Helping SIL manage settlement money

[y4m]

Background for anyone who doesn't remember - My SIL is 24 and a newly-minted nurse.  About two years ago, she was in a boating accident and lost her non-dominant thumb.  She was still able to graduate from nursing school and begin working (and presumably will be able to work going forward) but she has had something like 20+ reconstructive surgeries and will surely have others in the future.  She's currently living with my ILs while she recovers from a major surgery, but wants to move out once she is able.  You will recall that my ILs are a hot mess financially--to the point that we are helping them file BK and probably buying them a house to live in.

We encouraged SIL to go after the boat insurance policy for her injuries and she just got a substantial settlement, like multiple 6-figures settlement after legal fees.  Basically she's going from living at home, with maybe $1000 in her checking account and a ton of student loan debt, to having the means to put herself in a really good financial position, if she plays her cards right.

Other background - she has ~60K in SLs ranging from 4-8%, a one year old car financed at 1% or less.  No other debts or substantial assets. At one time she was interested in going back to school for a more advanced nursing degree that would presumably increase her earning potential (but I'm not 100% sure she's still interested/capable of that).

She has asked us for advice and will be flying out at the end of the month to go over finances and our recommendations.  So now I'm asking you...

What advice would you have for SIL?

[Deleted]

1)Figure out the tax ramifications of the settlement. I have no idea what those are.
2)I'd probably pay off the SL, just for the freedom of it.
3)Put a bunch into retirement.

Actually:
1) Go talk to a financial planner and get some real, qualified advice. That's MORE than enough money to ask someone smarter than me for advice.

[y4m]

Jan 5, 2015 14:42:07 GMT -5 @choco said:

4. I don't know anything about settlement money and taxes, so I would ask if she has met with an accountant to help her navigate that.

My understanding is that policies like this that are paid with post-tax dollars generally are not taxable when they pay out settlements.  But if anyone has other info I am all ears.

[tacosforlife]

I agree with the recs to pay off the SLs and to see a financial advisor. I would also consider consulting with an attorney (probably someone who does tax and estate planning). Just to figure out - does she need more insurance, is there some sort of trust vehicle that would protect it in the case of a judgment against her, etc.

And of course, I'd have a serious conversation with her out of the presence of the ILs about not letting them have access to her money, being very careful with any support she gives them, and the like. You don't want them to wind up leaning on her and sucking her dry.

[tacosforlife]

Jan 5, 2015 14:47:22 GMT -5 y4m said:

Jan 5, 2015 14:42:07 GMT -5 @choco said:

4. I don't know anything about settlement money and taxes, so I would ask if she has met with an accountant to help her navigate that.

My understanding is that policies like this that are paid with post-tax dollars generally are not taxable when they pay out settlements.  But if anyone has other info I am all ears.

My memory from law school is that personal injury settlements are not taxed. But I came kinda close to failing Federal Income Taxation, so you should probably not take my word on it. LOL.

[womet]

Jan 5, 2015 14:47:22 GMT -5 y4m said:

Jan 5, 2015 14:42:07 GMT -5 @choco said:

4. I don't know anything about settlement money and taxes, so I would ask if she has met with an accountant to help her navigate that.

My understanding is that policies like this that are paid with post-tax dollars generally are not taxable when they pay out settlements.  But if anyone has other info I am all ears.

When I got a settlement check, I did not have to pay taxes on it.

[y4m]

Jan 5, 2015 14:52:06 GMT -5 tacosforlife said:

Jan 5, 2015 14:47:22 GMT -5 y4m said:

My understanding is that policies like this that are paid with post-tax dollars generally are not taxable when they pay out settlements.  But if anyone has other info I am all ears.

My memory from law school is that personal injury settlements are not taxed. But I came kinda close to failing Federal Income Taxation, so you should probably not take my word on it. LOL.

Mr Y4M freaking loved Tax.  Like scary loved.  His understanding matches yours and matches google.  Punitive damages are taxable, but not personal injury settlements.

[krystee]

I feel like investments are the best idea for people with willpower and good financial sense...but if she is more like her parents, something like a paid-for house and setting her up for a life without debt might be more effective for her personally.

