Legal settlement, we don't know where to begin.

August 29, 2013 3:27 PM

My mother endured injuries while working for the post office that left her mostly immobile. She was eligible to retire early due to these injuries. She sued her doctors and they agreed on a settlement of 475,000 (Before misc fees and deductions). I believe its for lost wages.

We are in need of advice on several levels;

1) Settlement Tax advice.

Penalties/Taxes on the lumpsome. Her lawyer told us that the settlement is not taxable but i'm afraid that he is side talking her.

2) Personal tax advice

My mother has no income but Social security and workmans compensation and has not filed taxes in years (Exempt). Now this will change to Social security and Pension.

3) Taxes on gifts:

My mother plans on gifting about 50K to each of her kids. I believe there is a lifetime exclusion for 1M that she has not touched. It's not exactly clear how she will "file" for both the settlement and gifts. They would also need advice on how to best use the money.
I have reached out to a local CPA but have not heard back yet. Is this the right action for this scenario?

2) Personal Finance advice.

My mother has a "Bad" mortgage @ 9.5% APR for 15 years (Despite putting 50% of the homes value down). She has roughly 10 years left. I plan on getting her to pay the balance since it has such a high interest rate, along with any small debts. Where can I find an advisor that will consult with us over a few sessions rather than a long term contract? Part of the issue is convincing her that it’s a good move.

Are there any ONLINE advisors or resources that we can use? My mother is incapable of managing her money and may actually gift it all to me to figure out what to do with it.
Overall any advice would be appreciated. Thank you.

posted by Highest_Of_Fives to Work & Money (13 answers total)

Talk to an established account in person. It's cheaper than a lawyer to start.

At the end of the day, there are many variables, from the nature of the lump-sum settlement, to your mother's tax status, to the mortgage, so you are going to have to shell out for at least a little professional help.

As well, the course of action recommended by a professional is an opinion in regards to the law or laws, and so your course of action could theoretically challenged by the tax office(s). You need someone competent that you trust who will go to bat for you.

That's why an online tool won't cut it.
posted by KokuRyu at 3:32 PM on August 29, 2013

Response by poster: Part of the trouble is that they live in FL, and I live in NY. I'm managing everything remotely and traveling often.

We're ok with paying, but dont even know how much such a service would cost or where to begin.
posted by Highest_Of_Fives at 3:42 PM on August 29, 2013

Best answer: There are a remarkable number of issues in your question; I think an estate planning lawyer is a better first stop than an accountant. An accountant can implement a strategy if you know what you want to have happen, but I think you need a lawyer to plan it out. IANATaxL, and IANYL, but just off the top of my head, I see questions about tax treatment for the settlement payment, about how the money might affect SS, Medicare and/or pension, worker's comp, and her gift plans. There are a lot of moving pieces, and you'd be well-served to talk to a single person who can put it all together.

If I were you, I'd find and phone-interview several Florida estate lawyers, then take Mom to visit one the next time you go down there.

Good luck.
posted by spacewrench at 3:46 PM on August 29, 2013 [2 favorites]

All of these answers should be given to you by a CPA in her jurisdiction. Nothing else is going to work. If one CPA isn't responding, find another -- you'd like a medium sized office, where they have multiple people who will be able to help on the multiple fronts. You're not looking for a single person running their own office.
posted by jeather at 3:47 PM on August 29, 2013 [3 favorites]

Also, there are a LOT of CPAs in Florida who have jurisdiction in NY.
posted by small_ruminant at 4:13 PM on August 29, 2013 [1 favorite]

Response by poster: Yeah. There are a lot of questions and some overlap between boundaries. I never considered Estate planning. Ideally a one stop shop is what we need!
There are two options nearby: http://protectyourfuture.com and http://newtampalegalcounsel.com
posted by Highest_Of_Fives at 4:15 PM on August 29, 2013

may actually gift it all to me to figure out what to do with it.
Don't let her gift it to you if you are going to be spending it for her benefit - then it can taxed as a gift twice - her gift to you and your "gift" when you spend in on her. I think she can give a power of attorney to manage her money for her - which suggests that estate lawyer is a good place to start.
posted by metahawk at 4:20 PM on August 29, 2013 [1 favorite]

Response by poster: Got it. Thanks for all of the tips.
posted by Highest_Of_Fives at 4:28 PM on August 29, 2013

Response by poster: Any idea how would fee's work with the Estate Lawyer or CPA on advisement?
posted by Highest_Of_Fives at 4:28 PM on August 29, 2013

Best answer: For the last item look at Certified Financial Planners (CFPs) who are fee-based, not commission based. The commission-based ones get paid based on what they sell you, whereas the fee based ones just get paid to do a good job for you.

I found when I went looking for a CFP that a lot of them also do long-term financial advising and investment managing/wealth management stuff, but that they do give an option for a "financial plan" that is just a one time deal (usually an initial consultation, you fill out some forms/give your info, then they present you with the plan). So that is some wording you could try to use.

As for convincing your mother that paying off (or at least refinancing) her mortgage is a good idea, what is her resistance? It's simple math - her interest rate is super high. Could you just use an online amortization calculator to show her how much she will end up paying over time at that interest rate versus how much she'll pay if she pays it off now/gets a lower rate? It should be a pretty shocking difference.

And by the way the moderators here are likely to jump in and advise you not to continue to comment in this thread except for necessary clarifications.
posted by treehorn+bunny at 4:36 PM on August 29, 2013 [1 favorite]

Best answer: By all means she should pay off that mortgage.
posted by yclipse at 6:24 PM on August 29, 2013

Best answer: Well, make sure you find out what any early payoff penalties might be on the mortgage. God only knows with a bubble-peak-alicious instrument like that.

But perhaps explain to your mother that paying off a debt is equivalent to investing that amount of money at the interest rate you're paying. And there sure aren't many things that pay 9.5% APR these days.

Owning the house free and clear would then give her the option of a reverse mortgage, should she need it, down the line. Absolutely discourage any home equity loans/lines of credit as these will piss that money away toot sweet.

As for the gifting, a competent attorney, CPA, or CFP will be able to advise you on various instruments that will do a better job at avoiding or limiting taxes, e.g. a springing trust, making children beneficiaries or joint owners of any income streams or assets, and so forth.

You're ahead of the game -- thinking about this before you get the money is good.

As for consultation/asset management, you will probably be better off, due to distance, to find a national broker such as Morgan Stanley (but I'm not up on who among the banksters is trustworthy these days, my experience comes from all the book money my grandfather had with Smith Barney for decades). It will be a lot easier to transfer control when the time comes, even if that's a long way off.
posted by dhartung at 3:53 AM on August 30, 2013 [1 favorite]

Best answer: I found a CFP(r) and CPA up the road. We found our answers! hopefully.
posted by Highest_Of_Fives at 11:59 AM on August 30, 2013