(Not actually Colin, his mother or sister)
Courtesy of Visual Photos
In today’s Case Study reader Colin offers us a chance to take a look at a tough situation many us have had or will have to deal with at some point. Many years ago, I did myself and with a situation eerily similar to Colin’s. His mother is sadly facing a serious illness and, with his help, is sorting thru a mix of investments that appear to have been chosen for the benefit of those selling them.
In this study we’ll see another example of why I don’t like investment advisors and we’ll examine some steps Colin can take to help his mother escape.
While I have already responded to Colin in Ask jlcollinsnh, it occurred to me this is a case that deserves wider readership. Many of you might benefit from the conversation and others might well have useful suggestions for Colin as well. If you do, I hope you’ll add your thoughts in the comments.
Here is Colin’s note:
I recently started reading your blog and I really enjoy all the great articles and advice.
I’m fairly confident when it comes to my own current investments, but I’d like to help my mother get her affairs in order and although I have ideas I’m a bit overwhelmed. I currently live in Germany so I’m somewhat limited with some of the help I can offer when I’m not in the US. I’m currently back in the US through the first week of January.
She was recently diagnosed with two types of cancer. One is a slow moving lymphoma and the other is squamous cell lung cancer which is large cell and less lethal than small cell lung cancer. She thought she was going to have surgery this week to remove a lobe of her lung but the date was moved to February. I came home with the intention to help her with her recovery but now that we have more time and energy I decided with her consent to help her get her home and finances in order.
My mother will be 65 in March and is retired. She receives $1,200 a month from social security. She has $40,000 in investments with Edward Jones of which $30,000 are in a taxable account and $10,000 are in an IRA. I was fairly shocked when I looked at what the taxable account is comprised of:
- Freeport-McMoran Copper & Gold – FCX $13,876
- Dawson Geophysical Co – DWSN $6,464
- Broadcom Corp – BRCM $720
- Patriot Coal Corp – PCXCQ $42
- Hartford Balanced Income Fund C – HBLCX $11,071
The individual stocks are all holdover investments from a previous advisor at a different company my mother used.
I asked why no one at Edward Jones had sold the stocks as it is obviously very risky to have so much of ones money invested so narrowly especially at her age. She said that her current advisor wants to sell them but is waiting for the right time. That statement is a red flag to me. My mother did ask the advisor to take a small amount of her money and invest it aggressively.
I’d like to sell all of these stocks and the mutual fund and move most the money into Vanguard Total Bond Market with a small amount in Vanguard Total Stock Market and either a savings account, money market, or cd.
I know bonds are generally placed in tax deferred accounts but her income is so low I think her taxes would be minimal. Patriot Coal Corp is in the process of declaring bankruptcy and I was thinking it may be possible to use some of the capital losses to offset any capital gains. I’m not sure how bankruptcy affects selling stock. I realize that the stock may just be a total loss.
I think my mother would possibly like to stay with Edward Jones as they offer face to face advice (although I’m skeptical of the quality of it). I’m not sure if it would be possible to buy the Vanguard funds through EJ.
Would it be better to wait until the new year to put off paying taxes on the sale of the investments until the next tax year? I believe the Hartford Balanced Income Fund has a deferred load of 1% so I should probably read more about possible costs of selling it. If I transfer the investments to Vanguard from what I’ve read it would be better to transfer them in kind but I’m not sure all that implies.
Her IRA consists of:
- Franklin Income Fund A – FKINX $4,240
- Income Fund of American Fund A – AMECX $3,700
- Lord Abbett Short Duration Income Fund A – LALDX $2,467
I’m slightly less concerned with these investments, but I’m nervous about how heavily they are invested in junk bonds. I didn’t know that mutual funds existed that would invest in dividend paying large cap stocks along with junk bonds. It is an interesting idea but seems overly complicated and risky. I would probably like to move these investments to Vanguard and place them all in Total Bond Market.
Courtesy of Lilac & Lavender
She owns her home with no mortgage in West Virginia on 60 acres in a rural area. Overall the house is in good shape but could use some repairs to plumbing and eventually will need a new roof. I’m sure other expenses will come up as often happens in life. The value is in the range of 80 to 100k. She has no desire or plans to move.
I think a possible asset allocation would be 70% Total Bond Market, 20% Total Stock Market, and 10% mix of savings account, cds, and money market. I like the Total International Stock fund as well (I own some in my AA) but it seems more volatile than is necessary.
She has a life expectancy as little as one year but possibly ten or more. It is really hard to tell at the moment. Besides the cancer she is very healthy and active. She will probably know more after her surgery in February but even then it is very uncertain.
I think it makes sense to have her assets as stable as possible so she can access the money as needed to make larger purchases for car and home repair.
My mother has a will and living will already. My sister and I are her only heirs and we are close and generally agree on how to proceed with all of these issues. My mother seems hesitant to spend the money to go to an estate lawyer but I think it would be good to go to see her options to protect her remaining assets and especially her home from medical debt.
I’m not concerned with inheriting the house or money but I also don’t want her to have to sign it over to the bank or hospital (she doesn’t either). She has been receiving a very generous amount of charity aid from the two hospitals she has been going to but the she has to reapply every six months. Currently she receives a 75% discount from one and a 100% from another. This won’t cover certain doctor’s fees though. She will have Medicaid until Medicare starts the month before she turns 65.
