How To Handle A Large Inheritance

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
LMLP
Posts: 3
Joined: Tue Dec 21, 2021 11:59 am

How To Handle A Large Inheritance

Post by LMLP »

My spouse and I are both in our mid 40's. We're inheriting approximately $3 million in stocks/cash. All of the stocks are in individual companies, no index funds, no bonds. Roughly 250k of that will be in a rollover traditional IRA and the rest will come from a taxable brokerage account. I know I'll be required to draw down the IRA over the next few years.

But my overall question is what to do with the inherited stocks/cash, which will all go into a taxable account. I had been tempted to take a set it and forget it path, sell off the stocks and use all the funds to buy into a target date 2040 fund. I've also looked at Vanguard Life Strategy funds and Vanguard Balanced Index.

But the recent tax issue with Vanguard's target date fund has me reevaluating. Is the best move then to go with a three-fund strategy in taxable and rebalance manually as I go? My spouse and I have around $600k in tax deferred accounts that could be switched to total bond market funds and carry some of the bond asset allocation. I'm wondering if there are other hands-off alternatives that are more tax friendly than target date style funds.
Carl53
Posts: 2693
Joined: Sun Mar 07, 2010 7:26 pm

Re: How To Handle A Large Inheritance

Post by Carl53 »

Welcome to the forum.

Check this out. https://www.bogleheads.org/wiki/Managing_a_windfall
Thesaints
Posts: 5108
Joined: Tue Jun 20, 2017 12:25 am

Re: How To Handle A Large Inheritance

Post by Thesaints »

Since you get step up basis on the stocks, this is the perfect time to sell them and buy index funds instead.
You probably don’t want a target date (nor a balanced) fund. Those are a good choice only for a stereotypical small investor and with 3M+ you ain’t one.
If you feel lost having to chose how to invest, invest a few hundred bucks in a fee only advisor.
User avatar
Wiggums
Posts: 7051
Joined: Thu Jan 31, 2019 7:02 am

Re: How To Handle A Large Inheritance

Post by Wiggums »

LMLP wrote: Fri Jan 21, 2022 3:47 pm My spouse and I are both in our mid 40's. We're inheriting approximately $3 million in stocks/cash. All of the stocks are in individual companies, no index funds, no bonds. Roughly 250k of that will be in a rollover traditional IRA and the rest will come from a taxable brokerage account. I know I'll be required to draw down the IRA over the next few years.

But my overall question is what to do with the inherited stocks/cash, which will all go into a taxable account. I had been tempted to take a set it and forget it path, sell off the stocks and use all the funds to buy into a target date 2040 fund. I've also looked at Vanguard Life Strategy funds and Vanguard Balanced Index.

But the recent tax issue with Vanguard's target date fund has me reevaluating. Is the best move then to go with a three-fund strategy in taxable and rebalance manually as I go? My spouse and I have around $600k in tax deferred accounts that could be switched to total bond market funds and carry some of the bond asset allocation. I'm wondering if there are other hands-off alternatives that are more tax friendly than target date style funds.
I would not use the TDF with that amount of money. You are getting a step up basis to invest as you want. I would use the three fund portfolio. That will allow you to adjust your AA to match your risk tolerance as you get older. This strategy will give you greater flexibility over a TDF.
Last edited by Wiggums on Fri Jan 21, 2022 4:35 pm, edited 1 time in total.
"I started with nothing and I still have most of it left."
User avatar
BolderBoy
Posts: 6753
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: How To Handle A Large Inheritance

Post by BolderBoy »

Thesaints wrote: Fri Jan 21, 2022 4:26 pm Since you get step up basis on the stocks, this is the perfect time to sell them and buy index funds instead.
I agree with this.

OP, without knowing more about your situation (tax bracket, etc) our advice will be very broadly stroked. But your posting indicates you are pretty savvy. A two-fund or three-fund portfolio may serve you quite well.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
User avatar
retired@50
Posts: 12822
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: How To Handle A Large Inheritance

Post by retired@50 »

LMLP wrote: Fri Jan 21, 2022 3:47 pm I'm wondering if there are other hands-off alternatives that are more tax friendly than target date style funds.
The answer is yes. ^^^.

