December 7, 2024 - Money Matters Podcast
A complex pension question, confusing life insurance products, estate planning insights, and wealth strategies.
On this week’s Money Matters, Scott and Pat help callers with crucial financial decisions. They dive deep into the complex choice between taking a pension as a lump sum or as monthly income. They provide valuable tips on managing vacant property in disrepair and whether to sell or renovate. They discuss the intricacies of Indexed Universal Life Insurance and why it may not be the best choice for tax savings. Plus, they cover estate planning and step-up in basis, offering listeners comprehensive strategies for efficient wealth management.
With insightful discussions on retirement strategies, annuities, and pension plans, Scott and Pat offer practical advice to navigate these significant financial crossroads. Don't miss this informative session as they debunk myths, provide clarity, and guide you towards financially sound decisions.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
Transcript
Man: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-WORTH.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: And Pat McClain.
Scott: Glad you are here with us, and hope everybody had a...I think the best of last week is Thanksgiving. Here we are, back in the saddle, working. Both myself and my partner here, we're both financial advisors. And we've got some calls already on hold, so we're going to get right to the calls today. If you want to join us, you can send us an email, questions@moneymatters.com, and that's probably the simplest way, questions@moneymatters.com, or call us at 833-99-WORTH. We're starting off with Bill. Bill, you're with Allworth's "Money Matters."
Bill: I'm a 70-year-old divorced male that will be retiring soon with a $1.2 million pension. And I was made aware that when I'm going to take the lump sum that I never wanted a check written in my name because I have to pay taxes on it right away. So what I like to know is what IRA account is the best one to roll it into and how to do that.
Pat: Okay. So let's step back a couple of steps. You're 72.
Bill: I'm 70. Seventy.
Pat: Seventy. You're retiring. And do you have a choice between a pension and a lump sum, or do you have a choice between a monthly income and a lump sum?
Bill: Well, yes, I do, but I was also made aware, since I'm not married, I cannot leave it to my children. So, say, I was taking a monthly sum. And then, if I were to die, they would keep the rest. So I'm really forced into taking the lump sum.
Pat: Well, no, no, no, no, no, no, no, no, no, no, no, no, no.
Bill: No? Okay.
Pat: You stepped ahead, and it may or may not be appropriate. So let's just try to determine whether you should take the pension or the lump sum, right?
Bill: Okay.
Pat: That's the first question because...
Scott: And you don't like the idea of the pension because you say, "Look, I die and there's nothing left from my heirs."
Bill: Correct.
Pat: But maybe the pension is an equivalent to an 8% or 10% return, and you decide to live with that, or maybe the pension is the equivalent of a 2% return, right? So a pension is determined...this is how they determine the size of the lump sum. They use a life expectancy, and then...
Scott: Which means, the older you get, the shorter your life expectancy.
Pat: Right. And, therefore, the larger the lump sum. And then they use an interest rate.
Scott: The smaller the lump sum, the older you get.
Pat: I'm sorry. The smaller the lump sum, the older you get. And then they use an interest rate that determines the size of the lump sum. The lower the interest rate, the bigger the lump sum. The higher the interest rate that they use... And there's all kinds of different interest rates. So if you worked at a phone company, they use the UP-1984. Some use an IRS expectancy table. There's all kinds of different. So let's understand whether we should take the pension or the lump sum. And then, if we decide the lump sum is appropriate, then we go forward. So what other money do you have outside of this pension or lump sum?
Bill: I have two annuities.
Pat: What are those worth?
Bill: They're worth about $200,000. I have...
Pat: Two hundred each or $200,000 between the two?
Bill: Between the two.
Pat: Okay.
Bill: I have the 401(k). It's about $300,000. And I got money in the bank that I've been sitting on, figuring what to do with it, about $150,000.
Pat: And do you owe anyone any money?
Bill: Yeah. I still owe in my house. And unfortunately, I still have a timeshare.
Pat: What do you owe in your home?
Bill: About $380,000.
Pat: What's the interest rate?
Bill: Two-point-five percent.
Pat: And what's the value of the home?
Bill: About $650,000.
Pat: Does anyone have a claim to your pension, like an ex-wife or anything like that?
Bill: She already received her part, yeah.
Scott: Okay. So she doesn't have...
Pat: And when did you retire?
Bill: I'm going to be retiring soon. I was figuring beginning of next year.
Pat: And what's your annual income now from work?
Bill: It's about $170,000.
Pat: And what's the monthly income you would receive from a pension if you decided to take the monthly pension?
Bill: I looked at the numbers. Of course, there's different...
Pat: You're going to look at the single life only.
Bill: The single life only, and there's 5-year, 10-year, 20-year. It's about $8,000 a month.
Pat: Eight thousand a month. So let's explain what that 5-year, 10-year, 15-, 20-year is. And so the longer you get, you'll see that that pension drops, correct?
