Stable income from inheritance for my brother

[Steelart99]

My mother has asked that I try to help my brother with his future inheritance. He is not very savvy with money.

Mom and Dad did well with their investments; Dad passed a few years ago and Mom is in her early 80's now. I will be the executor of her will (hopefully many, many years from now).

What I would like to do is help him set up something that would generate a fairly secure yearly income from about $1M without going the annuity path. His health is not so good (overweight, diabetic; dual foot amputee) but he is covered by the VA ... for however good that is.

I would appreciate any thoughts on a method for doing this.

 

[Independent]

Your brother may be around 60? And he is "overweight, diabetic; dual foot amputee".
Presumably the foot issue means the diabetes is pretty serious.
So his life expectancy is about ___ ?
It appears that your Mom doesn't want to start the income now, we're just talking about the inheritance after she dies. That means he already has adequate income from other sources to live today.
I assume he is mentally competent according to the law. So all you can do is provide advice unless your Mom does something that legally restricts your brother.

I can see why you wouldn't want an annuity, though you might find "substandard" annuities if you Google.

One thought is that it's okay if he blows through the money pretty quickly, he might as well enjoy it while he's alive.

The other seems to be a trust. Your Mom can set it up while she's living. She can fund it before she dies, or in the will. She can specify categories of investments, or leave that to the trustee. The trustee can have discretion regarding income levels, medical expenses, long term care, etc. She can specify who gets the residual amount after your brother dies. You don't need to be the trustee, but you could be.

 

[pb4uski]

If he is cooperative, you could just set up a mutual fund account and set up automatic transfers from the account to his bank and he could then spend that money once it hits his bank. If he understands his shortcomings and is willing to agree not to try to get money other than the automatic withdrawals then it might work.

I helped BIL's Mom and sister setting up something like this for BIL's Mom. She had a fixed annuity that was doing so-so. She cashed it out (over two tax years so she wouldn't have to pay tax on the inside build-up) and invested the proceeds in Vanguard Wellesley. They set up automatic withdrawls from the mutual fund account to her bank account to supplement her SS income and make things a little more comfortable for her. When she passes on, her kids are beneficiaries of the remaining balance in the account.

 

[Steelart99]

Your brother may be around 60? And he is "overweight, diabetic; dual foot amputee".
Presumably the foot issue means the diabetes is pretty serious.
So his life expectancy is about ___ ?
It appears that your Mom doesn't want to start the income now, we're just talking about the inheritance after she dies. That means he already has adequate income from other sources to live today.
I assume he is mentally competent according to the law. So all you can do is provide advice unless your Mom does something that legally restricts your brother.

I can see why you wouldn't want an annuity, though you might find "substandard" annuities if you Google.

One thought is that it's okay if he blows through the money pretty quickly, he might as well enjoy it while he's alive.

The other seems to be a trust. Your Mom can set it up while she's living. She can fund it before she dies, or in the will. She can specify categories of investments, or leave that to the trustee. The trustee can have discretion regarding income levels, medical expenses, long term care, etc. She can specify who gets the residual amount after your brother dies. You don't need to be the trustee, but you could be.

My brother is about 58 and his income is currently SS disability along with money Mom gives him now to help him out. He'd prefer not to take it (pride) but does recognize his limitations. Yes his is mentally competent and is actually an intelligent, funny guy who had a rough life. I do want to provide good advice without treating him like he is incapable. I may talk to Mom about a trust fund ... i had not actually thought about that. Thanks.

 

[Steelart99]

If he is cooperative, you could just set up a mutual fund account and set up automatic transfers from the account to his bank and he could then spend that money once it hits his bank. If he understands his shortcomings and is willing to agree not to try to get money other than the automatic withdrawals then it might work.

I helped BIL's Mom and sister setting up something like this for BIL's Mom. She had a fixed annuity that was doing so-so. She cashed it out (over two tax years so she wouldn't have to pay tax on the inside build-up) and invested the proceeds in Vanguard Wellesley. They set up automatic withdrawls from the mutual fund account to her bank account to supplement her SS income and make things a little more comfortable for her. When she passes on, her kids are beneficiaries of the remaining balance in the account.

Hmmmm... another possibility. I think that he'd be fine with set disbursements without messing with a fund. No sure about his son though ... I'll explore that thought.