See the wiki page on tax efficient fund placement. Using your tax-deferred accounts for bond index funds, and the taxable accounts for stock index funds like a Total US Stock Index or a Total International Stock Index is the general guideline. If you still need more bond funds based on your desired asset allocation, you may want to include some bond funds in taxable. If your tax bracket is high enough (24% or more), you could consider municipal bond funds.

Link: https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: How To Handle A Large Inheritance

Post by delamer »

Thesaints wrote: Fri Jan 21, 2022 4:26 pm Since you get step up basis on the stocks, this is the perfect time to sell them and buy index funds instead.
You probably don’t want a target date (nor a balanced) fund. Those are a good choice only for a stereotypical small investor and with 3M+ you ain’t one.
If you feel lost having to chose how to invest, invest a few hundred bucks in a fee only advisor.
If the assets were held in certain types of trusts, there would not be a step-up in the taxable account.

So the first thing is to determine if the heir did receive a step-up. If there was a step-up, selling the individual stocks makes sense. Your instinct that a portfolio of a handful of ETFs or mutual funds is the better option is good.

Did you both actually receive the inheritance or was it one spouse? Assuming it was one of you only, there are good legal reasons to keep the taxable assets in an account in the heir’s name only. That doesn’t mean that you can’t treat your entire portfolio as one for asset allocation purposes.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
mhalley
Posts: 10432
Joined: Tue Nov 20, 2007 5:02 am

Re: How To Handle A Large Inheritance

Post by mhalley »

Target date funds aren’t great in taxable accounts. A lot of people got hosed on taxes last year due to a huge cap gains distribution. Maybe it was a one time thing, but you never know.
https://www.wsj.com/articles/vanguard-t ... 1642781228
https://www.mymoneyblog.com/vanguard-ta ... ution.html
KyleAAA
Posts: 9498
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: How To Handle A Large Inheritance

Post by KyleAAA »

The first question is to ask yourself what do you plan to do? If you plan to retire right away, a balanced fund might be fine since you'd be spending the interest rather than reinvesting it anyway. But otherwise, you probably shouldn't own a TDF in taxable. Managing a 3 fund portfolio only takes about 10 minutes a year to do. It isn't a major time investment. Bonds in tax-deferred, stocks in taxable.
Apathizer
Posts: 2507
Joined: Sun Sep 26, 2021 2:56 pm

Re: How To Handle A Large Inheritance

Post by Apathizer »

Since you have $3mil why make it unnecessarily complicated just for a little more tax efficiency? If I had that much I'd just buy VSCGX and call it good.

You could automatically withdraw $10K per month and probably never run out of money.
ROTH: 50% AVGE, 10% DFAX, 40% BNDW. Taxable: 50% BNDW, 40% AVGE, 10% DFAX.
User avatar
arcticpineapplecorp.
Posts: 15081
Joined: Tue Mar 06, 2012 8:22 pm

Re: How To Handle A Large Inheritance

Post by arcticpineapplecorp. »

LMLP wrote: Fri Jan 21, 2022 3:47 pm But my overall question is what to do with the inherited stocks/cash, which will all go into a taxable account. I've also looked at Vanguard Life Strategy funds and Vanguard Balanced Index.
Depends in part on the desired allocation. Tax managed balanced fund could work only if it carries the desired allocation or you can design that between taxable and tax advantaged.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
phxjcc
Posts: 1329
Joined: Thu Aug 23, 2018 3:47 pm

Re: How To Handle A Large Inheritance

Post by phxjcc »

Apathizer wrote: Fri Jan 21, 2022 8:52 pm Since you have $3mil why make it unnecessarily complicated just for a little more tax efficiency? If I had that much I'd just buy VSCGX and call it good.

You could automatically withdraw $10K per month and probably never run out of money.
Better than VTMFX?

A real question....not a challenge.👀
Apathizer
Posts: 2507
Joined: Sun Sep 26, 2021 2:56 pm

Re: How To Handle A Large Inheritance

Post by Apathizer »

phxjcc wrote: Fri Jan 21, 2022 9:14 pm
Apathizer wrote: Fri Jan 21, 2022 8:52 pm Since you have $3mil why make it unnecessarily complicated just for a little more tax efficiency? If I had that much I'd just buy VSCGX and call it good.

