Louisa
You feel this tightening in your chest when you have to think about all these things. I don't know; things that you had never thought about.
Jamie
Meet Louisa. She's in her mid 40s, and until recently was living in a small rental apartment with her partner and two teenagers.
Louisa
I have one who is graduating high school this year. The other one is younger.
Jamie
They weren't struggling to get by, but they also weren't living in luxury. Then two things happened. The first, a huge loss. Louisa's mother passed away after a long illness.
The second, a total surprise. Louisa learned her mother had left her an inheritance worth millions of dollars in property, cash and investments.
Louisa
There were all these little accounts, varying sizes, all over the place. It was really hard to manage. It was definitely more money than I had ever experienced either growing up or as an adult myself.
Jamie
After her mom passed away, Louisa had to camp out at her mom's house, waiting for the mail to arrive, just so she could find out where all the accounts were and how much they held. The amounts were shocking to her because all her life, money had always been tight.
Louisa
Growing up, it was difficult. There were some issues in the family, parents filed for bankruptcy. Then they divorced and my mom continued her career. She was a teacher, and after restabilizing everything, managed to go back to school, get a better degree. She had a good job as a teacher and was then slowly able to build up her, I guess, financial portfolio, let's say, although it was never really discussed at home.
Jamie
She had no idea that in the years since, her mother had saved and invested so well that she was sitting quite comfortably.
Louisa
It was just surprising knowing just growing up some things... I guess this is kind of personal, but things that I'm like, well, why did we have to live through that when there was really all of this accumulating on the side? We couldn't have fixed that in our house or we couldn't have done just not huge things, but some things that I would've considered or that I do consider basic. I guess just for me, the hardest part was not having discussed any of that. That money wasn't something that was discussed in the family.
Jamie
Because they didn't talk about money, Louisa now has a sizeable sum she doesn't know how to manage.
I'm Jamie Roo, and welcome to What Should I Do With My Money, an original podcast from Morgan Stanley.
We match real people asking real questions about their money with experienced financial advisors.
Here at Morgan Stanley, we work with a range of clients. Some, are experienced investors. Others, are new to working with a financial advisor.
On this show, you get a front row seat to hear what these initial conversations are like. And get answers to some of the questions you might have yourself.
Louisa's inheritance has raised many questions for her. Things like what are her choices if she decides to get a new house? What should she do with her mom's retirement condo? Can she switch her mom's investments to more ethical ones and will those pay off? And what else does she need to think about that she doesn't even know to ask?
Jamie
Joining us today to help answer those questions is Seth, a financial advisor from our Boston office. Seth is a Vice President of Wealth Management and a Senior Portfolio Manager, but long before he became a financial advisor, Seth was an elite athlete. Seth had trained for the 1996 Olympic decathlon team, and even became a fitness instructor. That career started by chance when one day his gym asked him if he could take over someone else's class.
Seth
I said, sure, I'll give it a shot. I watched some videos that night and then I went in and I taught the class.
Jamie
Seth was teaching a women's kickboxing class three days a week for six months.
Seth
These women, they changed. It was unbelievable the change that they went through, and it sort of reinforced for me how much effect I could have in something that I really felt strongly about.
Jamie
That experience has stayed with Seth and informed his work in the mortgage industry, as a business owner of several national gym franchises, throughout his MBA, and now, as an FA.
Seth
So, Just like health, finances is one of these things that a lot of people don't really know that much about, necessarily. So if I can make it more manageable for you – and that's sort of my whole spiel, if you will, for people, is I want them to understand. I want to help them feel empowered. I love that.
Jamie
Okay. It's time to put these two together and find out how Seth can help Louisa work out her finances.
Seth
All right. Louisa, hi.
Louisa
Hi. Nice to meet you.
Seth
Yeah. Nice to meet you as well. Let me do begin by acknowledging your loss.
Louisa
Thank you.
Seth
Absolutely.
Louisa
Thank you.
Seth
Give me an idea about maybe the top three things that you have on your mind that seem to have raised the most questions.
Louisa
I would say definitely how do I deal with those investments that don't fall into line with my, I guess, moral code? Another question is a house. How much money... if you put down a lot of money, then your mortgage payment is extremely low.
Seth
Sure.
Louisa
Right, or you decide, even though we could, we're not going to and we're going to have a larger mortgage, which means higher monthly payments, but then we have that cash available to invest or do whatever we're going to. Yeah. That's also a new one for me dealing with that decision as well.
Seth
Okay.
Louisa
I had one more thing that I was thinking about as part of the inheritance is a condo, far away from where I live now. At first, I was thinking, I'm just going to get rid of it because it's just another thing on my plate. We recently visited it once we were finally able to travel after COVID and it was like, well, maybe we should keep it. Just the implications of owning a property in two different places, and at what point do you say it's worth it or it isn't worth it to invest the money for the upkeep and the time maybe trying to find somebody to rent it and trying to update? I feel like once we made the decision to keep it, there were so many variables to it that I was like, well, I don't know. Should we keep it? That's another question that I have.