Bill: Right. Correct.
Pat: So that is actually a guarantee to a beneficiary that you can name.
Scott: Or beneficiaries.
Pat: Or beneficiaries. So you said earlier that if you died, if you took the pension and you died, that your children would receive none of that. That's not true. That is not true. Because if you had a life with a 20-year guarantee and you retire today and go out and get run over by an Amazon van, your family or the beneficiaries would receive that pension, the remainder pension for the next 20 years.
Bill: See, that's what I was confused about because they kept mentioning spouse. They didn't say anything about anything else. If you didn't have a spouse to leave it to, then you...it didn't say anything about benefits.
Pat: The people at the pension company told you that? Who told you that?
Bill: I did a printout from the pension, and they were saying only for spouses.
Pat: That's not true.
Scott: Well, that's what...if there is...
Pat: Normally, it would be a spouse, but it doesn't have to be a spouse.
Scott: That's the whole point of the 5-, 10-, or 20-year.
Pat: Yeah. And by the way, they have other options that if you were married, it would actually cover the spouse at a full benefit, a partial benefit. There's probably about eight or nine different choices you could make.
Scott: This should be like a single life with guaranteed 20 years. So if you died the next day, it would continue to pay for 20 years.
Pat: Did you calculate the hurdle rate on this, Scott?
Scott: It's 8%. If you took the 1.2 million and you wanted to generate $8,000 a month off those dollars, you would need to earn 8%.
Pat: And what this means, this is how you determine it, I start with $1.2 million and I use a normal life expectancy for Bill. I use an IRS.
Scott: Let's back up before we get to it.
Pat: Okay.
Scott: What's your health like?
Bill: Other than having diabetes, it's good. That's why I'm still able to work.
Pat: Do you have any habits that would lessen your...
Scott: Do you think you have a normal life expectancy? If you took 100 random 70-year-olds, put them in the room, do you think you're normal?
Bill: I think so. My mom lived to 94.
Scott: Okay.
Pat: Okay.
Scott: Siblings? How long do they live?
Bill: Yes. They're younger than I, so.
Pat: Okay. All right. So what happens is...so we'll go back to how they determine this. So if I took you, Bill, and I said, "Look, Bill, give me that $1.2 million. I'm going to actually invest it, and it's going to return 8%." I would then look at a life expectancy table of Bill, and I would actually figure out the day you were going to die and that $1.2 million would be empty. We would have used, assuming it returned 8%, I ran it against your life expectancy or assumed life expectancy, at the end of your...the day you die, there'd be zero money in the pot.
Scott: Actually, the 8% figure was a hurdle rate of maintaining the principle.
Pat: Oh, got it. Got it. It was maintaining. So it's probably 6-1, 6-2. I think you should really explore...
Scott: Here's our concern. We've seen this movie a lot. If you're 60, it's much easier because the lump sum would be that much greater, right? Because the longer the life expectancy, the more money the pension plan needs to set aside to pay that 8 grand a month. The closer you get to your death, the less money it is. So the older we get, the harder it is to make a lump sum work. You're 70 and you're single. So now, the challenge...here's what my concern is, and Pat would certainly agree with me. You take this $1.2 million, you roll it over, we need to get 8 grand, somehow produce 8% a year. That's maybe realistic over a 10-year period. Not over one year, who knows what's going to happen in one year, right? So we put together a nice balanced portfolio based upon a bunch of different things, and the first year, the market, let's say it's flat. You took out 96 grand. Your 1.2 is now 1.1 million. Or worst case, market's down significantly.
Pat: Ten percent.
Scott: Ten percent. Your portfolio is down 10%, plus you pulled out 8%. Now your portfolio's down...you've lost almost...your account's down almost 200 grand. Psychologically, here's what we've seen happen, this is just the movie we've seen, people are like, "I can't handle this. This is terrible. I can't deal with this." And so they end up becoming much more conservative than the pension plan ever would have been.
Pat: That's right.
Scott: To generate that $8,000 a month.
Pat: Because the pension plan doesn't worry about it. The pension plan, you have investment professionals that understand, and they have the benefit of a pool of large employees in order to spread that risk. So in this situation, I think that, actually, probably, you know, you're going to have to take a reduction. So the life in 20-year certain, what would that pay out, $7,100 a month?
Bill: Yes.
Pat: Is that the amount? I'm just guessing.
Bill: Well, yeah, because the 5-year was $8,000. No, it was $9,000. Then, every time you extend the years, it goes down.
Scott: That's right.
Bill: I think it's about $7,500.
Pat: Okay. So look, you need...
Scott: We don't know. I mean, based upon what you've told us thus far, I don't know anything else about it. Had you said you had $2 million in your 401(k) that you've been investing all these years?
