What to do with Grandmother's cash from home sale??

[Alex N]

This past spring we went through the task of helping my grandmother transition into a senior independent apartment. We have had her home listed throughout the summer and if everything holds up we should be closing in 2 weeks.

I have already worked with her on a budget because surprisingly (or maybe not) the 500 sq ft 1bedroom apartment will cost her more per month then her old 1700 sq ft home with a 2 car garage on a .5 acre city lot. I've worked the numbers based on her S.S. and my grandfathers pension payments PLUS her current savings, and what she walks away with from the sale of her house, and she can essentially live in this apartment situation (adjusting for inflation) for 10-11 years if she decides to stay her (rather then switching to something less expensive or another scenario all together).

Without getting into too many details I want to make sure I am not missing something and more importantly what should we have her do with the funds from the house sale. After paying of a small equity loans, realtor fees and other closing fees she will have ~ 110K. She also has approximately 30K in a savings account at a local bank. In the past she has put some in CD's (when she had more) and I don't think she has clue what to do with the 110K she will be coming into. Ideally at this point we aren't looking for big gains, but something rather then nothing would be nice. What is the best route to keep it safe and secure but also makes financial sense? Is it worth setting up a trust for an amount like that and given her circumstances? She will essentially be drawing on this each year - the idea being should would essentially die "broke" in 10-12 years. Her health is fair/good at 82 but no one ever knows, she could live 3 more years or 15.

With my family a simple approach is best because complex scenarios don't seem to sit well with them I am just trying to help out and any advice is much appreciated.

 

[Matt]

Quick question first- the $140k... Is that being included in your 10-11 year budget or is it on top of that?

If on top (which I'm guessing) what is the apt going to cost in 10-11 years, are it's rates rising with inflation, locked in, or on any other rate structure?

Off the bat I'm leaning towards stretching that time horizon of 93-4 outwards using the available funds.

 

[Alex N]

Yeah, let me clarify that. The 140K once she sells her house is basically all her assets (in cash) besides a car which is worth maybe 10K. On top of that she has about $1700 in income a month. I arrived at the 10-11 years (11.4 years to be exact) based on how many years she could live before she would essentially be broke and would have $0 savings and just be receiving her income. At that point she could move to a less expensive housings (subsidized) and or look at other options. I basically did this because she was worried at the high cost of her current apartment per month (which is an all-inclusive type place that provides 3 meals, weekly cleaning, etc - actually it all seems pretty nice to me!) and she was worried she would run out of money in 3-5 years which I proved to her was not true if she maintained a certain level of spending.

As far as the rent on her apartment, I am trying to get the actual rate structure which supposedly they have. She is in a trial 6 month lease right now so it's possible we could lock in a rate for a longer period which is what i am working on now. When I did the budget I just figured a 3.5% increase year over year in her rent, most everything is included so I didn't worry about inflation of her spending outside her living expenses as much (but maybe I should of) but at the time I was just looking for a ball park to make sure she could live as she is now for the next 10 years.

Thanks for your help Matt.

 

[Annie H.]

I love this forum and Matt to death. However, this section of the forum doesn't get very many eyes. Matt is super busy and so while you're waiting for him (with all respect due Mr. Matt, no sarcasm intended) you might want to post over at Bogleheads where you'll hopefully be able to get a half dozen or more responses.

http://www.bogleheads.org/forum/viewforum.php?f=1
You want to post in the: Investing - Help with Personal Investments Forum.

 

[Matt]

Yeah, let me clarify that. The 140K once she sells her house is basically all her assets (in cash) besides a car which is worth maybe 10K. On top of that she has about $1700 in income a month. I arrived at the 10-11 years (11.4 years to be exact) based on how many years she could live before she would essentially be broke and would have $0 savings and just be receiving her income. At that point she could move to a less expensive housings (subsidized) and or look at other options. I basically did this because she was worried at the high cost of her current apartment per month (which is an all-inclusive type place that provides 3 meals, weekly cleaning, etc - actually it all seems pretty nice to me!) and she was worried she would run out of money in 3-5 years which I proved to her was not true if she maintained a certain level of spending.

As far as the rent on her apartment, I am trying to get the actual rate structure which supposedly they have. She is in a trial 6 month lease right now so it's possible we could lock in a rate for a longer period which is what i am working on now. When I did the budget I just figured a 3.5% increase year over year in her rent, most everything is included so I didn't worry about inflation of her spending outside her living expenses as much (but maybe I should of) but at the time I was just looking for a ball park to make sure she could live as she is now for the next 10 years.

