savings

Use windfall for retirement, debt

Don Taylorq_v2.gifDear Dr. Don,
My mother died recently and left me $80,000 in annuities. My boyfriend and I have approximately $20,000 in credit card debt and $50,000 in vehicle debt. We would like to pay it all off.

I own a home that I bought five years ago for $210,000. I still owe $176,000 and the home is only worth $167,000. Our household income is about $70,000, and we file income taxes separately. We are considering having my boyfriend buy a home as a first-time homebuyer, so we would like to use some of this money for a down payment.

I am 44 and he is 54. Neither one of us has retirement savings, and I have a daughter going into college next year. I know we are blessed to have this money and that it will probably be taxed very high. Any suggestions?
-- Cyndi Choices

a_v2.gifDear Cyndi,
I'm sorry for the loss of your mother.

While being the beneficiary of $80,000 is a blessing, it's not a miracle. You need to prioritize your financial goals and allocate the money based on that prioritization. I'll share how I'd prioritize things, but I'm not you, and you'll have to adjust my advice to fit your reality.

The first priority is to estimate the tax bill. You don't want to spend out the inheritance only to leave yourself with a big tax bill. There's no point in me going out on a limb here making assumptions about how the income is taxed. You need to work this out with your tax professional.

It's easy for me to sit on the sidelines and tell you that I don't recommend using your inheritance to pay off your boyfriend's debts. I don't know the extent of your commitment or how you manage your finances as a couple. Still, I think it makes more sense for you to use the money on your bills and then, if you want to, use the money that gets freed up in your monthly budget to work on paying down his bills.

Although it may sound hard, with no accumulated savings for retirement and with substantial credit card debt and auto loans, I wouldn't make financing your daughter's college education a top priority. You certainly can and may feel obligated to contribute toward it, but she's investing in her future by going to college. She'll reap the rewards from that investment and she should try to finance the lion's share of it through jobs, loans, scholarships and grants.

Your boyfriend may qualify as a first-time homebuyer, but if you're living together, why would the two of you want to own two personal residences? You're underwater in the house you own, although you may qualify to refinance the loan under the government's Making Home Affordable program. Being underwater makes your selling of the home and moving into his new home problematic.

You could spend part of your inheritance to make this work, but don't let the tax credit become the tail wagging the dog in making the decision to do it. As for you supplying the down payment, I can't recommend it without a nonmarital agreement in place securing your investment in the home, but this wouldn't even register as a priority on my list.

I'm a big fan of financial flexibility, so I'd encourage you to keep some of the money set aside in an emergency fund. The Bankrate feature "Building an emergency fund" provides the details of establishing one.

Finally, if you and your boyfriend don't have some sort of nonmarital contract agreement in place, you should have one drafted. Nolo.com will provide you with the basics. I suggest working with an attorney to draft it, but you may choose a do-it-yourself approach.

Read more Dr. Don columns for additional personal finance advice.

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