It's our turn to ask the windfall questions
August 25, 2017 10:56 AM   Subscribe

We got a windfall of $250k. It came in the form of a personal check and has been deposited in our savings account for now. After reading all the relevant Metafilter threads I could find, here's everything I think you'll want to know:

The usual details
- We're in our 30s
- We already have degrees
- We have good health and no children
- We live in Oregon
- There will be no future windfall
- This was an early "inheritance" from living relatives

Money etc.

- We have no debt
- We have a year's worth of savings.
- Combined living expenses are up to $15k/year.
- Income from part-time jobs breaks even with living expenses.
- We own our home outright. It is worth $150k, maybe a little more.

- We know not to change our lifestyle
- We are spending $1-3k on one already-identified big splurge
- We will donate 10% to an already-identified non-profit. This is orders of magnitude bigger than we're used to donating.

The futures we already dreamed of
because "what are you going to want the money for?" comes up as a question, not because we want advice in this area
- Starting a farm in the tropics in the next 5-10 years, somewhere with a low cost of living relative to Oregon. We come from a farming community and we are clear-eyed about the amount of work that comes with a farm. This is the only reason we would consider spending down the principal at this time (barring unexpected medical expenses).
- In the nearer future, we would also be happy living where we are and volunteering more in our community.

The Questions
Investment & Financial Planners
1. I read somewhere in the past couple days that "financial independence retire early" means you need to save up 25x what you spend in a year. All of a sudden, we seem to have 25x what we spend in a year. Is this true? Under what circumstances would this be true for us?
2. Investment is what everything suggests for people in our shoes. Are there *highly ethical* investment options? (We would prefer to not support, for example: oil, auto, weapons, big data, big ag, pepsi, etc.. We do want to support fair trade, local, non-profit, etc.. We understand this could mean lower interest rates.) Where do we find them? Is this a financial planner?
3. Ask Metafilter has mixed reviews about going to a financial planner, but are clear that we should go to a fee-based planner. How do we find a good one without telling people about the windfall? Is there anything we need to know that we won't learn from reading the references listed on wikipedia?

Estate Planning
4. The check came with no strings, but we've been advised to look into seeing an estate attorney and consider forming a trust. After reading Ask Metafilter on trusts, I'm confused. These seem to be for dispensing money to other people through a third party. Or maybe to protect the money e.g., from Medicare?
5. How do we find a good estate attorney without telling people about the windfall?
6. I've read that we need a will. Presumably an estate attorney would help with this?

7. We think the answer is "no," but do we need to do anything special about taxes this year?
8. If you had to choose ONE type of expert for us to talk to, who would it be? Why? How much should it cost?
9. We sent a heartfelt thank you card immediately. We will keep in touch. How did you thank someone who gave you this kind of money?

Totality was a good day for us.
posted by anonymous to Work & Money (19 answers total) 9 users marked this as a favorite
"Combined living expenses are up to $15k/year."

That's impressive. I worry that you might be leaving something out:

- your employer(s) contributions to your benefits, especially health insurance? Keep in mind health insurance will get more expensive as you age.
- home maintenance? Are you setting aside something for regular replacement of appliances, roofs, etc.?
- long-term care when you're older?
posted by floppyroofing at 11:11 AM on August 25, 2017 [4 favorites]

"Combined living expenses are up to $15k/year."

It sounds like something might be missing here? Are you talking here about your discretionary spending, or literally every penny you expect to spend per year going forward. Be sure to account for stuff like home insurance/taxes, health insurance, $$ for health care on top of health insurance (if something bad happens, your deductible may be high), $ for home repairs like when the roof or furnace or whatever needs to be replaced, retirement savings, etc.?

I am not a tax expert by any means, but my understanding is that any amount over $14,000 per person in one year is taxed under the gift tax. So, if the gift was structured to be $14K for each of you, that would exclude $28K and leave $222K to be taxed. I think this might be why people are suggesting trusts to you as ways to structure the gift differently to not incur the taxes. At the least I would consult a tax lawyer to find out!
posted by rainbowbrite at 11:17 AM on August 25, 2017 [3 favorites]

This is not entirely unlike me. I can answer some of your questions.

- It's okay to just tell planners about the windfall. They will, optimally, want to know about your lifestyle and help you with investment strategies that work for your life. They can also help you with ethical investing though, yeah, the difference in income is substantial. Find one by looking at the NAPFA directory, or asking if you know people locally who may know people.

- Try jiggering with those little "when can you retire" tools online to see how you fare. The big deal is that you may have higher expenses (health, notably) in future years than you do now.

- You will owe taxes on that gift, at the very least you'll need a tax person to help you through that. My experience with trusts is that they are of the most use if you want to pass on wealth to family or if you want to hold on to a lot of money for a purpose (like a house and a lot of money for that house) that you don't need access to. Likely not what you want but ask a professional.