Thanks for your help Matt.

So... there are a few routes to take with this, and you'd need to speak with an elder law attorney to confirm eligibility, as rules vary by state.

Let me just confirm though - she'd be broke because her income ($1700) is insufficient to meet her expenses and she'd be tapping the $140K to make ends meet? Or is it that you expect the inflation rates to exceed COLA for SSI and Pension? If it is the latter you are in good shape, if the former, not so much...

If you are looking at Long Term Care, and don't have insurance, and aren't self insured then there is Medicaid. The issue (for the lawyer to confirm) is that her assets (140K) are in excess of the threshold to receive medicaid. It (may..) be possible to shift said assets out of her estate via gifting. However, she cannot just give away all her money and plead poverty, there is a 5 year look back period, and the government will consider gifts within this time to be included in wealth calculations.

The route here (should it be viable) would be to quickly enter poverty levels by gifting away the assets to below the state accepted level, pay for care using the income from pension and SSI, and in 5 years time, after the lookback period has ended, apply for Medicaid. During this time and onwards you could keep the gifted money separate from your own, and invest it in low cost funds to provide a backup system in the event that there were any changes to Medicaid eligibility. Note that you may gift tax free the full $140K in a single year. The IRS would need to be informed, but it is not a taxable event, until such gifting exceeds the lifetime exclusion (over 5M).

This would be the savviest way, it would cost a bit of lawyer money to set up, but then you take the $140K and keep it safe, and she can be supported by the kind US Govt.

The other route you could take would be to try to go from paying with income, to then using the (hopefully appreciated) $140K to kick in.. again I am missing something obvious here as I can't see all the data, but going back to my earlier point, does she need the $140K from pretty much now, or does she not need it until 11.4 years in?

 

[Sesq]

How old is your Grandmother? Its not knowable what her true life expectancy is, but based on the little we can know (e.g. current health), how does that measure up against your 10 year estimate?

 

[Matt]

How old is your Grandmother? Its not knowable what her true life expectancy is, but based on the little we can know (e.g. current health), how does that measure up against your 10 year estimate?

82 per last paragraph of OP.

 

[Annie H.]

Yeah, let me clarify that. The 140K once she sells her house is basically all her assets (in cash) besides a car which is worth maybe 10K. On top of that she has about $1700 in income a month.

If you do decide to go the Medicaid route it is very important that you do it properly. There are organizations--non-profit and for profit who will consult and advise you on exactly what to do. I used to do accounting work with one of these firms in the SF Bay Area. The advise on CA but a good deal of this information can be extrapolated to other states. A large proportion of their clients come from lawyer referrals. It's never a bad idea to consult with a lawyer BUT firms who specialize in Medicaid rules can help you through. There are some interesting things you can do with annuities, prepaid funeral (unless that's changed) and other methods.

I can highly recommend this firm (they do free consultations)--do a read through just to inform yourself of options available and to begin to understand how this works:

http://www.seniormedi-benefits.org/mission.htm

 

[curtis1120]

I'd recommend against trying to go for Medicaid for now. I'm not sure your grandmother had being at "the mercy of the system" in mind when she saved for all these years. How about Vanguard managed payout fund?

https://investor.vanguard.com/mutual-funds/managed-payout/#/

This would satisfy your family's desire to keep things simple. The expenses are relatively low and she would still have control, she can take out more if needed and the capital can pass to heirs rather than being surrendered.

 

[Matt]

I'd recommend against trying to go for Medicaid for now. I'm not sure your grandmother had being at "the mercy of the system" in mind when she saved for all these years. How about Vanguard managed payout fund?

https://investor.vanguard.com/mutual-funds/managed-payout/#/

This would satisfy your family's desire to keep things simple. The expenses are relatively low and she would still have control, she can take out more if needed and the capital can pass to heirs rather than being surrendered.

Thanks for you input. Could I ask why you think this is better? The annuity payment from $140K is about $406 per month, which wouldn't be enough to maintain the expenses. This would be a trap situation where there are too much in the way of assets to get support, but too little inflow from the assets...by opting to divert funds out via gifting now you aren't going to surrender anything. I see your point about 'mercy of the system' but if the family can be trusted to take care of those funds then they still exist...