Seth
Sure. Let's tackle these individually. The easiest way, I think, the most logical beginning point would be just the overall inheritance in and of itself. The beauty of the inheritance is that you do have a step up in basis …
Jamie
Seth is explaining a provision in the tax code that allows an adjustment of the cost basis of an inherited asset when it's passed on after death. The term cost basis refers to the original purchase price of an asset for tax purposes.
Ordinarily, when you sell an asset, whether a house or a stock, you'd typically be taxed on the gain, the difference between what you paid for it, your cost, and what you sold it for. However, when you inherit an appreciated asset, the tax code allows for the raising or stepping up of the cost basis to the fair market value on the deceased individual’s date of death. That minimizes the capital gains taxes the heir owes if she sells the asset later.
Seth
So there is no capital gain issue to the heirs, being you, on these assets at the moment because of that step up in basis. If you decide to sell the asset later, you may owe capital gains tax on the difference between the sale price for the asset and the stepped up basis[FM(R1] .
Louisa
Okay. I didn't know that.
Jamie
Now that Louisa understands that she won't be taxed based on how the value of her inheritance increased over her mom's lifetime, Seth begins tackling one of Louisa's concerns, her mom's retirement condo, and if she should sell it or keep it to rent out.
Seth
If you were to rent it out, or say you were to put it on Airbnb or something like that. Then you would need to count that income received as earned income to you.
Louisa
Even if I use it... let's say I rent it to somebody for three months of the year, and over the course of that year, I use it for my personal use for up to a month over that course of the year, but I would still need to declare the rent I received?
Seth
You would.
Louisa
As earned income?
Seth
You would.
Louisa
Okay.
Seth
Yes, you would. That might help in some of the decision making around that. Now you still do have the ability to write off the property tax as a deduction, subject to limitations. You would maintain that and you would also be able to write off things that were upkeep.
Jamie
Now Seth explains how the tax treatment for a rental property is different than one that's for personal use. While you typically can't deduct repairs and improvements to homes that are for personal use, there may be opportunities to deduct repairs or depreciate the cost of improvements over time for rental properties. Since there may be considerations specific to the state you live in, Seth suggested that Louisa discussed these things with her accountant.
Louisa
If we do any improvements, which it does need, which are upcoming, as long as I have all the bills for that, then I can also submit that to the accountant and it could be written off or whatever somehow as tax relevant information?
Seth
Right - generally, expenses for repairing or maintaining your rental property may be deductible. This is something you should discuss with your accountant.
Louisa
Oh. Awesome. Okay.
Jamie
At this point, Seth brings up a new but important issue; end of life planning. This can be a difficult and emotional topic. It’s very common for people, like Louisa’s mom, to put off thinking about it, meaning that loved ones like Louisa have a lot to sort out on their own. Financial Advisors encounter this situation with many clients and know how to help them through it. As part of that, Seth wants Louisa to start thinking now about her own end of life plan. That includes estate planning and trusts.
Seth
Have you thought at all about a trust, any sort of trust that you would incorporate to protect the assets or help direct them?
Louisa
Does that mean that you have somebody in place to manage the inheritance if the child is still under a certain age at the time? Is that what you mean?
Seth
So a trust can direct assets for the benefit of a child regardless of the child’s age. Working with a lawyer, you put that language in, and you can devise it however you like. The idea behind the trust basically is to protect the flow of the assets. I'll give you an example, an extreme example, albeit, but it's an example. You and your partner have been married for more than 20 years and you pass away. Then your partner is now left with the inheritance that you received. They remarry and then they pass away. Now the person that they remarried, they now have control over the assets. How they direct them would really be up to them, unless there was a trust or a directive from a will involved around those assets.
Louisa
That would be something that could be or should be included, to say that inheritance should, of course, go to my children, to my mother's grandchildren, to whom the inheritance was originally meant for.
Seth
Exactly. Yeah. Trusts can be used in that way to protect those assets. That's something that you should really think about, and that's part of that end of life planning piece.
Louisa
Yeah, definitely. Sure.
Jamie
Now it's time to dig into Louisa's question of whether to get a mortgage or not. Louisa can afford to buy a house and afford to buy a house outright, but she's wondering if that makes sense and not have to worry about a monthly payment or if she should get a mortgage and invest the rest of her money elsewhere.
Seth
Making a decision to have a mortgage is where you're going to leverage your money best. Is it best leveraged in real estate? Do you think that real estate is going to do better than the stock market over the next five or 10 years?
Louisa
Not that you can predict the future, but this is a home that we plan to have for many years. That's it. We plan to stay here long term. Even if the value goes up, whatever it goes up in five years, 10 years, whatever, that wouldn't help us until we sold it, right?
