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Can I divide payments of inheritance money to me over several years?

I am trying to plan for a future inheritance of between $100,000 and $200,000. When the time comes, is there a way that I can structure/divide payment of this money to me in one-year increments for five years? I live in a rent-controlled apartment, and if my yearly income/combined assets go over a certain amount, I have to move and I don't want to. Am I compelled to receive this money in one lump sum? I live in the state of Oregon, if that matters. Thanks in advance for your advice.

Aug 04, 2014 by David from Portland, OR in  |  Flag
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If the money being left to you is not already a retirement account (such as pension, 401k, or IRA), you will have very limited options to avoid counting the money as your asset. Once you know that this inheritance is due to you, after estate taxes are paid or waived (9 months after death), you are morally and probably legally required to report the inheritance as an asset of yours if it is left to you in your name. You could ask the executor to pay you in increments or you could buy an immediate annuity, but in any case, this is still an asset of yours because there are no contingencies involved in paying you the money.

I see two possible solutions. It is possible that retirement assets do not count and in that case, you will want to convert the asset into a retirement asset and purchasing a deferred annuity might work. But remember that retirement assets have tax deferral because you can generally not access the money until age 59 1/2. So depending on your age you might have to wait a long time to access the money without significant tax penalties. This can be an advantage if you don't have any retirement savings because you can instantly create a significant retirement nest egg.

A single-premium life insurance policy could also work, but you generally have the same rules as the annuity on withdrawals or loans of the cash value because an SPL is considered a MEC (Modified Endowment Contract).

The second solution would be to have the person leaving you the money to specify that the money be left in a trust with a spendthrift clause in their will. This would limit your access to the money and it would be paid to you in the increments as specified in the will language. You would have to work with your friend/relative and their estate planning attorney to put this into the will. Normally I would say that this would be expensive for a couple of hundred thousand dollars. The estate planning attorney will charge for this. You will need a trustee for the trust who will manage the trust and the trustee is entitled to a fee. The trustee cannot be you or your spouse.

In any case you should look at the fine print of the income and asset requirements. How is income and assets measured. What kind of assets are excluded? Is there any kind of income that is excluded? This will give you the key information about how to accomplish what you want to accomplish.

I would recommend talking to a CFP for advice. I have passed the CFP exam myself (although I am still working on the work experience). CFP planners have studied estate planning in detail and will be familiar with the options once the requirements from the rent control are known.

1 Comment   |  Flag   |  Aug 05, 2014
Michael Steven Greenberg, CFP®

Good advice David. Good luck on your test.

Flag |  Aug 12, 2014 near Delray Beach, FL

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Sure. As soon as you receive the inheritance, buy an annuity that pays you a 5 year (or longer) income stream. Once you begin the income payments the amount you invested is no longer considered an asset (and therefore does not count against your combined asset limit), but is merely a series of payments that you can receive over 5, 10, 15, or 20+ years.

Almost all of the annual payment from this will not count as taxable income, it will be a return of your investment amount with ajust a small amount of taxable interest to claim each year.

View all 4 Comments   |  Flag   |  Aug 04, 2014 from Canton, GA
William Clay Tucker, RICP, CAP, CRPS,...

If the inheritance is from Retirement Accounts, the beneficiary must begin payments within certain time period - also without early distribution penalties. The payment terms would be based on the beneficiary's life expectancy,a 5-year distribution period, or continue payments based on decedent's age.

Flag |  Aug 04, 2014 near Canton, GA
William Clay Tucker, RICP, CAP, CRPS,...

The distributions from Retirement Accounts would count against your income limitations as 100% of the payments are taxable.

Flag |  Aug 04, 2014 near Canton, GA

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Also depends on the form the inheritance takes. If assets are in retirement accounts, you may have the option of taking distributions over your lifetime, or over 5 years - but such distributions will be considered ordinary income. If the asset is in an annuity, you may be offered the option of lifetime annuity payments as an option. If you are working together with the person from whom you are planning to receive the inheritance, all the better. They could leave the asset to a trust (perhaps even with you as the trustee) for instance. I could think of many other creative ways depending on the particulars of the situation.

Comment   |  Flag   |  Aug 04, 2014 from Bridgewater, NJ

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