- Estate attorney is another "ask around" thing. If you know someone who has had their wills done, ask if they liked the person. "Fit" is often more important than them being the top ranked etc etc. And yes, you tell them about the windfall. 250K is a lot of money but not like "someone overhearing you talk about it might want to rob your house" money. That person can help you write your will. This is especially important if you are not married. Absent a will that windfall goes to next of kin. Write that will.

So, you will need three people. If this were me, I'd write your will with an estate attorney NOW, scope out who could help you with your taxes LATER and then talk to those people about possible financial planners as you go.
posted by jessamyn at 11:20 AM on August 25, 2017 [5 favorites]

If the check is deposited in your savings account I think it's too late for a trust. If taxes are owed on that money, depositing it is likely the trigger event that the IRS will depend on.
posted by COD at 11:21 AM on August 25, 2017

Definitely first pay for a qualified legal opinion, they will probably have a way to optimize your donations for the best benefit to the organization, probably over a period of years, so don't just write a check.
posted by sammyo at 11:23 AM on August 25, 2017

> If the check is deposited in your savings account I think it's too late for a trust. If taxes are owed on that money, depositing it is likely the trigger event that the IRS will depend on.

I recently got a similar kind of "early inheritance." I won't be paying taxes on it (as income) because, though its value exceeds the annual gift exemption amount ($14K), it falls under a lifetime gift exemption amount, which is $5,340,000. The person who gave OP the $250K started with an estate tax exemption of $5,340,000, but their exemption drops down by $236K ($250K-$14K) to $5,104,000 by this gift. I think you will also not be paying taxes on this gift.

I recommend a book called "Squandering Aimlessly" by David Brancaccio, who at the time he wrote it was the host of the public radio show "Marketplace." Each chapter talks about different ways of dealing with a windfall, supported by a personal anecdote. Looks like you can get a copy for $2.
posted by Sunburnt at 11:47 AM on August 25, 2017 [13 favorites]

Gift taxes are paid by the donor, not the donee. And the gift may well fall within the donors' lifetime gift tax exemption, even though it would clearly exceed the annual one.

That 25x rule was made up for people retiring much later in life, with fewer years for unexpected events to happen and fewer years for market fluctuations to occur. Among the small group of people in that community who save that much, I would expect a considerable number of them to end up "coming in from the cold" eventually. As much younger people than the average retiree, you'd need to be much more conservative. (...$15k/year is ALL you are spending? On everything?)
posted by praemunire at 11:48 AM on August 25, 2017 [6 favorites]

I think the OP is asking about getting recommendations for an estate attorney and a financial planner without telling their friends it's because of the windfall ... and the answer is, just ask! Just say, "Yeah, we thought we should get around to writing wills at some point," or "We'd like an expert to look at our retirement planning with us, so we're after a fee-based financial planner," and nobody will think twice about it.

The attorney can walk you through your trust options; if someone said "you should look into a trust because you have some money now," I'm guessing they were suggesting a "living trust," which were extremely in vogue about 20 years ago, and some moderately wealthy people are convinced that a living trust (advocated for on late-night infomercials, no less) is a magical instrument that lowers your taxes, keeps you out of probate, and protects you from a parade of horribles that are all allegedly related to owning property in your own name. In reality it's generally a scam if there's tax avoidance involved; doesn't really protect you from anything in particular; and while it may keep you out of probate when you die that's only important if you live in places where probate is VERY SLOW or VERY EXPENSIVE. (Florida's probate courts, for example, are not adequate to keep up with the number of people dying in Florida, so they are quite slow and there might be an advantage to using a living trust that transfers the money faster; in my state, a living trust has no speed advantage over probate and costs considerably more over the life of the trust.) In most cases they're not appropriate and serve primarily to funnel money to the lawyers who create them, but there's a whole bunch of people whose received wisdom on financial planning comes from 1990s infomercials who keep handing this information down. (And now there's a cottage industry of sovereign citizen tax dodger moon lawyer types who think putting money in a trust for yourself means you don't pay income taxes.)

Maybe a trust is a good idea! But generally you get a trust to do something -- care for your children after you die, or provide income to a disabled adult over a long period, or to deal with certain asset transfers between spouses if one dies that might otherwise be messy. If someone's just like, "You have money so you should get a trust," that's infomercial wisdom talking. You should put a trust in place if it's appropriate to your situation and accomplishes your goals, not because it's some kind of rich-person magic that "everyone" has once they're rich. They don't. (/endrant)
posted by Eyebrows McGee at 11:49 AM on August 25, 2017 [5 favorites]

It sounds like this is from your perspective a large amount of money and that managing it will be complex. In the financial world, it is a relatively small pot, and you shouldn't have to make many decisions. I'd err on the side of simplicity. Remember that financial professionals can charge a lot of money. Pause before spending thousands of dollars on an estate attorney, financial advisor, or CPA. For $50 you can write a will using something like Willmaker. Investing money is free, and comes with basic advice from the broker.

