Old 02-14-2014, 10:53 PM   #7
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I think I remember looking at tax caster to estimate taxes and it was not estimating long term cap gains correctly . Try turbotax and see if you get the same result. It's my understanding that the long term cap tax is 0% in the 15% tax bracket.
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Old 02-14-2014, 11:14 PM   #8
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Keep in mind the fact that his care, all the costs but haircuts and the like, is likely a deductible medical expense. Take a look at the Internal Revenue Code to make sure that you have all the i's dotted and t's crossed to make sure his circumstances fit the regulations.

Any sale of the Exxon stock would be a long term capital gain assuming it is held outside an IRA.

I think you can manage to reduce his % of Exxon in his portfolio without significant tax consequences.

We too had a high % in Exxon years back and sold it for the sake of diversification. Kicking myself to this day.
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Old 02-15-2014, 02:24 AM   #9
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Hi Ready, there are people with better financial acumen on this site than me. But given your updated reply, I would be managing his funds based upon the age of the oldest person in line for inheritance. You clearly have enough funds so your father receives proper care. A very difficult situation which I can empathize.
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Old 02-15-2014, 03:40 AM   #10
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Father holds something like 650 shares of XOM. It pays a dividend of around $2.50. Share price is $94.

This year father collects ~ $1600 dividends (2.6%).

When you sell the stock, are there fees?

In the last crash XOM lost about 40% of NAV. But the dividend continued growing.

It really is a tough decision, as conventional wisdom says diversify. But he is holding one of the more desirable companies in the world.

If you diversify, how much risk are you leaving behind?

I have the same predicament, with F-I-L holding 7.5% in Verizon. I don't have cost basis or any type of history on the stock. For 5 years I've been telling wife that there is too much in one company. The dividend is auto-deposited, I look at the tax impact, and ask the same question again the following year.
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Old 02-15-2014, 08:29 AM   #11
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Ready,
Thanks for the additional info. The fact that essentially all his care can be covered by SS and his pension, now and for as long as he lives, is a biggie. I wouldn't have guessed that $36K would purchase full-time NH care for a cognitively declining individual, but it is good news.

Something isn't right about those Taxcaster results. +1 on Bogie's suggestion to run his numbers through a real tax program, it will be an hour well spent. Together with Brat's observations on his likely high medical deductions, I think you'll probably be able to sell that Exxon stock at the zero CG rate over the next few years, and that's what I'd do.
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Old 02-15-2014, 09:04 AM   #12
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I'm running Turbotax 2013 for him now. Inputting $19,394 for pension and $16,488 for SS. Taxes due are $938.

Adding $10,000 in CG increases the taxes to $1,909. So the increase of $971 / $10,000 shows I'm paying 9.71% taxes on the CGs. This is the same result as Taxcaster. His taxable income on line 43 of the 1040 is only $25,486.

I must be missing something, but I can't figure out what it is. One thing I noticed on the 1040 is that with the $10K in CGs, the taxable portion of SS is $7,592. If I remove the $10K in CGs, the taxable portion of SS drops to $1,319. So does the taxable portion of SS increase as your overall income increases?
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Old 02-15-2014, 09:10 AM   #13
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So does the taxable portion of SS increase as your overall income increases?
Yes.

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Your [SS] benefits generally are not taxable if half of your benefits, plus all your other income, is less than $25,000 if you are single ($32,000 if you are married filing jointly). If half of your benefits, plus all of your other income, is more than $34,000 (for singles) or $44,000 (married filing jointly), then 85% of your benefits are subject to income tax. If you fall somewhere between the lower and upper limits, then the percentage of your taxable benefits varies between 0% and 85%.
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Old 02-15-2014, 09:14 AM   #14
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I see it now. In the social security benefits worksheet, it shows the calculations. The extra $10K in CGs increases the portion of social security that becomes taxable. So while in theory one can earn up to $36,250 and not pay capital gains taxes, in this case the extra income from the stock sale pushes his taxes up by making a larger portion of his social security taxable. Very interesting.

So I guess he will get hit with about 10% in taxes on the sale of stock. Which makes me inclined to still want to sell it, but maybe over a period of 3-4 years to spread out the gains.

I don't like the wild price swings on this stock. It was over $100 two weeks ago, then went down to $89. Now it's back up a bit. That's too much volatility for someone his age.
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Old 02-15-2014, 11:13 AM   #15
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I wouldn't have guessed that $36K would purchase full-time NH care for a cognitively declining individual, but it is good news.
Agreed. Covering full time NH care with $36k wouldn't even be close here in northern Illinois. Our average is in the low $80k's. Although, Ready did mention additional charges of about $12k on top of the pension and SS which would bring the total up to $48k.