 

[Brat]

Vanguard's Managed Payout fund is designed to pay out 4% annually and grow the principal to match inflation. That or choose a Vanguard dividend fund such as Dividend Growth, Dividend Appreciation or REIT Index fund. I own Realty Income Corp which pays a dividend monthly but since this money may be your brother's only investment I recommend a more diversified approach.

 

[Bestwifeever]

You're a really good brother and son, Steelart.

 

[Walt34]

If he understands his shortcomings and is willing to agree not to try to get money other than the automatic withdrawals then it might work.

I helped BIL's Mom and sister setting up something like this for BIL's Mom. She had a fixed annuity that was doing so-so. She cashed it out (over two tax years so she wouldn't have to pay tax on the inside build-up) and invested the proceeds in Vanguard Wellesley. They set up automatic withdrawals from the mutual fund account to her bank account to supplement her SS income and make things a little more comfortable for her. When she passes on, her kids are beneficiaries of the remaining balance in the account.

Vanguard's Managed Payout fund is designed to pay out 4% annually and grow the principal to match inflation.

I was going to suggest something like these but it only works if he can keep from dipping into the principal.

 

[Chuckanut]

If he is cooperative, you could just set up a mutual fund account and set up automatic transfers from the account to his bank and he could then spend that money once it hits his bank. If he understands his shortcomings and is willing to agree not to try to get money other than the automatic withdrawals then it might work.

I helped BIL's Mom and sister setting up something like this for BIL's Mom. She had a fixed annuity that was doing so-so. She cashed it out (over two tax years so she wouldn't have to pay tax on the inside build-up) and invested the proceeds in Vanguard Wellesley. They set up automatic withdrawls from the mutual fund account to her bank account to supplement her SS income and make things a little more comfortable for her. When she passes on, her kids are beneficiaries of the remaining balance in the account.

I like this idea a lot, if, as mentioned above, he won't try and dip into the fund whenever things get messy.

While I don't like annuities for most people, one of the ways to keep an irresponsible/ignorant/desperate person from burning through their money and ending up with nothing in a few years is to annuitize it. GASP, CHOKE, WRETCH! I can't believe I said that.

 

[Walt34]

While I don't like annuities for most people, one of the ways to keep an irresponsible/ignorant/desperate person from burning through their money and ending up with nothing in a few years is to annuitize it. GASP, CHOKE, WRETCH! I can't believe I said that.

As much as most here dislike annuities it is a way to protect fools from themselves. Half a loaf is better than none.

 

[Steelart99]

In general my brother is not a spendthrift. I would think that if I set up a Managed Payout fund or a dividend fund(s) and didn't "really" let on that he could tap into the principal, then he'd have little inclination to investigate or a tendency to touch the principal. His son on the other hand would spend everything my brother has (or inherits) within months .... sigh. The entitlement mentality runs rampant there. That would be the primary reason for chatting with Mom about setting up a trust fund. These have all been good ideas ... I needed some knowledgeable input to chew on.

 

[pb4uski]

Both parts might be addressed by having the account in both your names and allowing you to control the fund and make your bro the beneficiary if something happens to you since you can fend off any attempts by nephew to influence your brother to his detriment. It would be functionally like a trust but without the formality of a trust and would work as long as your mom and brother trust you and you trust yourself.

One downside, is if your name is on the fund then it could come into play if you are sued but that could be addressed with umbrella insurance if desired.

Or put the account in his name but only you have the userid and password.

Also, if nephew ever expresses a desire for the funds just make it crystal clear that these funds are for your brother, not him and if there are any leftovers after your brother is done then perhaps nephew might benefit, but not a day sooner.

I don't think it critical that principal never be dipped into and that might happen in bad years depending on what you set up for automated transfers.

 

[38Chevy454]

A different approach, what I did as trustee for my parent's estate. Me and 2 sisters, of which 1 is not as good with finances. Before my last parent died, modified their trust to have my 1 sister's portion of inheritance go into an irrevocable trust in her name. Of course she had to agree to this and sign the irrevocable trust paperwork. I am the trustee for the irrevocable trust, as well as parent's estate trust. The irrevocable trust keeps my sister from doing anything without me agreeing. I control the investments of the money, it is essentially just for her retirement, not taking periodic withdrawals at this time. The irrevocable trust has provisions for the money if she passes, going to her kids.

In essence the portion of my sister's inheritance is her money, but I control it. Small legal fees to set up the irrevocable trust and modify my parent's trust.

 

[seraphim]

I was going with the irrevocable trust myself. Not a fan of annuities myself, but VG Wellesly in the trust, set up to pay 3% WR...