In your opinion does my mother have enough assets to warrant going to an estate lawyer?
It isn’t easy for me to make decisions with someone else’s money, but I don’t feel that my mother’s money is being handled appropriately.
I’ve read quite a few investment books at this point, but I have limited knowledge about issues she is facing. I’d hate to have someone from Edward Jones sell her another front load mutual fund with high fees and costs. I also don’t want her to lose her house. I know the decisions I make are ultimately my own and my responsibility but any advice would be greatly appreciated.
Thank you for your time,
And my reply:
I am very sorry to hear of the challenges your mother is facing with her health and finances. She is fortunate to have you there to help sort thru it all. And it is very fortunate she is open to your help and that you and your sister are on the same page.
You don’t mention what her annual expenses are, but I’m guessing she gets by on the $1200 from Social Security. I’m also going to assume you and your sister are willing and able to kick in to help support her if needed. This will play a role in the idea I’ll be suggesting at the end of this reply.
I am concerned that your mother asked the advisor to take a portion of her money to “invest aggressively.” This is the last thing someone her age and with her limited resources should be doing. Hopefully the advisor was honest enough not to take advantage of that request, but typically that’s like providing chum to sharks. In any event make sure it is off the table.
You are right to be concerned about her assets being in individual stocks and the advisor wanting to wait to “sell at the right time.” My guess is that this means some, in not all, are trading at a loss. It is foolish to hold on to these hoping for better days.
I agree with your plan to sell them all and redeploy the money at Vanguard in the Total Stock and Total Bond Funds. It is also a good idea to hold some cash for the house and car repairs you foresee. You are correct in that, at her income level, taxes are not much of a concern.
You should be able to sell the shares in the bankrupt company, but of course not for much.
It might be possible to buy the Vanguard funds thru Edward Jones (EJ), but why? You want to take all this and the IRA money out of EJ. Looking at what they have her in, the last thing your mother needs is more free advice from them. Clearly, these investments were made to benefit the broker, not your mother.
Likewise, roll the IRA into Vanguard. You can call Vanguard and they can help with the process. Don’t be surprised if EJ drags their feet and otherwise makes this difficult. It happens all too often. They don’t like seeing the gravy train head out the door.
Since your mother has minimal tax concerns, with the taxable account the easiest thing to do is have EJ sell everything and send her a check. She owes them no explanation. You could also do this with the IRA but you’d have to be sure to reinvest it in the Vanguard IRA within 60 days to avoid any taxes. But again, not a big deal for her.
Since we are near year end and just to spread the tax liabilities a bit, assuming there are capital gains in those stocks (and if not, no tax worries at all), you can sell the taxable stuff this year.
Then in January move the IRA to Vanguard and convert it to a Roth. Theoretically this will be taxable, but again in your mother’s situation a non-event. Once there, she’ll never have to pay tax on any withdrawals from it. Plus the Roth is much more advantageous to you and your sister should you inherit it.
Be sure she lists you as beneficiaries on all these accounts. This avoids probate and insures it passes seamlessly to you. Same with the taxable stuff.
And no, your mother doesn’t have enough assets to need an estate lawyer, but be sure her will is up to date.
As for the house, it sounds like that is where she is most comfortable and since she’s been there awhile and it is mortgage free I see no reason she shouldn’t stay as long as she is physically able.
My guess is that you might get some push back from her on leaving EJ. Sounds like she enjoys the interaction. But she is paying too steep a price. Here’s an alternative that would serve her better.
If you look at the right hand column here on the blog you’ll see an ad for Betterment. In the next few days I should have a post up recommending these guys. Not quite as cheap as DIY with Vanguard, they do provide an exceedingly simple way to invest in a portfolio of index funds. Rather than choosing the funds yourself, you open an account and tell them your goals. The software then suggests the asset allocations to reach those goals. Very simple and effective, and maybe just the level of involvement that your mother will enjoy with out the risk of expensive mistakes or her being sold high-profit-for-the-broker crap.
You mention a concern about losing the house to medical debt, but it is unclear in your comment whether she has that debt now or is concerned she might in the future. Regardless, she might want to consider moving some of her assets to you and your sister, and this is the idea I referred to in the beginning of my reply.
The IRS allows your mother to gift you and your sister each $14,000 with no tax consequences to you or her. If she can get comfortable with the idea, it would effectively take her taxable account from 30K to 6k. Less worry for her and possibly helpful in insuring the charitable benefits she now enjoys. Of course, if the time comes when she needs the money, you and your sister must be prepared to channel it back to her.
Hope this helps. Good luck to you and all the best to your mom!
Second thoughts on having mom gift money. From aspiringyogini in the comments below:
“I’m glad to hear that you will be talking to an elder care lawyer. We have consulted one too and have had good results. Your lawyer will very likely urge your mother to NOT give you money, just in case she needs long term nursing care and might need to qualify for Medicaid to get coverage. In order to qualify there is a 60 month look back period and if she has given money to her kids, then she would not qualify. This website echoes that and our elder care lawyer confirmed it too:http://www.elderlawanswers.com/how-gifts-can-affect-medicaid-eligibility-10006”
Also see Prob8’s detailed comment below. He is the author of this guest post: Death, Taxes, Estate Plans, Probate and Prob8.