You could automatically withdraw $10K per month and probably never run out of money.
Better than VTMFX?

A real question....not a challenge.👀
I prefer VSCGX because it's globally diversified, but either would probably be fine. Since it the US has out performed ex-US equities VTMFX has performed better, but that's certainly not guaranteed to continue. VSCGX is about 25% US equities, 15% ex-US equities, 40% US bonds and 15% ex-US bonds, so it's really well diversified. It should provide consistently decent returns with relatively little volatility. Either would probably work fine.
ROTH: 50% AVGE, 10% DFAX, 40% BNDW. Taxable: 50% BNDW, 40% AVGE, 10% DFAX.
phxjcc
Posts: 1329
Joined: Thu Aug 23, 2018 3:47 pm

Re: How To Handle A Large Inheritance

Post by phxjcc »

Apathizer wrote: Fri Jan 21, 2022 10:12 pm
phxjcc wrote: Fri Jan 21, 2022 9:14 pm
Apathizer wrote: Fri Jan 21, 2022 8:52 pm Since you have $3mil why make it unnecessarily complicated just for a little more tax efficiency? If I had that much I'd just buy VSCGX and call it good.

You could automatically withdraw $10K per month and probably never run out of money.
Better than VTMFX?

A real question....not a challenge.👀
I prefer VSCGX because it's globally diversified, but either would probably be fine. Since it the US has out performed ex-US equities VTMFX has performed better, but that's certainly not guaranteed to continue. VSCGX is about 25% US equities, 15% ex-US equities, 40% US bonds and 15% ex-US bonds, so it's really well diversified. It should provide consistently decent returns with relatively little volatility. Either would probably work fine.
Ok, thanks…never heard of it before this.
Topic Author
LMLP
Posts: 3
Joined: Tue Dec 21, 2021 11:59 am

Re: How To Handle A Large Inheritance

Post by LMLP »

Wow, I completely forgot to revisit this thread after posting it. So belated thanks for everyone who chimed in.

I've got one little follow up question though. Of the 3 million we're inheriting, it looks now like about 300k is in the form of an inherited traditional IRA that I will have to draw down in the next 10 years. I'm inclined to use all of this IRA as part of my bond allocation as it's in a tax advantaged account. But being that the IRA has to be closed in 10 years, it's essentially tax advantaged but with an expiration date. So would it be smarter to fill this account completely with bonds that I would have to sell out of in 10 years, or to use some of the IRA space for VTI/VXUS as well which would then make my bond allocation larger in taxable?
Gill
Posts: 8221
Joined: Sun Mar 04, 2007 7:38 pm
Location: Florida

Re: How To Handle A Large Inheritance

Post by Gill »

delamer wrote: Fri Jan 21, 2022 4:50 pm
Thesaints wrote: Fri Jan 21, 2022 4:26 pm Since you get step up basis on the stocks, this is the perfect time to sell them and buy index funds instead.
You probably don’t want a target date (nor a balanced) fund. Those are a good choice only for a stereotypical small investor and with 3M+ you ain’t one.
If you feel lost having to chose how to invest, invest a few hundred bucks in a fee only advisor.
If the assets were held in certain types of trusts, there would not be a step-up in the taxable account.

So the first thing is to determine if the heir did receive a step-up. If there was a step-up, selling the individual stocks makes sense. Your instinct that a portfolio of a handful of ETFs or mutual funds is the better option is good.

Did you both actually receive the inheritance or was it one spouse? Assuming it was one of you only, there are good legal reasons to keep the taxable assets in an account in the heir’s name only. That doesn’t mean that you can’t treat your entire portfolio as one for asset allocation purposes.
Thanks for posting this. It seems in every post involving an inheritance everyone assumes there is a stepup in basis. That is often not the case as you point out..
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Topic Author
LMLP
Posts: 3
Joined: Tue Dec 21, 2021 11:59 am

Re: How To Handle A Large Inheritance

Post by LMLP »

delamer wrote: Fri Jan 21, 2022 4:50 pm
Thesaints wrote: Fri Jan 21, 2022 4:26 pm Since you get step up basis on the stocks, this is the perfect time to sell them and buy index funds instead.
You probably don’t want a target date (nor a balanced) fund. Those are a good choice only for a stereotypical small investor and with 3M+ you ain’t one.
If you feel lost having to chose how to invest, invest a few hundred bucks in a fee only advisor.
If the assets were held in certain types of trusts, there would not be a step-up in the taxable account.