 

[curtis1120]

People's priorities change when they get tens of thousands of dollars in thier bank account - even if its supposed to be for grandma. Additionally the kids creditors can get their hands on Grandmas money once its been "given" to them. But ok lets say that telling Grandma to give it all to the kids and trust them is an option. Those kids still need some advice on where to keep it safe.

Additionally SSI and pensions count against Medicaid eligibility many states it is $1293 of income per month. So her $1700 income will disqualify her even if she is broke.

Grandma has $1700/month of expenses covered by SSI and pension. She also has $1,014/month in other expenses (based on 140K being drained in "11.5 years to be exact"). If she does the managed payout fund she's keeping $608 more than she would have otherwise (at least the first year, of course it would go down and a spreadsheet would help). That extra money each month can really add up and help cover unforseen expenses or some fun things. I don't think its a problem for an 82 year old to tap the principal. Her life expectancy is 8.5 years (per SSA).

 

[Matt]

People's priorities change when they get tens of thousands of dollars in thier bank account - even if its supposed to be for grandma. Additionally the kids creditors can get their hands on Grandmas money once its been "given" to them. But ok lets say that telling Grandma to give it all to the kids and trust them is an option. Those kids still need some advice on where to keep it safe.

Additionally SSI and pensions count against Medicaid eligibility many states it is $1293 of income per month. So her $1700 income will disqualify her even if she is broke.

Grandma has $1700/month of expenses covered by SSI and pension. She also has $1,014/month in other expenses (based on 140K being drained in "11.5 years to be exact"). If she does the managed payout fund she's keeping $608 more than she would have otherwise (at least the first year, of course it would go down and a spreadsheet would help). That extra money each month can really add up and help cover unforseen expenses or some fun things. I don't think its a problem for an 82 year old to tap the principal. Her life expectancy is 8.5 years (per SSA).

If you read my responses above I wasn't quite sure what was going on with that monthly expense, it wasn't clear if the $140K was needed or was in surplus. If in surplus then the idea of an annuity isn't terrible, but I don't know how that exactly helps if there is such a discrepancy in the amount needed and the amount it provides- it just doesn't add up so probably would fail as a strategy (IE Vanguard would say it doesn't work to try to set up something that spins off $1014 from something that is designed to pay less than half of that).

Regarding the $1293 level, that is the 133% FPL level that is used for Medicaid, I believe that long term care tends to run on different schedule, of 300% FPL.

I think you do raise a good point about Grandma's money and the impact of changing the title of it, and I agree that the kids would still need advice on how to invest it. I'm not sure that if we managed to successfully remove it from the estate that the annuity concept is necessarily needed, but it isn't a terrible option. I might just be inclined to invest it in a diversified portfolio - I'd still be fine with Vanguard for this.

 

[Alex N]

So... there are a few routes to take with this, and you'd need to speak with an elder law attorney to confirm eligibility, as rules vary by state.

Let me just confirm though - she'd be broke because her income ($1700) is insufficient to meet her expenses and she'd be tapping the $140K to make ends meet? Or is it that you expect the inflation rates to exceed COLA for SSI and Pension? If it is the latter you are in good shape, if the former, not so much...

If you are looking at Long Term Care, and don't have insurance, and aren't self insured then there is Medicaid. The issue (for the lawyer to confirm) is that her assets (140K) are in excess of the threshold to receive medicaid. It (may..) be possible to shift said assets out of her estate via gifting. However, she cannot just give away all her money and plead poverty, there is a 5 year look back period, and the government will consider gifts within this time to be included in wealth calculations.

The route here (should it be viable) would be to quickly enter poverty levels by gifting away the assets to below the state accepted level, pay for care using the income from pension and SSI, and in 5 years time, after the lookback period has ended, apply for Medicaid. During this time and onwards you could keep the gifted money separate from your own, and invest it in low cost funds to provide a backup system in the event that there were any changes to Medicaid eligibility. Note that you may gift tax free the full $140K in a single year. The IRS would need to be informed, but it is not a taxable event, until such gifting exceeds the lifetime exclusion (over 5M).

This would be the savviest way, it would cost a bit of lawyer money to set up, but then you take the $140K and keep it safe, and she can be supported by the kind US Govt.