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[Brat]

These circumstances justify an irrevocable trust with you (or Vanguard) as trustee, pay the greater of income generated by investments (for tax reasons) or 3% - the only exception being to pay for medical care. When brother passes the residual goes to his heirs.

 

[easysurfer]

I like this idea a lot, if, as mentioned above, he won't try and dip into the fund whenever things get messy.

While I don't like annuities for most people, one of the ways to keep an irresponsible/ignorant/desperate person from burning through their money and ending up with nothing in a few years is to annuitize it. GASP, CHOKE, WRETCH! I can't believe I said that.

For someone who is totally irresponsible, I'd much rather go the annuity route. The reasoning is he/she after receiving such a windfall would probably just blow the money quickly anyhow.

I would be nice if one could have a life insurance policy that at death, use the proceeds to automatically open up a lifetime annuity for a heir.

Otherwise, if the heir sees, for example $1 Million payout but can't touch all of it immediately because that's under control by a person, he/she might cry bloody murder

 

[Brat]

Let 'em cry.

 

[Steelart99]

Reviving thread this after spending some time talking to Mom. Pardon my lack of financial acumen ...

If I help Mom set up a irrevocable trust, are the funds that she moves to the trust taxable as she sets up the trust? She has most of her funds tied up in investments. Can she just move the investments to the trust (no sales). Normally there would be no estate taxes for passing this on as an inheritance.

I hate to think of the loss in value from taxes !!!
Thanks

 

[Brat]

Why establish an irrevocable trust? A revocable trust is treated from a tax standpoint as the grantor's. Once the grantor passes the trust becomes irrevocable.

DO NOT PUT AN IRA in a revocable or irrevocable trust without the advice of a knowledgeable estate attorney. The IRA survivor information is used for inheritance purposes.

 

[Steelart99]

Why establish an irrevocable trust? A revocable trust is treated from a tax standpoint as the grantor's. Once the grantor passes the trust becomes irrevocable.

DO NOT PUT AN IRA in a revocable or irrevocable trust without the advice of a knowledgeable estate attorney. The IRA survivor information is used for inheritance purposes.

Ahhhh ... yes you are right about the revocable vice irrevocable ... something I "know" but didn't register. Does a revocable trust established upon death still have no estate taxes?

Mom doesn't have an IRA, just investments that she and Dad did very well with.

In a revocable trust, would she be able to define the investments it would go into as well as what might happen to any remaining funds should my brother pass on? I assume so since it would then become irrevocable.

 

[Brat]

Estate taxes are determined by the value of the estate at the time of death. There are some techniques lawyers use for very large estates that avoid taxes but they must be established prior to death.

A revocable trust will enable your mother to describe exactly how she wants the assets in the trust distributed. She should also have a will that scoops up any assets that aren't in the trust at the time of her death. Frankly I recommend that you have a lawyer familiar with estates prepare the revocable trust and her will. If you draw up the trust other family members may claim that you had inappropriate influence. Your gift to your mother could be finding lawyers who would have her desires primary and paying for her estate planning.

Keep in mind the fact that it isn't enough to establish a trust, you need to put the assets in the name of the trust. This is a step many overlook.

 

[Steelart99]

Thanks Brat. As we go forward with this, we'd certainly employ the correct lawyer to establish the trust. Mom and Dad always insured that they had a good will drawn up and Mom has already made a few changes to it after Dad passed. Your last comment is interesting and something I'll certainly keep in mind !!!

 

[38Chevy454]

Estate taxes are determined by the value of the estate at the time of death. There are some techniques lawyers use for very large estates that avoid taxes but they must be established prior to death.

A revocable trust will enable your mother to describe exactly how she wants the assets in the trust distributed. She should also have a will that scoops up any assets that aren't in the trust at the time of her death. Frankly I recommend that you have a lawyer familiar with estates prepare the revocable trust and her will. If you draw up the trust other family members may claim that you had inappropriate influence. Your gift to your mother could be finding lawyers who would have her desires primary and paying for her estate planning.

Keep in mind the fact that it isn't enough to establish a trust, you need to put the assets in the name of the trust. This is a step many overlook.

X2, your mother has revocable trust, and it distributes the proceeds. The distribution is where you can have one of the recipients be an irrevocable trust for your sibling. When your mother dies, the revocable trust becomes irrevocable with someone as trustee to handle the distribution of assets, per the trust's instructions. You need to talk with estate attorney for your mother's state, and they can write it up to do what you need.