So the first thing is to determine if the heir did receive a step-up. If there was a step-up, selling the individual stocks makes sense. Your instinct that a portfolio of a handful of ETFs or mutual funds is the better option is good.

Did you both actually receive the inheritance or was it one spouse? Assuming it was one of you only, there are good legal reasons to keep the taxable assets in an account in the heir’s name only. That doesn’t mean that you can’t treat your entire portfolio as one for asset allocation purposes.
It's just me receiving the inheritance, not my spouse, and the assets are in an account only in my name. But I did get a step-up for all of the funds.
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: How To Handle A Large Inheritance

Post by delamer »

LMLP wrote: Thu Mar 31, 2022 3:40 pm
delamer wrote: Fri Jan 21, 2022 4:50 pm
Thesaints wrote: Fri Jan 21, 2022 4:26 pm Since you get step up basis on the stocks, this is the perfect time to sell them and buy index funds instead.
You probably don’t want a target date (nor a balanced) fund. Those are a good choice only for a stereotypical small investor and with 3M+ you ain’t one.
If you feel lost having to chose how to invest, invest a few hundred bucks in a fee only advisor.
If the assets were held in certain types of trusts, there would not be a step-up in the taxable account.

So the first thing is to determine if the heir did receive a step-up. If there was a step-up, selling the individual stocks makes sense. Your instinct that a portfolio of a handful of ETFs or mutual funds is the better option is good.

Did you both actually receive the inheritance or was it one spouse? Assuming it was one of you only, there are good legal reasons to keep the taxable assets in an account in the heir’s name only. That doesn’t mean that you can’t treat your entire portfolio as one for asset allocation purposes.
It's just me receiving the inheritance, not my spouse, and the assets are in an account only in my name. But I did get a step-up for all of the funds.
Then your plan to sell the individual stocks in taxable and invest in a 3-fund portfolio makes sense, given the tax consequences of selling should be minimal. Rebalancing a 3 -fund is harder (relative to tax-advantaged) in taxable, because of the potential tax consequences. But you’ll control when that happens, unlike with an all-in-one fund.

When I received a somewhat less-robust inheritance, I kept it solely in my name and it is handled differently in my will than the assets that my husband and I accumulated together. Just something to think about.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
livingalmostlarge
Posts: 233
Joined: Sun Jan 14, 2018 4:03 pm

Re: How To Handle A Large Inheritance

Post by livingalmostlarge »

Sell everything and rebalance and asset allocate to your taste, not TRF
NiceUnparticularMan
Posts: 6103
Joined: Sat Mar 11, 2017 6:51 am

Re: How To Handle A Large Inheritance

Post by NiceUnparticularMan »

Personally, I think there is a lot to be said for a one-fund/mirroring approach, and not just for unsophisticated investors, actually for any investor who is wise enough to understand that the benefits of a hands-off approach could be more important than the unpredictable tax efficiencies and other benefits promised for more complicated approaches. If you are worried about Target funds specifically, you could just choose a suitable static fund like a LifeStrategy fund instead. Particularly if you are already in your mid-40s, and at all interested in a possible early retirement, having a glide path from here is not really all that necessary. Like, if you were thinking you might want to retire in 10-15 years, a suitable Target fund might already be around 70/30, heading toward around 50/50 at retirement. So you could do, say, 60/40 (LifeStrategy Moderate Growth), and it would probably not make much difference.

However, I do think in taxable you can also do a very simple two-fund approach combining Vanguard Tax Managed Balanced Fund (VTMFX) with one other fund that gets you to a reasonable approximate overall allocation, and then simply not rebalance (except maybe when contributing or withdrawing).

For example, something like 75% VTMFX/25% VXUS (Vanguard Total International) gets you right around 60% stock/40% (municipal) bonds, and 60% (tax-managed) US/40% ex-US. You get munis, the foreign tax credit, tax-managed US, and with at least the US stock and munis rebalancing, plus any you do with contributions/withdrawals, drift should not be too bad barring a really unusual circumstance.

