Short-term access, long term strategies to fund assisted living and beyond -- where to start?

[politicat]

NB: I will be finding a financial consultant, but I need to do my homework first so that I can at least have the necessary conversations. It doesn't do anyone any good for me to go in as a complete neophyte. That way lies getting scammed.

I am now responsible for my grandmother's estate and for her well-being. Her major assets consist of her house (equally fragile as she is), and several pieces of farmland that are quite valuable. Given her state of health and her likely lifespan (5 years, +/- 4 years) and her cognitive issues, she will likely never be independent again and is now in assisted living. We are selling the farmland now because my mother, who is my grandmother's sole heir, is substantially attached to the house and cannot yet bear to part with it. (I'm working on that, but Mom has her own issues with relinquishing objects that cause pain.)

The farmland has been rented for 20+ years, and the rate of growth of the income has been consistently about 2% per year. My grandmother has consistently believed the land to be worth $100 an acre for at least 30 years and there was no arguing with her on this. That price is orders of magnitude too low. At sale, it will likely bring in the mid to high six figures to the very low seven figures. I have had three offers for it already, all above $750K.

As far as I'm concerned, it is utterly negligent of me to not sell the land and at least put the proceeds in something like an index fund. Even 7 year Treasuries do better than 2% per year, I don't have to carry insurance on treasuries, and capital gains taxes are lower than the extortionate and horribly badly managed county property taxes. (It's a hideously corrupt county, and the less I have to do with that deep red hole in the ground, the better for everyone.)

The pointers I need towards research are: assume you have between $600K and $1M in cash today that needs to last, at minimum, for the next 9 years, and ideally will also provide for similar care in about 20 years for 3-5 years, and with seriously good luck and planning, might cover partial college for 5 children, currently between the ages of 5 and 12. You know that you will have annual expenses in the range of $60,000 for the next 1-9 years, then no expenses until around 2024 (when my mother is likely to retire). Mom may want supplemental income between retirement and getting fragile, but should not likely need extensive care until her late 70s or early 80s, so around 2035. How do you invest the cash? I want the bulk of it in a place that is very, very hard to divest (but not real estate) so that it doesn't drip away (I.e. I can get at it in a month for a serious emergency, but I cannot easily hit an ATM for it.) I know I need to keep the annual expense money available in money-market checking or similar. Ideally, I would like to be able to pull the interest/earnings/dividends out on a quarterly basis and not touch the principal if at all possible.

I do great research, I am literate and competent, but my financial skills end at IRAs, 401Ks and 30 year fixed rate mortgages. The largest check I have ever written was for a couple grand. I know this is small potatoes high finance, but for me, it's enormous and I don't want to mess it up. What instruments should I research?

[elleng]

1. 2 'answers.'

My father invested returns from sale of homes, more recently with Morgan Stanley Smith Barney, after meeting a financial adviser (in Florida. The guy has since moved to Oregon, but continues the business.) It kept Dad well until his death at 98, including assisted living for about 6 years, and my brother and I will receive the rather small remainder shortly.

My husband (and I, to some extent) invested regularly, from Fed govt salary, with TRowe Price. He passed last year, and daughters and god-children inherited a lot, in addition to Federal govt employees life insurance.

Both investment sources were/are well-diversified, rather liquid, subject of course to capital gains, and did reliably well thru the years, subject of course to ups and downs of the market.

My point: Diversify with well-managed plans.

Good luck.

[politicat]

4. Thanks.

Diversity. Got it.

[Sherman A1]

2. I would suggest talking with

a couple of financial types (and your tax guy) or possibly three or four, then compare notes. I would look for similarities in what they tell you regarding your goals in this particular situation. I too suffer from the lack of high finance skills, but am stumbling along with 401k's and some small investments.

[politicat]

3. Oh, dear. I'm my tax guy.

My mother is an accountant. She was a CPA while I was growing up, but moved into project management about 20 years ago. I grew up helping during tax season, learned enough to keep up with doing my own, and I keep ours simple. I take a refresher class every few years.

My grandmother's tax guy retired (and I'm rapidly coming to the conclusion that the cultural differences between me, a Western states liberal academic, and professionals in her former residence -- Midwestern -- is just never going to work.)

