How to invest an inheritance
ear Liz: I’m writing to get some help on what to do with $300,000 that I have recently inherited. My husband and I are in our early 50s. We owe $180,000 on our home at 5% interest, with seven years left on our 15-year loan, and have no other debt. We have a combined $225,000 in retirement accounts and about $15,000 in a regular savings account. Does it make sense to pay off or pay down our mortgage with the inheritance or just keep it in savings?
Answer: You need to take a small chunk of that money and invest it in a session or two with a fee-only financial planner who can review your entire situation and give you personalized advice.
In all likelihood, the advice won’t be to pay off the mortgage. You’re on track to have your home loan paid off before retirement age, and most people have better things to do with their money than pay off a low-rate, often tax-deductible debt.
It doesn’t make much sense to let your inheritance languish in a savings account, however, when you’re likely to need more money for retirement. A planner can help you come up with an investment allocation that takes somewhat more risk but that should bring you greater returns.
You can get referrals to fee-only planners from the Garrett Planning Network at http://www.garrettplanningnetwork.com and from the National Assn. of Personal Financial Advisors at http://www.napfa.org.
Finding trustworthy advisors
ear Liz: It looks like my mother is going to win a lawsuit that could bring her more than $2 million. Can you advise us what steps to take once she receives her money? She wants me to play a major part in her finances as she is not a native English speaker, but I do not know much about finance, either. I can probably look for a financial advisor, but how do I know we are not going to bump into another Bernie Madoff?
Answer: Your mom needs at least three advisors to handle such a big windfall: a financial planner, an accountant and an estate-planning attorney.
You can get referrals for fee-only financial planners — who are compensated only by fees their clients pay and not by commissions or kickbacks — from the National Assn. of Personal Financial Advisors at http://www.napfa.org or the Garrett Planning Network at http://www.garrettplanningnetwork.com. You should interview at least three prospects about their education, ethical commitment and experience advising people who acquire sudden wealth. Check out their backgrounds using the BrokerCheck feature at the Financial Industry Regulatory Authority website (FINRA.org).
Garrett advisors typically charge by the hour and often don’t manage assets — the client makes the actual investments. NAPFA advisors typically do offer asset management and may charge a percentage of assets.
One way to reduce the chances of becoming a Ponzi scheme victim is to make sure your money is held by an independent financial institution such as a bank, brokerage or mutual fund and that your statements come from that institution. You also should find out who audits your advisor and do a background check on that company as well.
What to do now with your extra cash
Dear Liz: My husband and I make good money. We have a low-rate mortgage, a good amount in savings, and our retirement fund is well on its way, despite recent losses. We still have 25 years until retirement. What’s the best thing to do with our extra money? We have been putting it into projects to spruce up the house but otherwise just throw it in savings.
Answer: How about investing some of it in a session with a fee-only financial planner? That’s the best way to know if you really are on track for retirement, if you have enough emergency savings and if you’re adequately insured.
You can get referrals to fee-only planners who charge by the hour at Garrett Planning Network (www.garrettplanningnetwork.com) and the National Assn. of Personal Financial Advisors ( www.napfa.org).
If your finances are indeed as rosy as they seem, then you may want to consider enjoying your money a little more. Research shows us experiences make us happier than possessions, so consider a special vacation or travel to see family and friends.
You also might consider boosting your charitable donations to share your good fortune in these increasingly hard times.
Are Probate Laws Same in All States?
Dear Liz: Are laws regarding probate the same in all states? Do all estates have to go through probate upon the owner’s death, or does the estate go through probate only if it is above a certain value? If the rules vary by state, how do I find out the procedures for my state?
Answer: Probate is the legal process in which a court oversees the distribution of a dead person’s property.
The basic process is the same in every state: Assets are identified, creditors and taxes are paid, fees are distributed to attorneys, appraisers, accountants and others handling the estate. Whatever remains is distributed to the heirs.
You can avoid probate in all states by taking certain actions, such as creating a living trust or holding all your assets in ways that bypass probate, such as joint tenancy.
Otherwise, the rules about which estates must go through full probate, and which can avoid it, vary considerably by state. Some states have affidavit procedures that allow small estates to bypass probate entirely, but the definition of “small” ranges from $5,000 in New Jersey to $150,000 in Wyoming.
Other states offer simplified probate procedures for certain estates. In California, for example, estates worth $100,000 or less can qualify. California also has a “community property petition” that allows property of any amount to be transferred to a surviving spouse without going through full probate.
The Nolo Press Book “Plan Your Estate,” by attorneys Denis Clifford and Cora Jordan, includes a brief summary of state probate laws. You’ll find more complete details for each state in Nolo’s “8 Ways to Avoid Probate” by Mary Randolph.
Â
Help with Investment Portfolio Near Retirement
Question: I have been steadily investing in stock mutual funds since my early 20s. I have been following the buy-and-hold strategy, and unfortunately I have not been rebalancing my portfolio. Consequently, the vast majority of my portfolio is invested in growth mutual funds that have appreciated in value over the years.
I am now approaching retirement and want to reduce my risk. Should I leave my portfolio as is and invest any new money into fixed-income securities, or should I sell some of my growth mutual funds, which will trigger a substantial capital gains tax?
Answer: It sounds as if you’ve done a good job investing for your future. Now, you need to call in some help.
An objective, experienced, fee-only financial planner could take a look at your total financial situation  including your age, life expectancy, risk tolerance, expenses and other sources of income  to construct a portfolio strategy that will guide you safely through your retirement years.
This really isn’t a do-it-yourself project. There are too many ways to mess up your retirement income stream and too few ways to fix any errors you make. Take too much risk or withdraw too much from your accounts, and you could run out of money. Take too little risk, and the same thing could happen.
You really want professional help. Two sources for referrals are the National Assn. of Personal Financial Advisors (www.napfa.org or by phone toll-free at [888] FEE-ONLY) and the Garrett Planning Network, http://www.garrettplanningnetwork.com ).
If your portfolio truly is overweighted with growth funds, the planner perhaps in consultation with a tax pro might have you gradually sell off some of those investments so you can diversify into bonds, cash, value funds and international investments.
Â
The good news is that the top federal capital gains rate, 15%, is low, so you should still have plenty of money to reinvest.