[y4m]

Jan 5, 2015 14:55:19 GMT -5 @choco said:

Is she working yet or does she still need to find full time employment? Does she need to take licensing exams too?

She is licensed and employed (and did work for maybe a year already), but is on leave from her job to have this surgery for something like 6 months.

[Deleted]

I would pay off the SLs and take $1k to blow and invest the rest. Maybe at some point when she has been working for a few years, she can help with the parents situation.

ETA--I would pay off the SLs and possibly the car, just for the simple fact that her parents are going to know she has money and probably pressure her to give them some. At least she'll have a large chunk of her debt paid off--vs giving them money and pretty soon its gone and you still have debt.

[Deleted]

My financial planners (Timothy Financial) would be great for this situation. They are fee-only, based in Chicago area, and could help her look at this stuff objectively. I'd really love for her to have a good financial planner, and I am biased towards fee-only.

I'd be a little reluctant going into too many more specifics than that, because I've been burned with family & money stuff in the past.

But, I of course think she needs to set up a iving revocable trust ASAP & keep her mouth shut to her parents about the details of the settlement & set clear boundaries around helping others financially (as in, do not do it, or do it in a very strategic way.)

I'm so glad to hear she is able to continue her career, she's lucky in that respect.

[rubytue]

My thoughts:
Do nothing for a bit. Just hold it for a couple months while she thinks about options and consults with a financial planner and an tax attorney who can hopefully set up a trust or something.
After that, probably pay off the student loans, drop $11k in a Roth (2014 & 2015 contribution). I agree the car is basically free money so I wouldn't be in a rush to pay that off.

[AAM2012]

The funds will not be taxed.

Did her attorney discuss with her a structure settlement? That may be a great option for her.


I also agree a financial planner would be a good rec too!

[niq]

I would suggest that she pay off the SLs and find a financial planner/advisor for the rest of it. It won't look like other relatives trying to run her life, and it will be less of a time sink for you. I'm not really knowledgable about trusts n' stuff to really comment on that.

What does she think of her parents situation?

[msmerymac]

I agree about talking to a professional.

Off the top of my head, I would not pay off the student loans right away. I would figure out her budget. Does she have any money coming in or the ability to pay bills? Even living at home, I'm going to assume she has student loans, a cell phone, and car expenses to pay. That's assuming she's not contributing to rent/utilities or her own food. Plus extra "fun" expenses.

She should probably get on a budget where she can easily manage her expenses within her income, which will help everyone decide the best course of action for the money. If she wants to return to school, perhaps some of it will be used to pay off the loans. If she has half her loans at 7.8% and half at 4.2%, maybe she can pay off the high interest ones with the settlement and then just pay monthly (maybe even double) on the lower ones. If she can qualify for a mortgage at a good interest rate, it will probably be worth it to use some of the settlement money for a down payment and closing costs for a condo, assuming she can make PITI payments with her earnings (or using it for enough of a down payment that the PITI is affordable). She should DEFINITELY start retirement savings, regardless of what else the money is used for. If the settlement isn't taxable, I will ASSume it won't count against her MAGI for the year and she can easily put $5500 in a Roth IRA. My thought is that by investing a lot of the money (tax advantaged when possible, but index funds when not) she'll be making a better return on investment than she will saving 4% a year on SLs or a mortgage (assuming she'd use it to pay off SLs or buy a place to live in cash).

I hope this can set her up to live a financially comfortable life in which she isn't drowning and debt and can avoid a lot of monetary surprises and stay within a reasonable budget.

[msmerymac]

Oh! What is her health insurance situation? Will she have ongoing OOP costs for medical treatment? Will she have to take time off work for more reconstructive surgery in the future? That should probably be considered.

[jennistarr1]

I agree, pay off student loans.

Paying her car loan plus maybe some rent to her parents is good practice to be in the habit of paying bills. When she moves out on her own, she'll be used to paying rent. Plus I assume that rent money would help her parents out without being a "gift"

I would really encourage her to put money away, most of it where she can't easily access it...for future schooling, marriage, a house or whatever.

