Podcast Summary: Jill on Money with Jill Schlesinger

Episode Title: Time to Bring Assets Under Management?
Release Date: December 16, 2024
Host: Jill Schlesinger, CFP®
Guest: Therese from Buffalo, New York

1. Introduction to the Episode

In the December 16, 2024 episode of Jill on Money with Jill Schlesinger, host Jill Schlesinger engages in a comprehensive discussion with Therese from Buffalo, New York. Therese seeks advice on managing a significant inheritance and contemplates whether to bring her assets under professional management. The conversation delves into the nuances of financial planning, inheritance management, tax implications, and the potential benefits of hiring a financial advisor.

2. Guest's Financial Background and Inheritance

Therese’s Current Financial Situation:

• Age: 45
• Marital Status: Single
• Employment: Full-time
• Annual Income: $107,000
• Retirement Accounts:
  • New York State Deferred Compensation Account: $147,000
  • Pension: Estimated between $30,000 and $70,000 annually
  • Roth IRA: $93,000
• Brokerage Account: $136,000
• Certificates of Deposit (CDs): $140,000
• Emergency Fund: $60,000
• Home Ownership: Owns a mortgage-free home valued at approximately $300,000

Therese's Inheritance:

• Total Amount Inherited: Approximately $2 million
• Composition:
  • Inherited IRAs: $825,000
  • Brokerage Accounts: $1.175 million (two separate accounts)

Key Quote:

“I want to make sure that this is not just used for myself, but it honors the legacy of the person who gifted it to me.”
— Therese [08:43]

3. Assessing the Need for a Financial Advisor

Therese’s Query: Therese is contemplating whether to bring her assets under management with a Certified Financial Planner (CFP®), especially given the substantial inheritance that includes inherited IRAs requiring Required Minimum Distributions (RMDs).

Discussion Points:

• When to Hire an Advisor:

  • Significant changes in financial circumstances, such as receiving a large inheritance.
  • Need for expert guidance to manage and invest inherited funds effectively.

• Possible Fee Structures:

  • Percentage-Based Management: Typically around 1% of assets under management, which could amount to $10,000 annually for Therese’s inherited accounts.
  • One-Time Financial Plan: A lump sum fee (e.g., $10,000) for a comprehensive financial plan without ongoing management fees.

Key Quote:

“It's age 60, 147 in your deferred comp. Do you have other retirement assets? Don't. Listen, I'm not doing the inheritance yet.”
— Jill [06:34]

4. Managing Inherited Assets and Tax Implications

Inherited IRAs and RMDs:

• Therese’s Inherited IRAs: $825,000
• RMDs: Approximately $80,000 per year over the next 10 years
• Tax Bracket Considerations:
  • Expected to be in the 24% tax bracket based on her income ($107,000 annually).

Strategies Discussed:

• Equal Withdrawals: Taking out equal parts each year to manage tax liabilities effectively.
• Cost Basis Considerations:
  • Inheriting assets comes with a stepped-up cost basis, meaning capital gains taxes are based on the asset’s value at the time of the original owner’s death, not the original purchase price.

Key Quote:

“You get a step up in cost basis to the date of death valuation. That means that when you inherit assets, the cost basis is reset to their value at the time of death, reducing potential capital gains taxes.”
— Jill [17:26]

5. Transitioning to Passive Investing

Current Investment Approach:

• Active Management: Therese’s inherited brokerage accounts consist of actively managed stocks, which she finds exhausting and beyond her expertise.
• Desire for Passive Investing: Prefers a more hands-off approach using mutual funds or exchange-traded funds (ETFs) to simplify her investment strategy.

Recommendations:

• Reallocating Investments:

  • Move from individual, actively managed stocks to a diversified portfolio of ETFs or mutual funds.
  • Vanguard is suggested as a suitable platform for these investments.

• Tax-Efficient Strategies:

  • Selling off actively managed stocks for cash is tax-free due to the stepped-up cost basis.
  • Reinvesting in passive vehicles can streamline management and potentially enhance returns through diversification.

Key Quote:

“I really am more used to passive investing, so looking towards someone who can help me along the way to move some of these more actively managed funds into a more passive investing vehicle.”
— Therese [10:52]

6. The Role of Donor-Advised Funds

Philanthropic Goals:

• Honor the Legacy: Therese wishes to use a portion of her inheritance for charitable purposes, such as donations or scholarships.

Strategy:

• Establishing a Donor-Advised Fund (DAF):
  • Allocate a set amount annually to the DAF during the 10-year RMD period.
  • Allows for flexible charitable giving over time without immediate full distribution.

Benefits:

• Tax Efficiency: Contributions to a DAF can provide immediate tax benefits while allowing for strategic distribution of funds to charities over time.
• Legacy Preservation: Ensures that the philanthropic intentions of the decedent are honored and sustained.

Key Quote:

“Maybe you'll put some money in [a donor-advised fund]. Maybe over the next 10 years you'll say, you know, I know I have to, I'm going to have higher income over the next 10 years.”
— Jill [23:02]

7. Engaging a CPA for Tax Management

Tax Filing Considerations:

• Increased Complexity:

  • Larger capital gains from inherited brokerage accounts.
  • Additional taxable income from RMDs.

• Recommendation:

  • Hiring a Certified Public Accountant (CPA) can help manage the increased complexity of Therese’s tax situation.
  • CPAs can assist in optimizing tax strategies during the transition period.

Key Quote:

“There's not. It's a weird thing. It's not actually very different from your tax situation. Here's what's going to happen.”
— Jill [26:14]

8. Final Advice and Next Steps

Empowerment Through Professional Guidance:

• Hiring a Financial Advisor:

  • Provides comprehensive management and strategic planning for inherited assets.
  • Helps transition from active to passive investing seamlessly.

• Step-by-Step Process:

  • Obtain date of death valuations for inherited accounts.
  • Reallocate investments to tax-efficient, passive vehicles.
  • Establish a donor-advised fund for philanthropic goals.
  • Consider long-term financial planning to ensure sustainability and legacy preservation.

Encouragement to Take Action:

• Therese feels more secure after understanding the steps and options available to her.
• Jill emphasizes the importance of professional guidance in managing substantial financial changes.

Key Quote:

“You're going to be fine. Even if you said, I'm taking a $15,000 vacation every year, do it.”
— Jill [13:04]

Conclusion

In this episode, Jill Schlesinger provides Therese with a roadmap to effectively manage her significant inheritance. From understanding the importance of bringing assets under management to navigating tax implications and aligning her investments with personal values, the discussion offers valuable insights for anyone facing similar financial transitions. The episode underscores the critical role of professional financial advice in safeguarding and growing inherited wealth while honoring the legacy of loved ones.

For Further Assistance: If you find yourself in a financial situation similar to Therese’s or have other financial questions, consider reaching out to a Certified Financial Planner® to explore your options and secure your financial future.