Seth
Exactly. Plus, you may be able to write off the mortgage interest for up to a certain amount of indebtedness, depending on your situation, as a deduction – as well as throughout the lifetime of owning the home. That’s a potential offset to your taxes every year. In your situation, my suggestion would be to go with the mortgage option and invest that capital into the market.
Louisa
Okay. Taking a mortgage is definitely, or is for most people, preferable to buying a house outright, even if technically you could?
Seth
Right. Exactly.
Jamie
Ultimately, Louisa's decision will depend on the factors Seth mentioned, plus others like mortgage rates and her expectations for returns if she invested the cash elsewhere, particularly if markets are volatile. Speaking of markets, now we'll turn to Louisa's concerns about her mother's investments. Here's how she explained it.
Louisa
It's hard to say, right, to second guess somebody and why they made decisions when they made them. Some of the investments that she had, for me now, I was not comfortable with them. When you have a moral dilemma and how do you reconcile that and how do you step away from that if you want to step away from that? … if I switch to stocks and companies that are more aligned with how I'm morally and ethically comfortable, can I still build my portfolio and make money on those in order to pass down to my kids, but feeling like I've made some money for you, but I've done it in a way that more aligns with our family's current thoughts and values.
Seth
Yeah, absolutely. The great news about that is that, generally, historical data shows that indices that do incorporate environmental, social and governance factors, so ESG oriented investments, they've generally performed in line with or even better than conventional indices. In other words yeah, it's possible to do well by doing good.
Morgan Stanley has a tool that we call Impact Quotient, or MSIQ, and it helps people align their portfolios with their personal values. First it asks you questions to help us identify the values that are important to you and the impact that you hope to make with your investments. Then it analyzes your portfolio to assess how it aligns with the values that you've identified previously. Then finally, it helps us work together to suggest ways to enhance your portfolio's alignment with these suggested preferences of yours. In the end, you have a portfolio that's aligned with your values socially and ethically.
Louisa
Okay. That's good to know. Who determines what is qualified as an ESG? What are the determinants of that?
Seth
This is a great question. The fact is that there are lots of firms and advisors that struggle with this because there really haven't been any consistent methods developed yet for determining if an investment can meet ESG criteria. It can be hard for an investor to find the right information. We do have a team that does due diligence across the multitudes of ESG factors before we decide on which investment options are to be considered for our platform.
Louisa
Okay. That's really good to know.
Seth
Well, listen, hopefully I've addressed the majority of the concerns and challenges that you were talking about when we first started talking.
Louisa
Yeah, absolutely. Thank you so much. Yeah. It's really definitely put me at ease about some things, for sure. Thank you so much.
Seth
Good. Great. No problem. That is the goal.
Jamie
Now that Seth and Louisa have finished their session, I want to find out from Louisa how it all went for her. Louisa, what was your reaction to the information you got from Seth today? You certainly covered a ton of ground.
Louisa
Yeah, it was really good. You feel it a little bit in the body. You feel like this tightening in your chest when you have to think about all these things; these things that you had never thought about and the names of forms and the names of different kinds of stocks, and it's a little bit scary, but then speaking to Seth and you're able to be like okay, somebody who is in the know can really break it down very simply so that I could understand things. I have more information now, more knowledge, so I can make better, more informed decisions. I feel much better now.
Jamie
Was there anything surprising or really helpful about what Seth told you today?
Louisa
I think just the knowledge that investing in stocks that are more ethically aligned with my values is not a bad investment. That is actually an investment that I could make and feel good about, so that makes me feel better. So I was happy to hear that
Jamie
For sure. Anything else?
Louisa
Definitely about the trust. Look, I hadn't really thought about that rather frightening scenario of I pass away, my partner then goes on to have another relationship. That's not the scary part. I wouldn't hope for anyone to just be in a whole life of mourning or anything, but then that when my partner passed away, if there was no trust set up, that money would go perhaps to my partner's new family and not to my mother's grandchildren as had been intended. The idea of setting up a trust just to make sure that money is going where it's quote unquote supposed to go, so that was really important to me to know that.
Jamie
Sure. A super extreme example, but a good argument for having a plan, right?
Louisa
Yeah, and it could happen.
Jamie
What's the first thing you think you're going to do?
Louisa
Look for a lawyer to make a will. That is definitely something that has really been top of my mind, and now I feel like I have more information and more ideas that I could bring to the table when I do find somebody to say, this is also something that I'm interested in, so let's have this conversation as well.
Jamie
Fantastic. Well, Louisa, thank you so much for joining us today. I hope you found it helpful, and please keep in touch and let us know how things are going.
Louisa
Yeah. No, thank you so much, Jamie, and especially thank you to Seth for all the information. I really appreciate your time today. Thank you.
Jamie
Our pleasure. That's it for this episode of What Should I Do With My Money, an original podcast from Morgan Stanley. If you enjoyed the show, follow us wherever you listen to your favorite shows. If you would like a deeper dive on what was discussed today, come see us at morganstanley.com/mymoney. I'm Jamie Roo. Talk to you soon.