[Pom]

You've already gotten the important and relevant advice. I remember her accident and I am happy to hear she got a settlement and here's hoping it improves her future substantially.

[havarti]

Agreeing with msmerymac. Will her medical insurance cover the cost of surgeries for an injury for which she has received a payout? Is she expected to cover the costs of healthcare related to the injury with that payout? DH had a minor otj injury a few years ago for which we opted to not take the payout in case further surgery was ever necessary.

[Deleted]

Who will pay for future surgeries? Will her medical insurance refuse to cover those?

If that is potentially the case, pay off student loans and put the rest in a conservative mutual fund and use the money to pay for medical care as needed.

ETA: She can spend some of the gains if she wants, but I'd probably even save most of that. If in 10 years she has no more expenses, awesome. She can buy a house, put it in retirement, whatever.

[awkwardpenguin]

People are asking good questions about the extent to which the settlement will be needed for future medical expenses and lost wages. That makes a big difference in what she might want to do with the money.

I second @shoegal on a fee-only financial planner. We also use Timothy Financial and have been pretty happy with them, although the fees are on the high side for the first planning session where they do a review of your whole financial picture.

I think the most likely scenario is that she should invest most of the money, and use some of it to shore up her current financial situation and put her on track for future goals. That may or may not mean paying off the student loans in full. Our financial planner has suggested paying down our loans out of cash flow rather than using assets to do so.

[moolarkey]

Will she be strong enough to not let her parents have access to her money and blow it all?

I'm thinking not paying off the student loans immediately, the interest on them should be low.

Set up some long-term investments, figure out what she needs to live on, medical insurance included and get her on a budget. Possibly make larger than normal school loan payments but not pay them off yet.

Talk to a financial planner first.

[mich1]

Jan 5, 2015 15:13:49 GMT -5 rubytue said:

My thoughts:
Do nothing for a bit. Just hold it for a couple months while she thinks about options and consults with a financial planner and an tax attorney who can hopefully set up a trust or something.
After that, probably pay off the student loans, drop $11k in a Roth (2014 & 2015 contribution). I agree the car is basically free money so I wouldn't be in a rush to pay that off.

Doesn't money put into a Roth have to be earned income?  She has been out of work 6 months, so is eligible for 2014, but if she doesn't work in 2015, she is not.

[ESF]

I don't do personally injury law, but at least portions of my clients' settlement money is often taxed.

Generally speaking, money recovered in situations like this can be classified as compensating for lost income, out of pocket costs like medical expenses, for pain and suffering, and for litigation costs, such as your attorney fees. It is possible to receive a settlement or award and for portions of it to be taxed at different levels due to what the payout is for.

There are also differences between states, so unless someone here is a tax expert in the un identified state in which your sister resides, do not rely on the advice you are receiving here.

People should not give advice on something so serious unless they are 100% certain of what they are talking about.

[ESF]

One thing I should have said last night.

It would SHOCK me if the settlement agreement did not have a confidentiality provision. It is not uncommon for such provisions to limit even what you can disclose to immediate family.

They will take the money away if she violates that (or if they find out she violated it if she already has by telling you guys).

[iheartbanjos]

If I had a friend that was 24 and received a multiple 6 figure settlement, I would tell her to avoid advice from internet people, lol, and find a fee based, trustworthy financial planner.

[SJ]

Jan 6, 2015 12:03:58 GMT -5 iheartbanjos said:

If I had a friend that was 24 and received a multiple 6 figure settlement, I would tell her to avoid advice from internet people, lol, and find a fee based, trustworthy financial planner.

But that is what most of the internet people are recommending

[lishie]

Jan 5, 2015 14:52:06 GMT -5 tacosforlife said:

Jan 5, 2015 14:47:22 GMT -5 y4m said:

My understanding is that policies like this that are paid with post-tax dollars generally are not taxable when they pay out settlements.  But if anyone has other info I am all ears.

My memory from law school is that personal injury settlements are not taxed. But I came kinda close to failing Federal Income Taxation, so you should probably not take my word on it. LOL.

This is my memory too.