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Advice sought: financial planning for a recent widow

One of my friends lost her husband in a recent car accident. She has two children (15 and 11), the younger of the two is severely autistic. She used to be stay at home mom, but after the passing of her husband she started working at a day care part time, primarily for health insurance benefits. She is not very well informed about tax and financial planning and asked me if I could give her some direction. This is her financial situation:

1) She got $200K from life insurance ($100K for her, and $50K each for her kids). It is currently sitting in some sort of a money market account earning around 4%. 2) There is about $28K that she is eligible to get as the only beneficiary of her husband's 401k 3) She got about $25K in charitable contributions from friends and family 4) She receives $15K per annum from Social Security. Her day care job fetches about $15K in income. 5) She has a certificate of deposit of $10K. 6) She has a home that is worth about $255K, but if she were to sell it,. she will optimistically get $230. There is a loan of $188K. The cash assets total about $265K. The equity in the house is another $40K. Here are some questions from her:

a) Someone told her that if, god forbid, something were to happen to her, the 401k money would go to the state because her husband did not designate anyone else as the beneficiary. Is this true? If it is true, is she better off taking out the $28K, pay the penalties and face the tax consequences? b) What are the tax consequences of receiving the entire $200K life insurance benefit? If there is going to be huge tax burden, is there someway she can create a tax shelter and receive an annual income for sustenance? c) She has no intention of selling the house. Should she pay off some of the mortgage? d) Should she invest some of her assets in mutual funds with, possibly, a better return than 4%? I am sure some of you have experienced situations of this kind before. If you can give any advice, I would be grateful. I advised her to spend a few hundred dollars and get professional advice. She is willing to do that. But, we wanted to get some sense of what questions we should be asking and who we should go to. Thanks in advance. RT

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Reply to
DenverAnon
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a) no. and no. She should transfer (direct transfer) the funds into a rollover IRA in her name. No taxes would be due, and she should set up beneficiaries on that account. b) none. there could have been estate tax issues if the husband left more than $1M (more in 07, but back to $1M in

2011 so no need to elaborate). c) probably not, what is the rate? what are the payments? If she sold the house, what could she rent in her area? Sounds like she should conserve the money, it needs to bridge her until she can work for higher wages if that's possible when the kids are older. d) maybe half of her $100K should be put into a very low cost stock index fund, but over time, maybe $5,000 every 3-4 months. This is so if the market continues to be volatile she won't panic if it's down 10% in 6 months with all the money invested. If she has more questions, especially on answer (a), come on back. JOE
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Reply to
joetaxpayer

snipped-for-privacy@gmail.com (DenverAnon) posted:

[Remainder elided for brevity]

It is unreasonable for anyone to really provide in-depth recommendations from an internet posting. There is a give-and-take process involving personal lifestyle preferences, costs of living in the individual market where she resides, etc., that cannot be exchanged in this milieu. My recommendation would be that you help your friend by assisting her in finding a Financial Advisor who is local, and who is willing to provide her the guidance she needs, on a continuing basis, at a reasonable cost. Most financial planners -- who operate under several "professional" banners, such as Certified Financial Planner, for one example -- will agree to a _no obligation_ introductory interview, during which they would listen to your friends general needs and discuss how they would propose to serve her, and how she would be charged. Fee-based planners are generally recommended, but some who function on a commission basis, may be individually quite competent and useful. There are questions of personal chemistry and comfort that are very important, and impossible to guage without a face-to-face session. These are as significant for the planner, as for your friend. Both need to be comfortable, if there is going to be a long-term, good relationship. For the moment, the short-term structure of your friend's investments (i.e., money market accounts) would seem to be sound -- and you should counsel her to avoid long-term commitments, until she has _landed_ in a comfortable, trusting relationship with an advisor. Don't hesitate to seek referrals from other friends in your community, whom you trust or whom you know to be "smart," when it comes to finances. Good luck to your friend. Take it slowly, and do it right.

Bill

Reply to
Bill

I am sorry for the loss. Please pass my condolences.

Nonsense. As a spouse, she can treat the 401k as her own and roll it over to an inherited IRA. At that time she'll designate new beneficiaries.

Life insurance proceeds are free from income taxation but includable in estate taxes. Since there is no estate tax liability (it seems) the full 200k is totally tax free.

That depends. We could use a better picture of her situation. What are the loan terms? Does her income (from all sources) meet expenses today, or does she need additional income?

That also depends on the additional info we need. Her plans/needs for the money will highly impact what its invested in.

Go slowly. Ask a TON of questions. Don't worry about appearing dumb. If it sounds fishy, it probably is. Double check everything. Your first question concerns me. Whoever told her that is an idiot or trying to scare her into action. The chances of that happening are slim, there are very commonplace ways of avoiding it, and there are a half dozen other worries that should be more pressing at this point.

Agreed. There are many facets to this case. Income planning alone is an ongoing process that often needs a dedicated professional to monitor (especially since it appears she is fairly uninformed regarding these matters). Once she becomes more skilled at managing her finances, she may be able to handle it on her own. Go to a profesional that is credentialled. Preferrably one that is recommended from trusted and financially savvy friends. She shouldn't pay a dime without a full understanding of what she is getting into and what she'll get in return. Good Luck.

Reply to
kastnna

I'm only responding to your a) above. Are you sure? She is not the beneficiary of the 401k, therefore she can't roll it over into her account, at least not because of that fact. She should get to an attorney at once to probate the will, or absent a will,get herself appointed administrator of the estate. And listen to the lawyer instead of other people. Gawd! I recommended an attorney? (grin)

ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

Clarification: I just responded to the first responder and not sure about the facts now. See quotes above; I took that to mean anyone else other than himself. But maybe OP meant anyone else other than his wife. You reckon? ChEAr$, Harlan

Reply to
Harlan Lunsford

Yes, I see how you read it, but the "if something were to happen to her" implied she has access to the 401(k) money, but the concern was the lack of next beneficiary. I'm not

100% sure of this being clear to us either way. I know when I rolled my cash value pension to an IRA, I needed my wife's notarized signature, the Mrs has dibs on that and 401(k) money. Even my 401(k) loan years ago needed her signature. We'll see if OP clarifies. JOE
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Reply to
joetaxpayer

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