To find a financial advisor, I would email your questions to a few and ask what advice and services they can provide. I'd then choose whoever suggests the lowest amount of services. Do not set up a trust unless someone gives you a compelling reason to do so.

"You will owe taxes on that gift." " understanding is that any amount over $14,000 per person in one year is taxed under the gift tax."

Almost certainly not, for several reasons.

1) The $14,000 annual exemption is the amount that is not even considered in the calculation. The actual threshold is over $5 million.

2) The gift tax is paid by the giver, not the recipient. If the gifter owes tax and does not pay it, the IRS may come to you, but that is pretty unlikely, unless someone's been giving out dozens of $250,000 checks and not paying the gift tax.

"they will probably have a way to optimize your donations for the best benefit to the organization, probably over a period of years"

You may want to spread out your donations, because you generally can only deduct charitable donations of up to 50 percent of your income. However, given your relatively low income and tax rate, you are probably facing very low income taxes, so maximizing the tax value of your donation might not be worth it. My off-the-cuff guess is that tax planning might save you a few hundred dollars, which is about the amount that an advisor might charge you for an hour of advice.

But to optimize the benefit to the organization, chances are very good that they will want it ASAP. Call them and ask them what they really want. (Charities sometimes say they prefer you to sign up for an annual giving plans to ensure a steady stream of income. They are lying. They want to sign up so that you will keep giving year after year. If you actually have a fixed donation amount, they'd prefer to have it right away. Explain clearly that this is really a one-time thing.)

You also could get many of the services if you invest your money through a broker. I think Schwab would be a good balance between low fees and good service, but there are plenty of other good ones (Vanguard, Fidelity, etc.).

You may wish to invest in a Socially Responsible investment fund, such as a Socially Responsible ETF.
posted by Mr.Know-it-some at 11:52 AM on August 25, 2017 [8 favorites]

Seconding that you don't need to tell friends/family why you're looking for a financial planner or attorney; just "we're thinking ahead and need some advice" is fine.

The 25x Rule you mentioned is another way of characterizing the 4% withdrawal rule - the basic idea is that, allowing for market fluctuations etc., historically if you withdrew 4% of your nest egg every year it would keep going indefinitely. Nobody knows whether this will hold true in the future, but it's a decent starting point.

When we were asking some of the same questions, we found a fee-only financial planner who charged us an hourly rate for her time, and after our initial "get to know you" meeting gave us an accurate forecast of what services she would provide and approximately what it would cost. The peace of mind we got from those meetings was well worth the expense.
posted by craven_morhead at 11:54 AM on August 25, 2017

If you are only making 15k per year, it may not make sense to donate the entire 25k in a single year as you will not be able to deduct it all. I don't think you need to be in a rush to invest it or make any decisions this year, but I do think you need at least one appointment with a tax accountant before the end of the year. The back and forth about gift taxes in this thread alone illustrates that you need a professional's help with your taxes.
posted by soelo at 11:57 AM on August 25, 2017 [8 favorites]

A good tax accountant would be able to help you with tax issues, like Roth IRA, etc. You're young and investing much of it in a higher-return, higher-risk manner seems to be the conventional wisdom. Jessamyn's comments are spot on. Spreading the donation over time for tax reasons makes sense to me.

One thing to consider about buying a farm in the tropics is Climate Change. The tropics may not continue to be as arable as you'd want. Start looking for land locations, and you can be ready if you find something ideal.

You know the giver best. Bake them cookies, send flowers, a bottle of fancy bourbon, whatever they might enjoy. I'd take pictures of whatever you do to splurge and send them, and regular pictures in general.
posted by theora55 at 12:11 PM on August 25, 2017 [1 favorite]

I understand that $250k may be a large sum of money for you, but in the world of financial planners, etc., this is frankly on the smaller side.

You mention nothing about current retirement savings - given your current income and lifestyle, I will just go ahead and assume it is $0.

If I were in your shoes, after you donate your 10%, I would open up a vanguard account and put the entire sum in an index fund of some sort. Since you mentioned you're specifically interested in ethical investments, there are funds like this:

Absolutely do not set up a trust, that will trap the money in there for a long time. You can set up a will (you don't need to mention the amount of assets in the will), but you should set up a will regardless.

Dumping it all in a mutual fund let's you maintain your current lifestyle without worrying for the future. You can withstand any major medical expenses, unexpected loss of income, sudden death of a partner, etc.

