What to do with trust fund?

Question

Upon the death of a relative, a trust was established in my name.  In 2 years I will gain control of 50% of the trust and gain control of the remainder 5 years after that.

In 2 years 50% will likely be worth between $225k-$250k.  At that time, my debt will consist of $55k in student loans and $85k remaining on my mortgage (4.1% rate).  My emergency fund will likely be $4k-$5k.  My gross household income is currently around $65k/year.  I get the full match on my 401k and contribute to a Roth IRA, although not the maximum amount yet.

My question is what are some suggestions as to how I should invest/continue investing the money?  I assume the standard answer would be to up my emergency fund, pay off the student loans and possibly the mortgage, and continue investing the rest as is; allocated across mutual/index funds based upon my age.

However, my goal is to get to a point where I eventually work for myself and to use this money to work towards this goal.  A few of the more standard ideas I have come up with are real estate, angel investing, business partnerships, etc.  While I do not claim to be an expert in any of these fields, I was thinking I could spend the next 2 years educating myself on some or all of these topics, so I can be ready to put my money to work when the time comes.

Thoughts?  Suggestions?  Thanks in advance.

Paul Allen · Answer

I suspect that if you took $140K out of the trust to pay off your personal debts (mortgage and S/L) you would be mighty unhappy with your tax situation the following spring.  Trust distributions are nearly always taxable as income to the distributee.  Make sure you understand the tax ramifications before you start moving money around.

James Triano · Answer

@Jason C.

Here's what I would do:

1) If the home you are living in is somewhere that would lend itself to becoming a rental property, I would take your trust fund, purchase a multi-family home where you can house-hack and live for free (or a reduced monthly amount), and rent out your current home.  This is actually what I did (sans trust fund).  Keep a mortgage on your original home (the $85k) and have a mortgage on the multi-family. Let's say this will use up $75k in down payments and renovations.

2)  Then, payoff your credit card ($2.6k), auto loans ($23k), and student loans ($55k).  Get this stuff done and never worry about it again. This leaves you with almost $70k left over ($225k - $75k - $55k - $23k - $2.6k = $69.4k)

3)  Take $20k and add it to your emergency fund of $4-$5k and stick it in a Vanguard high yield bond fund.  Don't ever touch this money.  This is your rainy day fund in case your world falls apart. Leaves you with $50k plus an incredible amount of disposable income each month because your housing expenses are very low (possibly $0), you have no consumer debt, and you have money in the bank. Also, take advantage of your 401k employer match and max out your Roth IRA of $5,500 per year.

4) Take your $50k and build any business you'd like.  Flip a house, buy another rental, open a hot dog stand, whatever.  Then know that in another 5 years you'll be able to re-invest another $250k into your business(es) of choice.

Matt K. · Answer

You could easily (in theory) match or outperform all but the CC debt and maybe the high student loan debt.I'd invest most that money and pay off the cc debt, high student loan debt, bump up emergency fund to years worth of bills or 6 mo total living expenses, and invest the rest. You figure IF you were to lose a job or both jobs, you could find work within 6-12 months.

Jason C. · Answer

So debt today is as follows:CC:  $2050 - 17.99% - should have paid off in 6 months or lessCar1:  $5705 - 3.85% - was planning to use next tax return to pay remainder, so around Feb 2018Car2:  $17k - 3.69 % APR - was planning to focus on paying this off after car1Mortgage:  $93k - 4.00%* - purchased home in Mar 2017 for 93500 from in laws.  Was appraised at $120kStudent loans (actually my wifes):  $36k @ 7.65% & $30k @ lower rate (believe my wife said in the 4s)Based upon my current plan I expect to have CC and both cars paid off when portion 1 of trust becomes available.  Probably should've included this info in the OP.   Let me know if this changes anything.

John P. · Answer

It's great to ask the question here on BP and then also ask it on bogleheads. Then blend the answers you get from each site as they will be different.

Jason C. · Answer

Thanks for the advice thus far.  The student loan rate is 7.65%.  I've read countless personal finance/investment books that all seem to say the same thing (not to imply this information isn't valuable).  However, it was Rich Dad/Poor Dad that really opened my eyes as to the opportunities that are available with right amount of education and effort.

I currently have around $2600 in cc debt and $23k in auto loans, which will take me 18-24 months to pay off.

Steve K. · Answer

@Jason C. , welcome.

I used to think conventionally (35 years ago), paying off mortgage first, etc. But on a site such as BP, you'll likely hear that real estate investing can earn you 10% to 20% yield....why earn 4% by paying off your mortgage?

Are you up to remodeling a rent/hold property? Have you read about the BRRRR method. If it's for you, get inspired by what other investors did with very little capital. You could even begin today....then really be in an envious position in 2 years when the trust is available to you.

Read some real life case histories of @Joshua D. , @William Collins and @Austin Fruechting did in 5, 2.5 years and 7 years, respectively, by using BRRRR method

https://www.biggerpockets.com/forums/223/topics/459415-500k-net-worth-in-5-years-im-30-today?page=1

https://www.biggerpockets.com/forums/48/topics/429980-officially-financially-free-at-32----exciting-day

https://www.biggerpockets.com/forums/223/topics/445367-full-time-employee-multiple-brrrr-side-hustle-2875-to-goal

Good luck to you

Jay Hinrichs · Answer

you could explore othere business type opportunities.. if you want to work in the business.. you may want to look at buying an existing business that interests you..

Dan Rudolph · Answer

Don't accept the "standard" answers.  For starters, do not pay off your mortgage, it is one of the best tax advantages that uncle sam provides.  Do NOT listen to Dave Ramsey.  Instead understand the difference between good debt and bad debt.

https://www.youtube.com/watch?v=qRkc3HpOZcQ

I recommend that you begin by becoming a student of Rich Dad / Poor Dad.

What to do with trust fund?

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