The other route you could take would be to try to go from paying with income, to then using the (hopefully appreciated) $140K to kick in.. again I am missing something obvious here as I can't see all the data, but going back to my earlier point, does she need the $140K from pretty much now, or does she not need it until 11.4 years in?

Thanks for all the information Matt. It sounds like I really need to get some more detailed information from her (if possible). I know she has medicare and some additional insurance through AARP that is a few hundred bucks a month (I know, more specific details would be better at this point but it's hard to get information from her at this age unless I am going through her paperwork myself, which is tough being 3K miles away).

I need to clear up the 140K as well, her monthly expenses exceed her income at this point (most due to the high cost of independent senior living) so your initial assumption was right. She is currently burning through the 140K to pay for expenses monthly. That is where the 11.4 years came from before she was essentially out of savings entirely. We have looked at other options for her living situation but there are not lots of options in central Maine and she is unwilling to move to the southern part of the state or out of state at this point ( I have tried). The majority of her expenses are in her monthly rent to the tune of $2200 (which includes meals and most utilities). So yes, she is spending her savings to cover her expenses each and every month.

I'll reply to the other posts individually, i've been out of pocket for a few days. Thanks again!

 

[Alex N]

82 per last paragraph of OP.

Like Matt stated 82, and her health is "good" but there is a blood condition she has had for years and has been treated which makes her high risk for strokes, she had an episode last year which is part of the reason for the move but as of now she is doing well. At this point it's hard to say if she will live 5, 10 or 15 years. We have history of a few women living well into there 90s in our family.

 

[Matt]

Thanks for all the information Matt. It sounds like I really need to get some more detailed information from her (if possible). I know she has medicare and some additional insurance through AARP that is a few hundred bucks a month (I know, more specific details would be better at this point but it's hard to get information from her at this age unless I am going through her paperwork myself, which is tough being 3K miles away).

I need to clear up the 140K as well, her monthly expenses exceed her income at this point (most due to the high cost of independent senior living) so your initial assumption was right. She is currently burning through the 140K to pay for expenses monthly. That is where the 11.4 years came from before she was essentially out of savings entirely. We have looked at other options for her living situation but there are not lots of options in central Maine and she is unwilling to move to the southern part of the state or out of state at this point ( I have tried). The majority of her expenses are in her monthly rent to the tune of $2200 (which includes meals and most utilities). So yes, she is spending her savings to cover her expenses each and every month.

I'll reply to the other posts individually, i've been out of pocket for a few days. Thanks again!

To be clear (and I think its clear but no harm in being certain) with the information we have at hand we can't give more than some ideas for further exploration.

Regarding the 140K - what rate were you using for inflation adjusted interest rates for the 11.4 year projection?

 

[Alex N]

People's priorities change when they get tens of thousands of dollars in thier bank account - even if its supposed to be for grandma. Additionally the kids creditors can get their hands on Grandmas money once its been "given" to them. But ok lets say that telling Grandma to give it all to the kids and trust them is an option. Those kids still need some advice on where to keep it safe.

Additionally SSI and pensions count against Medicaid eligibility many states it is $1293 of income per month. So her $1700 income will disqualify her even if she is broke.

Grandma has $1700/month of expenses covered by SSI and pension. She also has $1,014/month in other expenses (based on 140K being drained in "11.5 years to be exact"). If she does the managed payout fund she's keeping $608 more than she would have otherwise (at least the first year, of course it would go down and a spreadsheet would help). That extra money each month can really add up and help cover unforseen expenses or some fun things. I don't think its a problem for an 82 year old to tap the principal. Her life expectancy is 8.5 years (per SSA).

Thanks for the input Curtis. This is part of what we are struggling with if we gifted it, on daughter is financially in good shape and can be trusted, the other not so much, same goes with the grand kids (which is where I fall into). Your math is all correct, I wasn't as clear on how the 140K would be used but you are correct. I appreciate the advice and feedback, I am going to look into everything and then talk with the rest of the family that is actually helping.

 

[Alex N]

To be clear (and I think its clear but no harm in being certain) with the information we have at hand we can't give more than some ideas for further exploration.

Regarding the 140K - what rate were you using for inflation adjusted interest rates for the 11.4 year projection?

