Retire Smart: Mailbag: Inheritance, long-term care and tapping retirement savings
Sunday, December 29, 2013
 
By Jill Schlesinger
Tribune Media Services
 
 
  Every few months, I like to use this space to empty out the inbox and answer some reader questions. And just a reminder: If you have a financial question or a comment about a recent column, send it to askjill@jillonmoney.com. And if you would like to be a guest on my syndicated radio show, call 1-855-411-JILL.
 
  Q. My ex-husband's father died recently and left six of his grown grandchildren $40,000 each, but his two grandchildren from my marriage were excluded (due to the messiness of my divorce). The cousins want to reduce their inheritances and include my children, but I am worried that this may not be legal. What are your thoughts? - Patty
 
  A. You are smart to recognize that a will is a legal document, but this is actually not a legal issue. Some might say that it is heresy to mess with the deceased's wishes, but let's deal with the mechanics first. Once the money is distributed from the estate to the six adult grandchildren, it is theirs to do with what they please. 
 
  If one wants to blow the amount on a car, so be it. Similarly, if all six chose to give $10,000 each to anyone, including your grown kids, it is perfectly legitimate. (The IRS annual gift tax exclusion is $14,000 annually, so there would be no gift tax applied to these gifts.) If just three of the six want to be generous, that's fine - there does not need to be consensus. It may not be exactly what grandpa wanted, but it is a pretty cool demonstration of cousinly love.
 
  Q. With regard to self-insuring for long-term care, does net worth mean with or without the house you live in? - Joan 
 
  A. For most planning issues like long-term care (LTC) or retirement needs analysis, I suggest excluding the equity in your home. As we all learned during the last downturn, selling an illiquid asset like a home can be difficult. Also, many people would prefer to stay in their homes, even if they were afflicted with a long-term illness. That said: If you are single and are willing to sell your home to enter a facility, you could include the home as part of the planning process.
 
  One more note about a recent LTC column: Alan correctly pointed out that I omitted New York Life as a quality provider of LTC insurance.
 
  Q. I am 68 years old and will retire at the end of the year. I have three different "pots" of savings, with roughly equal amounts: my 401(k), a Roth IRA and a regular investment account. Does it matter which account I draw from to supplement my Social Security income? - Jerome
 
  A. Sometimes it can be easier to accumulate retirement savings than to figure out how to actually tap the money when you need it. Remember to keep at least one year's worth of expenses sacrosanct in a safe (read: boring and low interest) account, like a savings, checking or short-term CD. The emergency reserve fund should be in a non-retirement account.
 
  You should then plan on depleting the pots as follows: non-retirement accounts first, followed by employer-based retirement accounts and IRAs, and lastly, Roth IRAs. The theory is based on taxation: the non-retirement funds have already been subjected to income tax, so using them may mean liquidating and paying capital gains rates, but those rates are lower than income tax rates. 
 
  Retirement assets come next because Uncle Sam will force you to withdraw funds starting after age 70 1/2 anyway (these funds have not yet been taxed at either the federal or state levels).
 
  Roth IRAs should come last because you have paid all of the taxes due. If you are fortunate enough not to need your Roth IRA funds, they will pass to your heirs, free of income tax. Of course, if you have a total estate that is subject to federal or estate tax, your Roth IRA will be included as an estate asset.
 
  Now, keep those questions coming - I really do enjoy hearing from you!
 
 
Jill Schlesinger, CFP, is the Emmy-nominated, Senior Business Analyst for CBS News. A former options trader and CIO of an investment advisory firm, Jill covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, "Jill on Money."  She welcomes comments and questions at askjill@jillonmoney.com.
 

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