Early inheritance, how to apply it.

Diogenes · #1 (**permalink**) 11-08-2009, 11:10 AM

First time poster with what I hope is a simple question.

I have a relative who has decided to gift my wife and I some of her estate for various reasons.

She intends to give me and my wife separate gifts of 13K this year and 12K next year for a total of 50K.

This should fall under the gift tax regulation so neither my wife and I nor the person giving the gift should incur any tax liabilities.

Here is my situation. I am in a job that is at risk for various reasons. My wife is the primary income and has a secure job. Our debts are not too outlandish by some peoples standards but I would like to use this to try and become debt free.

We have a first and second mortgage on our house for a combined total of 28.4K. House is worth maybe 145K in todays market.

We owe 5.5K on one auto loan, 11K on another auto loan and 13.2K on a boat loan.

Credit card loans total about 4.5K.

I would like to have the house free and clear.

What I plan right now is to pay off the first mortgage first since it is a higher payment amount. That amounts is 14.5K.

Next we will pay off the credit cards for an amount of 4.5k.

Next we would pay off the 5.5 car loan. The remainder of the first gift would go into savings to hold until the second gift next year.

This would pay off the first mortgage with the higher payment, pay off the credit cards with their high interest. It would pay off one vehicle which should last me many years to come.

When the next gift comes in we would pay off the second mortgage for 13.9K.

We would then put the rest of the gift money into savings to have a cash cushion on hand in case my job goes south. With the money freed up by not have two mortgage payments and a car payment we could apply that towards the two remaining loans.

Does anyone see any pitfalls to this or have any suggestions?

Option B would be to pay off the first and second mortgage with the first gift and some from our savings, then use the second gift to pay off a vehicle, the credit cards and replenish our savings.

debtconsol · #2 (**permalink**) 12-06-2009, 05:20 PM

You should always have an emergency fund when you start off. Then I have been told that it would be smarter to attack the smallest loans you have before going for the bigger ones.

In the end you should just do the math. What would save you more money in the long run?

robert fourman · #3 (**permalink**) 12-08-2009, 05:49 PM

Hope this can help, I was just browsing around and read what your post. I am a non practicing CFP. Howeever I have 15 years of experience mostly working for a company that makes Execplan Express financial planning software for professionals. I work with advisors dealing with the most complex tax and cash flow strategies. Yours is pretty straightf forward. Here is the best advise I could give, seperate yourself from what you want to do emotionally and do what makes the most financial sense. First, unless something is really wrong, my gues is that your home mortgage is the lowest interst rate of all debt, so it should be the last debt to be paid off. Even more so if you itemize you tax dedictons, however my guess i that you do not based on the balance owed. My gues is that the credit cards are the highest, the boat next, then the car then the home. Debt is debt, and you are personally responsible for all of it regardless if it is secured meaning that if your house is paid off, but your boat isnt and you fail to make payment on the boat, the boat lender, can get a judgement for the balance. So payoff high interest debt so future cashflow can be used to pay of other debts to other debts plus interest. For example reducing $25,000 worth of debt for credit cards, boats and cars that your paying an average of 10% saves $2500 a year in interest payments. Paying off $25,000 of lower interest mortgage debt for example at 6% saves $1500. So if it makes you feel better to pay $1000 (actually even more with the tax savings) toward paying your mortgage than go for it

Second, after all your debt, except your motgage is paid off, put aside some cash for a rainy day or when you might have a big credit card bill come due.

Finally, set up a home equity line of credit to use to make any large payments in the fututre, such as a car, boat or furniture (unless they are offering low finance. And avoid credit card debt

Hope that helps
robert

Sponsors