Pat: And that you were experienced in the market.
Scott: And you said 70% in stocks. Then we'd probably say, lean for the lump sum. But the biggest risk going forward is not the financial markets. The biggest risk going forward would be how you react to the financial cycles.
Bill: Right.
Scott: And the older we get, the more challenging it is to have that long term, particularly when it's your life savings and the pension that you've taken a lump sum on.
Pat: So this situation, you need to... Don't go to the bank and hire a wealth manager. Find an independent fiduciary advisor at a mid-size firm. And I'm not talking about the biggest firms, and I'm not talking about the smallest firms. I'm talking about a mid-size firm. And my guess is that you're going to end up with that life in 20-year certain. That's where I would go with it. Because it achieves that benefit that if you die in the next 20 years, the kids get the money. And then these annuities in the 401(k) and the bank IRAs or the bank money, then you decide whether the appropriate direction is for that at the same time. But I wouldn't take the lump sum.
Scott: Yeah, I wouldn't either, just based on your situation.
Bill: That was really enlightening because I kept thinking, "I'm going to have to do the lump sum. I'm going to have to do the lump sum."
Pat: I wouldn't do the lump sum.
Bill: It makes a lot of sense.
Pat: The life in 20...
Scott: And by the way, when you talk to a financial advisor, even if it's a fiduciary, there's a conflict of interest. So that advisor typically gets paid by managing money. So an advisor talking to you is like, "Hmm, if Bill takes the lump sum, I have $1.2 million that I can manage. I can earn fees on those dollars. If Bill takes the monthly pension, I don't have that money to manage."
Pat: Scott, I'm going to share this with Bill.
Scott: Appreciate the call, Bill.
Pat: Bill, thank you. Appreciate it, Bill. The life in 20 years is how I'd go, but I'd get the rest of it wrapped up. I had a client years ago, wanted to take the lump sum, and I was explaining to them why they shouldn't take the lump sum.
Scott: And the majority of time back in those days, you were telling people to take the lump sum. Every situation is different.
Pat: His pension plan and his friends had all taken, but he worked at a different company. It's just the internal calculation. And I argued with him for about a half hour. He's like, "Well, you told him and him to take the lump sum." I'm like, "You're not them. This is a different calculation. You have a different pension plan. You retired from a different company." And he said, "Well, I'm going to take it," the lump sum. And I said to him, "You know I get paid to manage money. You know what I do for a living. You give me that lump sum, I make more money because I'm going to charge you an annual fee to manage it."
Scott: And I'm begging you not to.
Pat: And I'm begging you not to. And he looked at me, and he said, "I don't understand why, but that makes sense to me."
Scott: We're heading to Missouri, talking to Karen. Karen, you're with Allworth's "Money Matters."
Karen: Hi, thank you for taking my call.
Scott: Hi, Karen.
Karen: Hi, I have... I was wondering, how does one go about advising, helping an aging relative with very limited means decide what to do with a vacant house in disrepair on a city lot?
Pat: Wow. Where is the house?
Karen: It's in Florida.
Pat: And when you say disrepair and vacant, how long has it been vacant?
Karen: About 20 years.
Pat: No tenants, anything?
Karen: But been checked on. Like, it's still been, like, eyes on it.
Pat: What's the value of the property approximately? Your guess.
Karen: I do not know.
Pat: How about...is it...
Scott: Thirty thousand, 300,000?
Karen: Oh, with the house being in good condition, it would be close to...
Scott: No, no, no.
Karen: Okay.
Pat: Today.
Karen: I'm sorry. Excuse me.
Scott: I mean, it's essentially worth the land, right?
Pat: That's what I'm thinking.
Karen: Yeah. Yes. Yes.
Scott: So, is it in the middle of swampland Florida where it's worth nothing, or is it...?
Karen: No. No. No, it's a city lot.
Pat: So if I looked at this house today, would I say...
Scott: It looks like a crack house.
Karen: No, not a crack house. It's just...
Pat: If I were to buy it, would I tear it down and rebuild?
Karen: Tear it down and rebuild.
Scott: Okay, so it's worth the land.
Pat: Okay, it's worth the land.
Scott: And you have no idea what that's worth.
Karen: Well, it's about close to 300 with the house in good condition. So I don't know how much the land would be because there's no vacant lands in the area.
Pat: And why do you feel the need to actually fix the house? Are you getting...?
Karen: No, it's just a question.
Pat: Okay.
Scott: I wouldn't worry about it.
Karen: Like, what decision points must be made before actions are taken? And then what kind of taxes should be expected with the sale of it?
Pat: Well, that's a different question. So the value of the house or the land is always determined by the buyer, never by the seller.
Scott: Or eminent domain.
Pat: Or eminent domain, which is...