DO NOT try to overcomplicate this. It's very easy to get lost setting up fees, structures, etc. - there are a lot of advisors that will do this and take you for a ride. None of that is necessary.

You will not have to pay any taxes on this amount. Taxes are always paid by the GIVER, not the person RECEIVING.

You may have lifestyle creep - you may have kids and you may want to pay for college. If you don't want to have kids, maybe you'll want to pay for their college - but remember, take care of yourself first.

Use this money to "future-proof" your life. Your 30 now, but what's life going to look like when your 60 or 70?
posted by unexpected at 12:16 PM on August 25, 2017 [10 favorites]

The 25x/4% withdrawal rule assumes that you are investing the money - usually something along the lines of 80% equities/20% bonds, with minimal drag on your portfolio (churn/fees/etc.). You can't do the 4% rule if you aren't willing to take some risks with the money, and you can't afford to spend a lot on fees.

I am actually 100% on board with retiring when you have 25x your annual expenses - just saying it's "simple" but there are caveats.

Also, if you already have very low spending, that tends to mean that there is less fat to cut from your budget. Like, if you spend $15K a year and $5K of that is on travel, ok, if you have a bad year, you don't travel! But if the majority of your spending is on essentials (food/housing/utilities), I think it makes sense to be a little more conservative than a 4% withdrawal rule.
posted by mskyle at 12:17 PM on August 25, 2017

If you own a house outright, it's a really good idea to have a trust. No need to tell friends why you're seeing an attorney except estate planning. Just the fact that you have the house should be enough. When both you and your partner are dead, the trust will go to whomever you identify as the executor. This will help avoid probate on everything you own including your house. It's just a good idea overall to see someone about estate planning and this seems as good a time as any.
posted by Sophie1 at 12:18 PM on August 25, 2017

To clarify on what Sophie1 is saying, when you own your house outright, you put the HOUSE in a trust, not all your money. Rich people do this to avoid paying estate taxes on their home. I would NOT do this for a $150k house.

Again, your total "portfolio" is a $150k house + $250k windfall. This is very small. If you have no dependents, no one will be fighting over your estate and probate is not some big and scary thing.

1) I would design a basic will now, in order to decide what to do with your money if you both die tomorrow (if one of you dies, it goes to your partner).

2) When your 60, review your estate plan and put a trust at that time. Trusts are designed to be permanent (other than revocable trusts). I would not do something permanent in your 30's.

Again, you just received this windfall a few days ago. Don't do anything rushed or without research. Honestly, I would just leave it in a savings account for the next year. I definitely would not donate it all at once either - $25k is a large donation to any charity, and I would want to see how they're going to spend it first.
posted by unexpected at 12:25 PM on August 25, 2017 [1 favorite]

I received a windfall (a little smaller than yours) about 7 years ago. I took it as a push to get my financial house in order. I put it all in an index fund, quit my terrible low-paying job and found a much higher paying one, read a ton about investing, continued to live very frugally, and put every extra cent into the same index fund account. The stock market did well and I have more than 3x the initial amount. In some ways the feeling of responsibility from managing "real" money was more important than the actual money itself for me. I still can't retire, because I spend more than you, but in another 7 years, if all goes well, I easily could. Although I don't think I will, I actually kind of like my job.

I met with some financial advisors but every single one of them skeeved me out so I decided to manage everything myself.
posted by miyabo at 11:36 PM on August 25, 2017 [3 favorites]

The advice is so far ranges from excellent to flat out wrong. Moral: be wary of advice from random strangers. Just listen to me instead (joking)
#1 Find a good tax accountant, pay for an hour of advice. They can tell you about gift taxes, charitable donations and trusts (they can't set one up but they should have at least as good an understanding as random Mefites since one of the major reasons for a trust is estate taxes)
#2 Decide on your time horizon for this money. Do you want to let it grow until you retire in 30 years? Until you are ready to start your farm in 5-10 years? Use it to fund extra spending this year?
#3 Figure out a very simple investment strategy to help you do #2. Personally I like Vanguard because they are owned by their inventors with no outside shareholders. This not only allows them to operate at a lower cost but also make them less "evil" than some other investment companies. Here is a link to their investment questionnaire that might help you think about asset allocation. (Asset allocation is the biggest determinate of overall returns) You might need to adjust their advice to fit your ethical concerns but this gives you a starting place.
#4 In the meanwhile, just leave it in a savings account. Interest rates are so low, you are better off being safe than impulsive at this point.
#5 pat yourself on the back - good job!
posted by metahawk at 12:14 AM on August 26, 2017

Just to be really clear: if you decide to go with a financial advisor, you want a "fee-only" financial advisor. The weasel word "fee-based" is sometimes used by the people you don't want, those working on commissions from predatory investment operations.
posted by Harvey Kilobit at 11:07 PM on August 26, 2017

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