What should my mother do with the income she received from selling her home?
My 90-year-old widowed mother recently sold her house and moved in with my sister. My sister suddenly passed away and I am in charge of finding a new place for my mother to live, as well as helping her manage her estate. She has $200,000 in the bank from the house sale, plus she receives Social Security and a small veteran's pension. She is looking to rent or buy a condo. Assisted living is a cost-prohibitive option and she's not ready for a nursing home. What is the best mix for investing the $200,000 from selling her home? Is it better to buy or rent at her age? What about an annuity? Should she move the money out of her name?
Do NOT do an annuity as they are expensive and she is too old to do for the "accumulation" (growth) phase anyway. If you "annuitize" it now for a "lifetime income" then when she passes, there is nothing left. You gave away an asset for an income stream. Annuities are usually great for the insurance agent and not very good for the client in my opinion. There are too many other ways to make money and even replicate annuity strategies without the exhorbinate fees. In this low interest rate environment, annuitization wouldn't be a good deal anyway.
At her age I would probably be looking at renting and investing the difference rather than locking in virtually all of her assets into a single condo. You need to interview a few different money managers. I would look for fee based only managers who do NOT work on commissions. Appropriate strategies would depend upon her goals, her knowlege, what she wants to do with the money when she is gone, etc.. But any strategy you chose should have some type of defensive sell discipline to limit the downside.
With regard to "moving money out of her name," if you are talking about to qualify for medicaid nursing home, there is a 5 year lookback of assets given away as well as an income test in order to qualify. This is complicated and tricky so I hate to try to give you advice in this forum so it is not done incorrectly. If you are talking about conventional estate planning, she is way under the estate exemption and will pay no estate tax. If you are talking about avoiding probate & therefore a living trust/will, it really depends upon the state you live in as to whether probate is a big deal. But a living trust/will really won't hurt anything and simply avoids probate, it does not provide asset protection or tax benefits. She should definitely have durable health powers & wishes in place regardless if she doesn't already have.
Hope this helps and best of luck, Dan Stewart CFA
DO NOT BUY AN ANNUITY!! First step is to determine your mom's monthly income need. This will help drive the allocation and income to be generated from the investment portfolio to supplement SS. Renting creates flexibility, so I would probably err on teh side of renting assuming she can find something she likes. Keep the money in her name, as the rules around gifting are relatively strict. Make sure she has her estate planning in order, and the assets are titled with a "TOD" registration so they avoid probate.
I would probably allocate her around 50/50 stocks to bonds but wouldn't be able to give that recommendation until proper income need planning was done.
You could set up a living trust for your Mother which would allow for transfer of assets upon death to inheritors free of probate. Probate is the legal process that inventories and distributes a person's property after death, and can be time consuming and expensive.
Or you could leave the money in her name and keep bank accounts out of probate by setting up payable-on-death accounts, which give the recipient immediate access to the money.
I would think at this age and depending on your local real estate market that renting may be a better option since that would allow for more flexibility. And also would be more cost effective for maintenance purposes.
Investing the $200,000 in some income producing investments in order to receive monthly income for your Mother. Of course, I would recommend all investment grade type securities and diversifying within different sectors.
You're asking great questions. Until you find her a place to live, keep it all at the bank, maybe look at a money market account at the bank, not a CD at the bank. Keep the funds very liquid until she is settled. The most important goal is to make sure your mother is settled and comfortable. Depending on where she lives, her health, other assets, income/expenses, among other factors (such as is she relocating to a different town?), ability to keep up with home etc, need to be considered when thinking about renting vs. buying. There are pro's and cons of each, not just financial concerns. She needs to keep the money in her name for now. You also need to determine if her income is meeting her expenses as well as possible future health care costs, which may become one of her largest expenses. You really need to study the advantages/disadvantages of an annuity.
I can't see the sense in buying a home at her age. Either she is going to use all of the savings to buy (and then live on what???) or she is going to take a mortgage (a 90 year old, really?). Much more important to be flexibile here. You want savings liquid and available in case it is needed for medical help or personal assistance. Invest in a modest portfolio of fixed income investments, laddered CD's, etc. Annuities are generally not appropriate at this age, due to surrender charges and/or short expected payout period and potential sacrifice of principle if taken in form of a lifetime payout.
If you are thinking of transferring money out of her name in order to potentially qualify for Medicaid benefits, be very careful how you do this and speak with an experienced elder care attorney before making any such moves. Also remember that in many areas, the nursing home facilities that will take Medicaid are the worst available options. Don't do this because a coworker or neighbor told you it was a good idea! Talk to resources in your local county dept. or elder services, talk to an elder attorney, talk to senior care consultant or advocate before making any move to transfer assets for Medicaid purposes. (and know that there is a 5 year lookback period - so if she applies for Medicaid within 5 years, Medicaid will try to claw back some or all of that gifted away money.