Buying stocks may boost medical settlement money

DEAR BRUCE: My father-in-law passed away 30 years ago from cancer. It was determined that his cancer was caused by decades of working in the plant where he was employed. Out of the blue, we recently received a medical settlement of $37,500. We are planning on putting $15,000 toward home improvements. I am seeking advice on what to do with the remaining $22,500. I am not sure if this type of settlement is counted as income and is taxable in Pennsylvania. We have about $5,500 in credit card debt (low interest rate) and a $100,000 mortgage. I was hoping to put the money into something that, if needed, we could tap into easily. My wife and I are in our early 50s. — V.P., Pennsylvania

DEAR V.P.: Ordinarily, any monies received from this type of litigation, a class-action lawsuit, is totally tax-free. You might wish to consult an accountant, but I think you'll find this is correct.

How you spend the money is entirely up to you. Any money that the $22,500 earns will be taxable unless it's put into tax-free bonds or something similar. There are a number of places where the money could be invested, but the reality is that it will earn next to nothing unless you're willing to take a risk.

If you are not totally risk-averse, you might want to have a broker look into some decent dividend-paying stocks. There are many that are paying 4 percent and 5 percent and that are perfectly sound, in my opinion, and they very possibly will appreciate with the current upswing (at this writing) in the market.

The interest that a CD or U.S. government instrument will pay is almost nonexistent. Maybe a year or two from now the interest rates will rise, but in the meantime, you will get almost nothing for your money. It's an unfortunate commentary on today's marketplace, but that's the way it is.

DEAR BRUCE: My wife and I are approaching my retirement and are contemplating renting our second home to acquire additional revenue after I retire. We are in our late 60s and, as I enjoy my profession, I believe I will retire close to 70. My wife is already retired. Our second home is located in a bordering state and is about 400 miles from our primary home. The house has three bedrooms, two baths, a two-car garage and central heating and air-conditioning on an acre of land. Both our primary and secondary homes are free and clear, and both are in highly visited communities that attract tourists.

My questions are related to how to go about renting our second home. Should we attempt to rent it ourselves or employ a property manager? What should we expect to pay a property manager, and what services can we expect? What should we look for in potential renters, and are there screening mechanisms? How should we collect rent (direct deposit, etc.)? What might be some of the tax consequences? (We have an excellent CPA who will work with us.) What are some of the pitfalls or problems we might anticipate? If we don't need the additional revenue, should we sell the house or keep it to pass along to our children via our trust? Any heads-up tips you can give us would be helpful. — K.M, via email

DEAR K.M.: In your letter, you've indicated that the income the rental may generate is not a big thing in your life and that the home is free and clear. It seems to me that you need the headache of being a landlord like you need a second head.

There's nothing wrong with being a landlord; however, it does involve a certain amount of attention, even with a property manager. There's always the difficulty of finding the right tenants and avoiding those who may skip out on you or damage your property. (Both have happened to me.) My rentals were close to home, where I was able to handle things when they came up; 400 miles is a long way to go to pay attention.

I recognize that the market is soft right now and that you may have to sell the home for less. You also could let it sit empty for a year or two, in hopes that the market slowly returns to normal. That doesn't mean it will obtain values that existed a year or two ago.

I would list the property at a decent price. If it doesn't sell, it's not going to penalize your lifestyle or force you to be on food stamps. On the other hand, if you can get a decent offer reflective of today's values, I would take that offer and invest the money someplace where you are comfortable, ranging from reasonable risk to no risk at all.

The fact that you want to leave something to your children is understandable, but it is the least important variable in this equation.

Send your questions to Smart Money, P.O. Box 2095, Elfers, FL 34680. Send email to Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.

Share This Story