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 at 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 spouse is 72. She doesn’t have an IRA, but my IRA is worth about $150,000. We have silver in large quantities and the rest in cash. We also have a stock brokerage account of about $80,000. We have six months of emergency funds and some bank savings. For the last 10 years we have been busy with a home art teaching business, which has provided some nice write-offs.
Don’t get the idea that we are rich. My sixth grade American history teacher told us that you couldn’t get rich working for the Fed, but you wouldn’t starve either. I think he was right.
I inherited a brokerage account from my parents and would like to pass it on to my daughters. To that end, I’m thinking of making some moves in my accounts, taking some of the profits and losses and then investing the majority in cash and CDs. I’d wait for the market to crash, then put it all in an index fund to make things easy for my girls to manage and easy for my wife, if I had to go first, based on some advice from Warren Buffett.
Our tax guy gave us some good advice, such as registering our house and vehicles in my two daughters’ names. I don’t have a financial advisor. I’m not sure who to trust. What do you think?
Steve
Dear Steve,
Usually you can’t go wrong by listening to Warren Buffett’s investing advice, but the way you put it here, I think maybe you’re misapplying it.
If you’re talking about his much-publicized 90/10 allocation strategy – which included instructions for his trust to structure his wife’s inheritance 90% in a low-cost index fund and 10% in government bonds – does not require starting from scratch all in cash. What you’re talking about by cashing out and waiting for a big drop in stocks is called timing the market, but it’s an impossible task for an individual investor. Most end up losing that bet, buying high and selling low, which is the exact opposite of what you want to do.
If your money in your brokerage account is invested now but you’re not happy 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 this doesn’t come? The S&P 500 SPX rose just over 24% in 2023 and is up in 2024. If you switch to cash, you’ll earn 5% in a flat or potentially declining interest rate environment.
Think big
The most important thing you can do if you’re worried about transferring your accounts is to make sure you have the correct 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 through the National Academy of Elder Law Attorneys.
You may not think you are rich, but even if you were, account balances and allocations are not the primary concern of an inheritance. When it comes time to deal with the paperwork, your wife and daughters will care little whether the investments are in this or that index or mutual fund, but how the accounts are titled will matter a lot. They will want to avoid the expense and hassles of probate and have easy access to the money they may need.
This goes double for homes and cars. Passing the house to your daughters before you die may actually be less financially advantageous than if they inherited it after you and your wife die, assuming the house is titled to both of you. “As a general rule, I strongly advise against such action,” says John Ross, a senior attorney at Texas-based Ross & Shoalmire. The difference is the basis, or what the government sets as the value of the asset for tax purposes.
If you give the house away now to your children in some way, they will lose the increase in market value when you die. You should also have some sort of trust or other legal agreement in place regarding the use of the home while you are still alive.
You may find it more efficient to place the home in a living trust now – in your name and your wife’s name – and let the children inherit it after your death. Then, they would get a boost based on the home’s value at the time of inheritance and would be much less likely to have to pay 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 ownership limit. If you take the step to start a living trust, you can register the cars in the trust, which will make the journey easier with both the DMV and any loans that may be involved.
So, Steve, don’t sit here on the sidelines hoping for a rainy day. Instead, make a long-term plan and spend your days painting beautiful landscapes.