I need to revisit my projections once the house closes (1 week) and I can look at everything in black and white but originally when I got the 11.4 years it was to just talk her off the ledge that she would be broke in 2 years (her thoughts if here rent/expenses jumped that much). I was pretty lazy about it because I was just looking for ball park but I basically figured a 3% inflation rate (mostly applied to her rent) and and a .5% interest rate (based on just having the money in a savings account) but I only did .5% because I didn't go into figuring out that any interest she earned in a ~1% savings account would continue to fall as the balance dropped. Also didn't account for interest rate possibly rising or falling (like I said I was pretty lazy about it the first go around).

For what it's worth she has traditionally on her own kept her savings in a savings account and CD's over the years (decades) and cashed them out as they came due and she needed the money (for gifting, expenses, home repairs, etc)

 

[jmt1030]

So, you're looking at a shortfall of about $500 a month. A $100k VA (variable annuity) should be able to give you somewhere between 5 and 6% income for the rest of her life, which would get you very close to that. I would only use $100k so that she can leave some liquid cash in savings in case of any emergency.

 

[Annie H.]

Bariabl

So, you're looking at a shortfall of about $500 a month. A $100k VA (variable annuity) should be able to give you somewhere between 5 and 6% income for the rest of her life, which would get you very close to that. I would only use $100k so that she can leave some liquid cash in savings in case of any emergency.

Variable annuities come with many risks and are not adbidable on this case.

http://www.rothira.com/blog/the-risk-of-variable-annuities
http://www.cbsnews.com/news/a-hidden-danger-of-variable-annuities/

 

[GA400]

Just chiming in to say that all of this analysis and input is very informative and helpful for me as well. I am helping my mother with a similar situation right now. She is 71 and still working full time, but she needs to retire very soon and can't afford to stay in her condo on just SSI and her savings are very minimal due to a myriad of reasons- low income, my stepdad lost everything several times starting companies that failed, and others. She is finally mentally ready to go into a smaller place and has found a very nice assisted living facility (section 8 but managed by local Episcopal diocese) but she can't be a homeowner to even start the process with them. I will be helping her work through the sale of her condo, consolidating her proceeds from home sale, retirement and savings accounts, choosing Medicare plans plus supplements and so forth. Thread subscribed!

 

[jmt1030]

Bariabl

Variable annuities come with many risks and are not adbidable on this case.

http://www.rothira.com/blog/the-risk-of-variable-annuities
http://www.cbsnews.com/news/a-hidden-danger-of-variable-annuities/

Those articles make some sweeping generalizations about VA's.

If you purchase a VA from a reputable insurance company, 95% of those worries will be out the door. I've never seen an annuity where you pay an upfront sales charge, and I've never seen an income rider that only lasts 10 years. Sure the VA has fees; somewhere in the neighborhood of 2.5%. Any run of the mill mutual fund that you use inside of that VA should be able to give you a higher return than that. If you use a good balanced fund you're going to get on average 5-7% annually on an average basis.

 

[Matt]

Those articles make some sweeping generalizations about VA's.

If you purchase a VA from a reputable insurance company, 95% of those worries will be out the door. I've never seen an annuity where you pay an upfront sales charge, and I've never seen an income rider that only lasts 10 years. Sure the VA has fees; somewhere in the neighborhood of 2.5%. Any run of the mill mutual fund that you use inside of that VA should be able to give you a higher return than that. If you use a good balanced fund you're going to get on average 5-7% annually on an average basis.

Most of the sweeping statements about VAs are accurate. Conceptually they are good investments and might seem ideal for such a situation, indeed, the Vanguard version upstream, is quite viable. However, I think that the shortfall may be mismatched - i'm only eyeballing it, but it looks like more than $500 per month is required, hence an annuity option failing.

Generally speaking, I'm very much against VAs, I think the only people who are in favor of them are selling them, or have been sold them well.

 

[Nguyen]

I would suggest that you look into buying municipal bonds since there are no tax on both federal and state. In California, muni bonds in schools are very safe. They can earn 3% or so (better than CD in bank now). Thanks.

 

[Matt]

I would suggest that you look into buying municipal bonds since there are no tax on both federal and state. In California, muni bonds in schools are very safe. They can earn 3% or so (better than CD in bank now). Thanks.

You should note that munis are only tax free on a state (and city) level when you reside in that state. I'm not sure if I missed it, but I didn't see any mention of CA here?

 

[Nguyen]

Yes, I forgot to mention that you have to reside in the same state in order for tax free in that state. I use CA since that is where I stay. Thanks Matt for the clarification.