Speaking of contributions/withdrawals, keeping it simple you can start, of course, by withdrawing any taxable income. If you want to reinvest any of that, or contribute more, you can just look at whatever is below that 75/25 ratio, and add it there. If you want to withdraw more, again you just look at whatever is above that 75/25 ratio, and take it out of there. Quite easy, no spreadsheets or other tracking of investments involved.

Anyway, just a thought. Some would prefer to do their own three-fund approach, and some would prefer to manage different allocations in different accounts, but again I personally think this is a wise hands-off approach that is also pretty well set up taxwise.
deltaneutral83
Posts: 2455
Joined: Tue Mar 07, 2017 3:25 pm

Re: How To Handle A Large Inheritance

Post by deltaneutral83 »

This amount of money in one swoop probably changes the AA and what OP's goals, tolerance, and capacity are. At the ages listed, I assume OP has close if not more than 25x expenses with windfall already and continue to work. Might not hurt to speak to your CPA and a fee only guy, will be pennies. But it seems straightforward, inherited IRA and a taxable account with stepped up basis.
Wanderingwheelz
Posts: 3145
Joined: Mon Mar 04, 2019 8:52 am

Re: How To Handle A Large Inheritance

Post by Wanderingwheelz »

delamer wrote: Fri Jan 21, 2022 4:50 pm
Thesaints wrote: Fri Jan 21, 2022 4:26 pm Since you get step up basis on the stocks, this is the perfect time to sell them and buy index funds instead.
You probably don’t want a target date (nor a balanced) fund. Those are a good choice only for a stereotypical small investor and with 3M+ you ain’t one.
If you feel lost having to chose how to invest, invest a few hundred bucks in a fee only advisor.
If the assets were held in certain types of trusts, there would not be a step-up in the taxable account.

So the first thing is to determine if the heir did receive a step-up. If there was a step-up, selling the individual stocks makes sense. Your instinct that a portfolio of a handful of ETFs or mutual funds is the better option is good.

Did you both actually receive the inheritance or was it one spouse? Assuming it was one of you only, there are good legal reasons to keep the taxable assets in an account in the heir’s name only. That doesn’t mean that you can’t treat your entire portfolio as one for asset allocation purposes.
That might be a bit risky to the non-inheriting partner- having the overwhelming majority of a households net worth be all equities for the benefit of one spouse only (mainly in the case of a divorce), but the other party having all of their net worth in bonds (named retirement accounts). If things fall apart, the non-inheriting spouse walks with the meager growth received on bonds in his retirement account(s).

I’d suggest that it might be best to keep the non-inheriting spouses retirement funds in equities and hold bonds in a portion of the inherited funds.
Being wrong compounds forever.
Silverado
Posts: 1650
Joined: Fri Oct 18, 2013 6:07 pm

Re: How To Handle A Large Inheritance

Post by Silverado »

LMLP wrote: Thu Mar 31, 2022 1:54 pm Wow, I completely forgot to revisit this thread after posting it. So belated thanks for everyone who chimed in.

I've got one little follow up question though. Of the 3 million we're inheriting, it looks now like about 300k is in the form of an inherited traditional IRA that I will have to draw down in the next 10 years. I'm inclined to use all of this IRA as part of my bond allocation as it's in a tax advantaged account. But being that the IRA has to be closed in 10 years, it's essentially tax advantaged but with an expiration date. So would it be smarter to fill this account completely with bonds that I would have to sell out of in 10 years, or to use some of the IRA space for VTI/VXUS as well which would then make my bond allocation larger in taxable?
Just bumping this question, since a lot of current posts are commenting on the original posts, but OP has this follow up.

Sorry, no experience with inherited IRA, so I can’t directly help.
HomeStretch
Posts: 11419
Joined: Thu Dec 27, 2018 2:06 pm

Re: How To Handle A Large Inheritance

Post by HomeStretch »

Yes, put your tax deferred holdings in the $300k Inherited IRA which should slow the growth and minimize the taxable distributions over the next 10 years.