[Sherman A1]

5. Well,

if you at the very least won't have trouble scheduling an appointment! That said, still might be good to get one or two more opinions.

[lastlib]

6. My first thought is this:

When the land is sold, be prepared for some MASSIVE federal income taxes. (You also need to do some research on what the cost basis for that property will be--what did grandparents pay for it, what did they spend to enhance it (not counting routine repairs). If you don't have that, the IRS is likely going to charge taxes on the full sale amount, so you may be shelling out a third or more of the sale proceeds for taxable gains.

You also need to consult an attorney to determine precisely what are your responsibilities here, and look into using a trust structured to deal with this.

I'll give this a little more thought and give you some more ideas a little later.

eta: I wrote this before I read your post about your tax work, so I guess you know about that part. my bad.

[politicat]

8. Actually, no taxes on the profits. Thanks, GOP.

My grandmother's current income keeps her under the 15% tax bracket. (In the last couple years, she's been in the 10% bracket.) the current tax code exempts her from capital gains from the sale of an asset, as long as she has 1) owned the property for at least 1 year, and b) as long as her income has been below the 15% tax threshold. Both of which are true. (I HATE that is true -- I'd be happy to pay the full 25% on full sales price because I believe in paying taxes -- but I am not going to not take advantage of it if ConAgra and the Koch brothers get out of paying their fair share. This one time, the little folk are coming out ahead.)

The problem with Gran believing that her land was worth $100 an acre is that she charged an equivalent rent and would not be moved when anyone tried to convince her otherwise. So yes, income in the painful poverty zone.

(Article here, but I verified it. Article

http://www.bankrate.com/finance/taxes/no-capital-gains-due-for-some-investors-1.aspx

We already have a trust in place, for which I am fully authorized to do what is needed to make it work, so any consultation I do with non-trust members (I.e. My mother) is exactly that -- consultation. I don't want to wreck my relationship with my mother, so she does get to advise and consent, but I know that continuing to lose money is a bad thing. (Also, I can be held criminally liable if I mismanage and continuing to lose money is a textbook definition of mismanagement.)

We will certainly be using a tax attorney for next year (probably the one associated with whatever financial services I go with). I don't screw around with the IRS, and I don't mind paying fair taxes.

[SheilaT]

7. I also want to emphasize

that you need to be very aware that there will be serious tax consequences to selling the land. If you can delay that until Grandma passes, the tax will be quite a bit less. But if the immediate financial need is sufficiently great, then sell but know right up front what you'll give up in tax.

The sum of money you expect, 600k to 1million, is substantial and, with reasonable management, will last a very long time. Since once Grandma is no longer with us, there should be little demand on that money for a period of time, you might also want to look at putting some of it into an annuity or two. Annuities come in various types and flavors, and of course the good financial planner will know a great deal more about them than I do.

I sincerely hope all goes well, however you wind up handling all this.

[politicat]

9. If I don't sell, she'll be in devastating shape.

She can't afford to live in her house with propane at 5.50 a gallon, and she can't afford to replace the furnace, and she can't afford to live elsewhere because of the hideously high property taxes. (Which will get worse if she moves to a warmer climate because of residency... It's complicated.) she can barely afford to stay in assisted living and any emergency (like if something happens to her house and requires us to pay the deductible for repair) will tip her into an economic death spiral. If she ends up deeply in debt to her facility, the state has the right to essentially confiscate her property, sell it and pay off her creditors before handing the remainder to her heirs, but in those sorts of fire sales, the property often gets sold at minimal prices. It's better for me to do the same thing in a responsible and sensible manner. The state where her property is is pretty... Awful in a lot of ways.

Waiting for her death was on the table, but it's not functional. (Especially because she actually would like to personally give some of the proceeds away to the great-grand kids in the form of college trusts. She can't do that when dead, and knows that colleges don't take 6 acres and thirty bushels as tuition payments anymore. She's losing her cognition and short term memory, but there's still a lot of her there.)

[SheilaT]

10. Thank you for clarifying things, and thank you even more for being willing

to share personal financial details.

It does seem as if you have a very good handle on what's going on. And even if you -- or she -- had to pay the maximum tax rate for the sale of the property, you will still be very far ahead of things, given how very much money the property is worth.

Good for you for being so very pro-active about this.