Ready, would you mind sharing the circumstances regarding your dad's NH care? Rural area? Facility with a religious or fraternal affiliation resulting in lower costs to your dad? Whatever it is, if the care is top notch, it really sounds like a bargain.

We had to manage MIL's modest portfolio, mainly the cash from selling her condo and car, to ensure she could private pay at a quality NH long enough that she'd be allowed to stay there when she ran out of money and converted to Medicaid.
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Old 02-15-2014, 11:23 AM   #16
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I see it now. In the social security benefits worksheet, it shows the calculations. The extra $10K in CGs increases the portion of social security that becomes taxable. So while in theory one can earn up to $36,250 and not pay capital gains taxes, in this case the extra income from the stock sale pushes his taxes up by making a larger portion of his social security taxable. Very interesting.

So I guess he will get hit with about 10% in taxes on the sale of stock. Which makes me inclined to still want to sell it, but maybe over a period of 3-4 years to spread out the gains.

I don't like the wild price swings on this stock. It was over $100 two weeks ago, then went down to $89. Now it's back up a bit. That's too much volatility for someone his age.
I'm not sure volitility is really an issue if there will be no reason to sell it (i.e. expenses are covered). I'd be inclined to hold on to it and take the step up in basis now that you've discovered that there is no zero percent capital gains due to SS taxation. You could even make a commitment to yourself that, should you need to liquidate the stock, you'd kick-in the difference between the sales price and the 6 month moving average, for instance, if the sale was at a crummy price.
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Old 02-15-2014, 11:25 AM   #17
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He moved into assisted living in Florida about two years ago. He had a studio apartment and was provided three meals a day in the dining room. They cleaned his room once a week, and did his laundry for $8 per load. We paid $4,000 per month for room and board for this. After about a year, it was clear that he couldn't handle assisted living.

The facility informed me he needed to move out and recommended a very small place a few miles away with only about a dozen beds. Technically it's still considered assisted living, but in reality there is not much difference between where he lives now and a full nursing home. He can't go to the bathroom most days without assistance. He gets assistance to shower, take meds, and eat his food. He has doctors who visit the facility to see him. On occasion he needs to go out to a doctor, and we hire a transportation company along with a nurse. Those visits cost several hundred dollars, so we try to make due with the on site physicians.

His room and board in this place are $3,000 per month. The main reason for the lower cost is that he shares a room with a roommate now, and the food is very basic. The first place had somewhat "gourmet" food compared to this place.

It's a very depressing place to live. The residents there are pretty comatose. He can't communicate much anyway, so it's very lonely for him. I've mentioned in other threads that I don't want to deplete all of my savings and then find myself unable to take care of myself and needing to go to one of these homes. It would be substantially more expensive to have full time care in my home, but if it allowed me to live my remaining years outside of one of these institutions, it would be well worth it to me.

I feel very bad for him, but he lives thousands of miles away from me. He no longer knows how to use a telephone, so having phone conversations with him is pretty much impossible. So I'm just doing the best I can to take care of his finances and make sure he's as comfortable as practical.
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Old 02-15-2014, 12:20 PM   #18
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Ready, not to push, but I think the situation your dad is in is not necessarily something you can count on as a long-term solution. If that particular facility changes its policies, or decides your dad's care exceeds what they are willing to provide, or you decide it's not really the best place for him, then there's very little chance of finding something else at/near that price. Consulting an elder law attorney or other expert soon could allow you to put things into place rnow so that he can get the help he needs later (again--those Medicaid lookback provisions. If it applies, you'll want to get the clock started ASAP). This not only impacts him, but also potentially your own finances.

Best wishes to you in what is surely a tough situation.
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Old 02-15-2014, 12:56 PM   #19
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I feel very bad for him, but he lives thousands of miles away from me. He no longer knows how to use a telephone, so having phone conversations with him is pretty much impossible. So I'm just doing the best I can to take care of his finances and make sure he's as comfortable as practical.
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Old 02-15-2014, 01:30 PM   #20
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Ready, not to push, but I think the situation your dad is in is not necessarily something you can count on as a long-term solution. If that particular facility changes its policies, or decides your dad's care exceeds what they are willing to provide, or you decide it's not really the best place for him, then there's very little chance of finding something else at/near that price.
I appreciate your input Samclem, and I have given that situation a lot of thought. At some point he may run out of money and then have to live on Medicaid. The lookback period is five years, so even if I make changes today, it's hard to imagine going five more years with his situation.

I have also begun researching Parent Filial Responsibility laws to understand whether I may have to provide my own finances to help him. Florida does not have Filial laws, but California does. From the research I've done so far, it appears that because he lives in Florida, I would not be held responsible because the state he resides in does not have these laws. However, I can't completely conclude whether I might somehow be tied in due to California having Filial laws in place. I suppose it's a good question for an elder law attorney.
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