+1 to selling the stepped-up Taxable account holdings and investing in a 3-fund portfolio with an eye towards tax efficiency given the large portfolio.

You and/or spouse should fully utilize all Roth or tax deferred space available to you annually. That includes utilizing a mega backdoor Roth if available in your 401k plans assuming the plan has good low-cost funds choices. If your net pay becomes too low to cover expenses, you can use your Taxable accounts as a source of funds. Shift as much of your retirement funds from your joint (and maybe inherited, if it’s not an issue) Taxable accounts to Roth for tax efficiency.
User avatar
Sandtrap
Posts: 19591
Joined: Sat Nov 26, 2016 5:32 pm
Location: Hawaii No Ka Oi - white sandy beaches, N. Arizona 1 mile high.

Re: How To Handle A Large Inheritance

Post by Sandtrap »

LMLP wrote: Fri Jan 21, 2022 3:47 pm My spouse and I are both in our mid 40's. We're inheriting approximately $3 million in stocks/cash. All of the stocks are in individual companies, no index funds, no bonds. Roughly 250k of that will be in a rollover traditional IRA and the rest will come from a taxable brokerage account. I know I'll be required to draw down the IRA over the next few years.

But my overall question is what to do with the inherited stocks/cash, which will all go into a taxable account. I had been tempted to take a set it and forget it path, sell off the stocks and use all the funds to buy into a target date 2040 fund. I've also looked at Vanguard Life Strategy funds and Vanguard Balanced Index.

But the recent tax issue with Vanguard's target date fund has me reevaluating. Is the best move then to go with a three-fund strategy in taxable and rebalance manually as I go? My spouse and I have around $600k in tax deferred accounts that could be switched to total bond market funds and carry some of the bond asset allocation. I'm wondering if there are other hands-off alternatives that are more tax friendly than target date style funds.
Notes:
1
You might want to consider posting for a full portfolio review so that you can get "comprhensive input from senior forum advisors" within a "larger context" of what you have now specifically. IE; The Big Picture.
And, in that way, construct a long term financial strategy that fits your needs and long term goals.
Like this:
Asking Portfolio Questions
https://www.bogleheads.org/forum/viewt ... =1&t=6212

2
Yes. Either a 3 fund portfolio of low cost index funds at; Schwab, Fidelity, Vanguard, etc.
And, now is a great time to consolidate all of the individual funds/stocks into a simple low cost portfolio structure.

3
As this is a large sum, and in taxable, there are other ways to diversify assets and income stream, perhaps with greater tax advantages.
(Feel free to PM me do discuss this so this doesn't throw your thread off here).

4
Do read and re read and keep reading. Print out and post on your door to memorize.
MANAGING A WINDFALL
https://www.bogleheads.org/wiki/Managing_a_windfall

5
Do be very careful and wary of the following: financial advisor salesman, brokerage advisor salesman, insurance policy and annuity salesman, personal banker advisor salesman, wealth consultant salesman, and friendly "uncle cleo who wants to help you with the burden of wealth", etc.
If you are attracted to the seeming reassurance of a financial advisor, consider a reputable "fee only" advisor or Vanguard VPAS services or equiv.

6.
Consider also: "Fund of funds" or "Balanced Funds" such as the low cost Vanguard Balanced Index Fund" at an allocation of 60/40. It is "self balancing" and does not need to be tended to as a 3-4 fund portfolio would be. It is a truly "set and forget" fund. There are others at Vanguard and Fidelity and Schwab, etc, that are like that, with a consistent none changing allocation, and low cost.

7.
Resist the urge to "do something" with the money. If it sits in a brokerage Money Market account or so forth there's no rush to "do something" with it. Wait until you are comfortable and it is no longer the defining thing in your life.
After investing it, again, do be sure it is not the "defining thing" in your life and lifestyle. Just continue your lifestyle and routine as if it were not there. Consider that it is a jumpstart on your retirement "nest egg".

