Pay Dirt is Slate’s money advice column. Have a question? Send it to Kristin and Ilyce here. (It’s anonymous!)
Dear Pay Dirt,
I need a sanity check on what I owe to my sister. We are both in our late 30s. She and I grew up comfortably middle class, but not rich. Our parents divorced due to our mother’s affair. Mom ended up remarrying her new partner, who was significantly more wealthy. No one ever cut anyone off, but for 10-15 years our relationship with Mom was distant. After her second husband passed away she did make more of an effort to reconnect.
When Mom’s health declined she named me her power of attorney. She had inherited her second husband’s entire estate (he never had children of his own), and upon the advice of Mom’s lawyer and accountant I used the power of attorney to make large gifts to myself, my sister, and my sister’s 8-year old daughter (in a trust) to avoid inheritance taxes.
After Mom died, I was the executor and divided her remaining estate between myself and my sister per her will. That was two years ago. My sister and I both inherited over $1,000,000, in addition to the $250,000 that was gifted to her and I during Mom’s life. The trust for my niece has a bit over $150,000 in it. My sister has recently become pregnant and asked me about “the trust for my second child.”
There’s no more money here that hasn’t been divvied up. I inherited my share, she inherited hers, and yes, one of her kids will have a trust and the other won’t, but the other child didn’t exist when we had to gift that money. I checked with the lawyer, who basically said those are the breaks. My sister can use some of her inheritance to create an equalizing trust if she wants, but there is no other money out there to create one. My sister cannot wrap her head around this and won’t do it. The only other “pile” of money is the money I inherited, which I have largely set aside in case our father needs help supporting himself as he ages, as well as for my retirement.
I know I don’t have any legal obligation to give money to my nephew, but am I missing a fundamental unfairness? I do plan to leave a portion of whatever is left when I die (hopefully decades from now) to my sister’s children, along with a number of charities. Is that enough?
—Embarrassed Heir
Dear Embarrassed Heir,
I wonder why you are embarrassed at all. It sounds to me as though you’ve competently handled a complicated financial situation with grace. The windfall has been distributed fairly, actually more than fairly, since your sister and her family received $150,000 more than you did. That she wants to change things now, because her circumstances have changed, seems unfair.
There are a couple of ways she can resolve the situation. She could fund another trust personally for her second child. Or, if she is the trustee to her daughter’s trust, she might be able to add her son, once he is born. While her daughter will no longer have access to the entire $150,000, her children will share in the windfall equally.
You’re under no obligation to give her some of your money now or ever. If you like, you can work with an estate attorney to formalize your intention to leave some of your money to your niece and nephew after you die. That may not satisfy your sister, who seems to feel entitled to your share simply because she has another child on the way.
Finally, if you are embarrassed, I hope it’s on behalf of your sibling, who is exhibiting an extraordinary amount of selfishness.
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Dear Pay Dirt,
I will soon have the ability to sell a number of stocks I hold in a company, currently valued at approximately $2 million, and I am trying to figure out what to do. This could be a life-changing amount of money for me, but I have complicated feelings about it. I was one of the first employees to join this company and was offered a large amount of stock back then, which was effectively worthless for about 10 years. I am fortunate that this company has become successful and recently went public, so after a holding period, I will have the option to sell my shares.
My first question is how many shares should I sell? I have a financial advisor whose general advice is to sell 90 to 100 percent of the shares and then invest the money in something more traditional, like a mutual fund. I believe that makes financial sense, but there is a part of me that wants to keep more shares with the company. I sacrificed a lot for my work at this company, so this part of me wants to keep ownership in what I helped create. However, the company is not in a stable position with consistent revenue, so the stock price could fluctuate significantly before I can sell my shares, or after as well. Keeping stock in this company is certainly a risky endeavor (though one that has paid off so far!).
My second question is about what I should do with the money after receiving it, as I have never handled anything of that amount before. I preemptively feel imposter syndrome if this windfall happens—my family is not rich. My parents seem to be set for retirement, but my brother lives near the poverty line with a long-term illness that impacts his ability to work. I also recognize the massive economic disparity in this country and place much of the blame on the elite and financial institutions. I now fear becoming a deeper part of the system I despise, such as making money via investments in the stock market and contributing to a system that rewards the rich and punishes the poor. I feel guilty about the possibility of having access to all this money while people are suffering and conditions are worsening. Is there a balance out there that allows me to guarantee my long-term financial security, enjoy the fruits of my labor, and support the people and causes that are important to me? I worked hard and am getting rewarded beyond my wildest dreams, but I recognize the privileges that enabled me to be in this situation. My hard work is no more special than that of many other people who will not receive rewards like this.
—Lucky in Stock
Dear Lucky in Stock,
Most people experience the imposter syndrome at least once in their careers, even some CEOs. Some journalists I know feel that way every time a story hits the home page, they win an award or sell a book proposal.
But you’re not an imposter. You’re a risk taker. And when it comes to investments, taking a risk often pays off. That’s what you did. You went to work for a start up, and put in 10 years earning nothing but your salary and perhaps a 401k match. Suddenly, in another 10-year overnight success story, your stock is worth $2 million. Congratulations. But I’m not surprised that it doesn’t feel real or that you feel like you’ve earned it. Let me assure you, you did.
What if you invested a small amount of money into a stock that hit it big over 10 years? In mid-2015, Nvidia traded around $0.49 to $0.80 per share, before adjusting for stock splits. If you invested $1,000 10 years ago, it would be worth at least $200,000 today. A $10,000 investment would be equal to the amount your company’s shares are worth.
Yes, you got lucky. But, you also took a risk (working for a startup is risky), worked hard, and rode it out. Now, it’s time to cash out at least part of your stock and invest it in a diversified portfolio.
Conventional wisdom says you should have no more than 15 percent of your net worth tied up in a single investment. I agree with that. So, consider selling 85 to 90 percent of your stock. If you don’t want to take the tax hit all at once, you could sell chunks of it. Depending on where you live, and other tax considerations, you could owe 20 percent (if it’s a long-term capital gain) to more than 50 percent (if it’s considered income and you live in a high-tax state) in taxes on the money.
An easy way to diversify your assets is to invest the cash in index mutual funds. They’re cheap to own and simple to manage, especially if you choose index mutual funds offered by a company like Fidelity, Charles Schwab, or Vanguard. I don’t know how old you are, but I’m guessing you’re in your 30s. If you start with $1.5 million (after taxes), and earn the same 7 percent return (adjusted for inflation), your money should double roughly every decade. That should give you plenty to help support your family members and charities of choice, while allowing you to enjoy a rewarding retirement.
—Ilyce
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