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Dear Fix My Portfolio,
I’m a 73-year-old retired federal employee and my bride of 53 years is 72. She doesn’t have an IRA, but my IRA is worth around $150,000. We have some bulk silver and the rest in cash. We also have a stock brokerage account of around $80,000. We have six months of emergency funds and some bank savings. We keep busy with an at-home art instruction business for the past 10 years, which has provided some nice write-offs.
Don’t get the idea that we are wealthy. My 10th grade U.S. history teacher told us that you can’t get rich working for the Fed, but you wouldn’t starve to death either. I think he was right.
I inherited a brokerage account from my parents and would like to pass it on to my girls. To that end, I’m thinking about making some moves in my accounts by taking some profits and losses and then putting most in cash and CDs. I would be waiting for the market to crash, then putting it all in an index fund to make things easy for my girls to manage and easy for my wife, should I go first, based on some advice from Warren Buffett.
Our tax guy has given us some good advice, such as placing our home and vehicles into my two daughters’ names. I don’t have a financial adviser. I’m not sure who to trust. What do you think?
You usually can’t go wrong listening to investing advice from Warren Buffett, but the way you put it here, I think maybe you’re misapplying it.
If you’re talking about his much-touted 90/10 allocation strategy — which was about instructions for his trust to structure his wife’s inheritance as 90% in a low-cost index fund and 10% in government bonds — it doesn’t require starting from zero all in cash. What you’re talking about doing by cashing out and waiting for a big stock dip is called timing the market, but that’s an impossible task for an individual investor. Most end up on the losing end of that bet, buying high and selling low, which is the exact opposite of what you’d want to do.
If your money in the brokerage account is invested now but you’re not satisfied with the funds you have, you can sell and buy what you think is best without having to wait for a downturn. Because what if that doesn’t come? The S&P 500
was up just over 24% in 2023, and has been rising in 2024. If you move to cash, you’ll be earning 5% in a flat or potentially declining interest-rate environment.
The most important thing you can do if you’re concerned about passing on your accounts is to make sure you’ve got proper beneficiary designations on all of them.
Next, you should think about creating a plan for the rest of your assets — not with an accountant, but with an estate attorney. One way to find a reputable person in your area is to search via the National Academy of Elder Law Attorneys.
You might not think you’re wealthy, but even if you were, the account balance and allocations are not the chief concern of a legacy. When it comes time to deal with the paperwork, your wife and daughters will care little about whether the investments are in this or that index or mutual fund, but it will matter tremendously how the accounts are titled. They’ll want to avoid the expense and hassle of probate, and have easy access to the money they might need.
That goes double for the house and cars. Passing along the house to your daughters before you die could actually be less financially advantageous than if they inherit it after you and your wife both pass, assuming the house is titled to both of you. “As a general rule, I’d highly recommend against such action,” says John Ross, an elder law attorney at Ross & Shoalmire, based in Texas. The difference is the basis, which is what the government pegs as the value of the asset for tax purposes.
If you give the house away now to your children in some capacity, they miss out on the step-up in basis to fair market value upon your death. You’d also have to craft some sort of trust or other legal agreement about your use of the house while you’re still living.
You might find it more efficient to put the house in a living trust now — in your name and your wife’s name — and let the children inherit it after you both pass. Then, they would get a step-up in basis to the value of the house at the time of the inheritance and they’d be much less likely to owe capital gains tax if they sell it.
As for the cars, it will depend on the rules of the state where you live, but many will fall under the small-estate limit. If you take the step to start a living trust, you can title the cars to the trust, which will ease the way with both the DMV and any loans that may be involved.
So, Steve, don’t just sit on the sidelines here and hope for a rainy day. Instead, make a long-term plan and spend your days painting beautiful landscapes.