8.
Read:
Investing Behavior Pitfalls
https://www.bogleheads.org/wiki/Behavioral_pitfalls

9. Finally:
a) Do seek legal counsel for estate planning, trust planning, etc.
b) Do consult with a CPA to look at your overall financial picture and strategize it.
c) Do increase your homeowners rider, or other, "umbrella insurance" to include your now larger, assets, etc.

j :D
Wiki Bogleheads Wiki: Everything You Need to Know
User avatar
Sandtrap
Posts: 19591
Joined: Sat Nov 26, 2016 5:32 pm
Location: Hawaii No Ka Oi - white sandy beaches, N. Arizona 1 mile high.

Re: How To Handle A Large Inheritance

Post by Sandtrap »

LMLP wrote: Thu Mar 31, 2022 3:40 pm
delamer wrote: Fri Jan 21, 2022 4:50 pm
Thesaints wrote: Fri Jan 21, 2022 4:26 pm Since you get step up basis on the stocks, this is the perfect time to sell them and buy index funds instead.
You probably don’t want a target date (nor a balanced) fund. Those are a good choice only for a stereotypical small investor and with 3M+ you ain’t one.
If you feel lost having to chose how to invest, invest a few hundred bucks in a fee only advisor.
If the assets were held in certain types of trusts, there would not be a step-up in the taxable account.

So the first thing is to determine if the heir did receive a step-up. If there was a step-up, selling the individual stocks makes sense. Your instinct that a portfolio of a handful of ETFs or mutual funds is the better option is good.

Did you both actually receive the inheritance or was it one spouse? Assuming it was one of you only, there are good legal reasons to keep the taxable assets in an account in the heir’s name only. That doesn’t mean that you can’t treat your entire portfolio as one for asset allocation purposes.
It's just me receiving the inheritance, not my spouse, and the assets are in an account only in my name. But I did get a step-up for all of the funds.
As it is "just you" that received the inheritance:
a) seek legal counsel to discuss; community property, commingling of funds, trust/will setup and funding, estate planning, etc.
b) discuss various trust structures, pros and cons, etc. (family dynamics, etc).

j :D
Wiki Bogleheads Wiki: Everything You Need to Know
HEAVYCRAIG
Posts: 11
Joined: Fri Aug 10, 2018 7:33 am

Re: How To Handle A Large Inheritance

Post by HEAVYCRAIG »

OP -

You have a good thought to consider the asset allocation of the inherited IRA against your whole portfolio. My recommendation is to keep the entire portion of the inherited IRA as your bond allocation (adjusting your other tax-deferred accounts to add bonds to complete the picture of your total desired bond allocation).

So over the 10 year period where you need to draw down the inherited IRA, the account would expect to see minimal growth and thus lower the expected tax burden due to the lower dollar amounts that would be withdrawn on a yearly basis.

I would also recommend using a three-fund portfolio approach so you can optimize the tax efficiency of your portfolio in your particular situation.

Your portfolio would look like this:
2.7m - taxable brokerage - 75% total stock market index, 25% Total International stock index
300k - inherited IRA - 100% total bond index
600k - existing tax-deferred accounts (IRA,401k, Roth) - 100% total bond index

This would give you a total portfolio asset allocation of:
75% Equities (with 55% in the total US stock index, 20% international)
25% Bonds

You could then tweak the funds within each account to match your desired asset allocation. You may end up needing some consideration for a tax-sensitive fixed income allocation in your taxable brokerage if you desire a higher overall bond allocation.

You can direct the Inherited IRA withdrawals to your taxable brokerage account to use for rebalancing, or withdraw as cash to your checking account to use for expenses depending on your needs.

I would also recommend consolidating to whatever brokerage you have the most accounts with for simplicity. 270
User avatar
Sandtrap
Posts: 19591
Joined: Sat Nov 26, 2016 5:32 pm
Location: Hawaii No Ka Oi - white sandy beaches, N. Arizona 1 mile high.

Re: How To Handle A Large Inheritance

Post by Sandtrap »

HEAVYCRAIG wrote: Fri Apr 01, 2022 7:36 am OP -

You have a good thought to consider the asset allocation of the inherited IRA against your whole portfolio. My recommendation is to keep the entire portion of the inherited IRA as your bond allocation (adjusting your other tax-deferred accounts to add bonds to complete the picture of your total desired bond allocation).

So over the 10 year period where you need to draw down the inherited IRA, the account would expect to see minimal growth and thus lower the expected tax burden due to the lower dollar amounts that would be withdrawn on a yearly basis.

