How to Handle an Inheritance?

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Question: My only brother was killed in an accident last year. He left me $250,000 in his will.  I plan to use $50,000 on improvements to our home. There is no mortgage on the property. I was told by the accountant that the inheritance is not subject to tax.

My husband and I are regular readers of yours and we refer to your advice about saving, investing & retirement. We probably lack the discipline we should have, but we have chipped away at IRA’s for both of us and 529 College Savings Plan accounts for our kids.

The inherited money is sitting in a checking account. I was told the bank only insures $100,000 per person but I want to keep it all in my name. I don’t have a clue how to proceed. It’s my older brother’s legacy to me and I want to protect it. At this point, I am comfortable with moderately conservative investing. I don’t want to tie it all up in the type of accounts I’m penalized for accessing prior to a certain age. I may want to use a portion of the interest from time to time.

Do you recommend a book or crash course that explains investing simply? I appreciate any recommendations you can give me.

Answer: Thank you for your email and for your readership over years.  I am very sorry to hear about your brother.

First of all, check with the bank -- FDIC insurance covers up to $250,000 per person in most bank accounts.  If you are not getting that protection, change banks.  Secondly, DO NOT let the bank talk you into any investments.  All too often, the teller will direct a customer with high balances or maturing CDs to the investment representative sitting  at a desk in the bank lobby. The customer will end up walking out of the bank with an expensive mutual fund portfolio or a variable annuity insurance contract with high fees and surrender charges that is in the banks own best interest, not yours.

If you plan on using the money in the next five years or so, then keep it in the bank in a checking or savings account or short-term CD.  It won’t earn much but it won’t go down in value and it will be there when you need it. 

You could also consider splitting the remaining $200,000 ($250,000 inherited less $50,000 for remodel) into two tranches -- long-term and short-term.  For example, if you think you'll need $75,000 over the next five years, put that amount in a short-term account invested in money market funds and CDs.  Then depsoit the remaining $125,000 in a brokerage account and invest it in a diversified portfolio of stocks and bods using mutual funds or ETFs -- according to your risk tolerance and time horizon.

If you want to do it yourself, a simple way is to use a target date fund from a low-fee self-help mutual fund company like Vanguard or T. Rowe Price.  You can pick one for 10, 15, and/or 20 years or longer.  Target date funds will go up and down, but if you leave it alone it should earn more than a bank account over 10 or more years. 

Additionally, it would be a good idea every year to contribute the maximum allowed to a Roth IRA account ($5,500 in 2015; verify your eligibility with your tax professional).

You don’t need to buy a book to educate yourself on investing. Just do an internet search for “Vanguard’s Principles of Investing Success.”  You can download a PDF copy for free. It will give you the basics you need.

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to ken@montereypw.com.