I would also recommend using a three-fund portfolio approach so you can optimize the tax efficiency of your portfolio in your particular situation.

Your portfolio would look like this:
2.7m - taxable brokerage - 75% total stock market index, 25% Total International stock index
300k - inherited IRA - 100% total bond index
600k - existing tax-deferred accounts (IRA,401k, Roth) - 100% total bond index

This would give you a total portfolio asset allocation of:
75% Equities (with 55% in the total US stock index, 20% international)
25% Bonds

You could then tweak the funds within each account to match your desired asset allocation. You may end up needing some consideration for a tax-sensitive fixed income allocation in your taxable brokerage if you desire a higher overall bond allocation.

You can direct the Inherited IRA withdrawals to your taxable brokerage account to use for rebalancing, or withdraw as cash to your checking account to use for expenses depending on your needs.

I would also recommend consolidating to whatever brokerage you have the most accounts with for simplicity. 270
+1
Great points. (actionable and substantive)
Well said.
(thanks "heavycraig")

OP: These are great suggestions.
Along those lines, consider using these online "tools" to setup and maintain your allocation and keep things simple across all of your accounts.
ONLINE FINANCIAL TOOLS
PORFOLIO VISUALIZERS, PROJECTIONS, AND ANALYSIS
https://www.portfoliovisualizer.com
Firecalc. Retirement. How long will your money last?
https://www.firecalc.com
Morningstar Instant Xray
http://www.morningstar.com/portfolio.ht ... Entry.aspx

**Reminder, setup for simplicity and maintain that simplicity in structure.

Aloha
j :D
Wiki Bogleheads Wiki: Everything You Need to Know
User avatar
HMSVictory
Posts: 1715
Joined: Sun Nov 01, 2020 6:02 am
Location: Lower Gun Deck

Re: How To Handle A Large Inheritance

Post by HMSVictory »

You are on the right track. Sell everything (you won't have any gains as you get a step up in basis to the time of death) and use a 3 fund approach (or you could just put everything in the Vanguard Balanced Fund and be done with it).

I would personally just flow the funds into my preset asset allocation but I would highly encourage you to enjoy (maybe a nice trip, or a new car) and give some of the money.
Stay the course!
BlackStrat
Posts: 330
Joined: Wed Apr 29, 2015 9:20 am

Re: How To Handle A Large Inheritance

Post by BlackStrat »

I have an acquaintance who inherited a relatively large amount years back and left it in a American funds mutual fund which now generates $36k per year in capital gains.

Between that, a pension, Social Security, and future RMD’s, a tax bomb awaits.

She now regrets not converting everything to a simple index fund at time of inheritance, and would be forced to pay capital gains to do so.

If it were me, I would take all of the pre-tax money ($850k?) and put it in bond funds and the rest I would simply cash out and put into the total stock market index fund (unless you’d like to allocate a portion of that to international as well).

Tax efficiency, diversification, and low cost should work wonders for this investment over the next 20-30 years.

Your only trick would be how to increase your stable bond holdings in an after-tax account if you decide that allocation isn’t safe enough for you.

Good luck!
HomeStretch
Posts: 11419
Joined: Thu Dec 27, 2018 2:06 pm

Re: How To Handle A Large Inheritance

Post by HomeStretch »

For overall portfolio tax efficiency, I usually recommend to hold as much as possible of one’s fixed income allocation in tax deferred space.

In your case my recommendation changes as you are keeping the inherited assets (which are the majority of the portfolio) titled in your name only. I assume this is for protection in case of divorce or to direct the beneficiaries as you wish.

If that’s the case, you should view your portfolios as two or three portfolios (yours, spouse, maybe ours) rather than one (ours). Your spouse should set an appropriate asset allocation including equity for growth even if spouse’s portfolio is totally held in tax deferred accounts. It wouldn’t be fair to load spouse’s accounts with slow-growth fixed income holdings (unless spouse specifically wants 0% equity). Even if divorce is unlikely… because the inherited assets are titled separately, in the interest of fairness and equal opportunity consider separate asset allocations and equally contributing joint income annually to retirement accounts.
Post Reply