Scott: Whatever the government agencies think it's worth.
Pat: Which is, therefore, the buyer.
Scott: And is that your concern that an agency is going to take it over?
Pat: Are you getting any letters from the city or county?
Karen: No.
Pat: Oh, perfect. Do you need to sell this, or do you want to sell this?
Karen: Well, it's an aging relative that owns it, not me.
Pat: Do they need the money?
Karen: Yes.
Scott: Okay.
Pat: Okay. Do you know what they paid? First of all, are they married?
Karen: He's single.
Pat: And were they married during the ownership of this property?
Karen: No.
Pat: Do you know what they paid for the property?
Karen: It's probably about 60 years old or 55 years old. So I'm not sure how much they paid. Not very much.
Pat: And does this aging relative have any other assets?
Karen: No.
Scott: And are you considering the sale to generate some cash to help pay for other expenses? We're trying to figure out, like...
Karen: For them. Yeah, for them.
Scott: Okay.
Pat: Okay. Well, then, you're going to take the capital gains. And the reason we ask is...
Scott: There won't be much capital gain, I can imagine.
Pat: They've owned it for 60 years.
Scott: There will be some cap, but some capital gains, there's no tax on it anyway because the income is so low.
Pat: That's right. But you may want to do a structured...it depends on what it sells for.
Scott: Yeah. I'm looking at the capital gain. Yeah. But there's so much capital gain that can get excluded.
Pat: I understand. But it depends on what they sell it for. If I were you, I wouldn't worry about the capital gain right now or the step-up in basis. I would worry about getting the money to care for the aged relative. That's what I would worry about. And you're not able to...financially, are you able to take care of the aging relative with your resources?
Karen: I don't live by them, but...
Pat: When you say by them, are there more than one?
Karen: No. By him. No, I don't.
Pat: Okay. I would...
Scott: Capital gain rate is zero if you're single and your taxable income is 47,000 or less. That's taxable after your standard deduction.
Pat: That's right. So I would...
Scott: I'd sell it. Do you have power of attorney?
Karen: No.
Pat: Does the relative...have you talked to the relative about this?
Karen: A little.
Pat: Yeah. I wouldn't put a single penny into trying to fix it.
Scott: No way.
Karen: Okay.
Pat: In fact, I might actually tear it down before I listed it. But I'd list it first.
Scott: Well, you talk to a couple of real estate agents and find out what's going on.
Pat: Yeah, I'd list it. I'd have a couple of real estate agents I'd interview and say, "We need to sell this. What's it worth? Is it worth more if we tear the house down?" Is there infill? Are they building around it? Is it one of these transitioning neighborhoods?
Karen: Oh, there's homes all around it. People are maintaining their properties.
Pat: Are they tearing down homes and building new ones? Like my son...
Scott: They must be, it's 60 years old.
Karen: Some have.
Pat: Okay. My son in Denver, a third of their house is on the street where he bought.
Scott: My daughter, third, 95% further along in the neighborhood, right? She says there's one crack house left on the street.
Pat: Perfect.
Scott: Probably some row houses or townhouses.
Pat: So it depends on whether that neighborhood is in transition. So I would absolutely sell it if I needed the resources to take care of the relative. I'd call a couple of real estate agents.
Scott: And if you're finding that the relative...if it's a situation where you're concerned about the person's health, they're not making wise choices, you could petition the court and get a guardianship and then act in his behalf.
Karen: Okay.
Pat: All right. Those are all in...
Scott: That's when you say, "Look, he's not making rational decisions. I'm concerned about his health," if that's the situation,
Pat: But if he is actually able to, you can ask him to do the documents that allow you to do it anyway to get power of attorney.
Scott: Power of attorney. Then you just take care of it all.
Pat: And then you take care of it all.
Scott: And I would just sell the capital gains. I can't imagine it'd be worth more than 50 grand if the full on houses were 300.
Pat: I have no idea. Not a clue. But that's what I would do.
Karen: And then, could he easily sell it by owner?
Pat: No, you know.
Scott: I would never sell this by owner.
Pat: No, no, no, no, no. You could, you're going to save a couple thousand dollars. I wouldn't. I'd want a professional, especially something like... I would do some research and find out who sold the most houses in that particular neighborhood and then contact that person and say, "This is the lot."
Scott: No way would I sell this by owner. You don't even know, there's time to find disclosure forms and stuff.
Pat: Yeah, your different area, different state.
Scott: Appreciate the call, Karen. We're talking now with Carla. Carla, you're with Allworth's "Money Matters."
Carla: Hi, guys. I love your show.
Scott: Thank you.
Carla: I listen to it every Saturday.
Scott: Awesome.
Carla: So my question is, actually, I'm speaking on behalf of my husband, regarding IULs and what you guys think about them, good, bad.
Pat: What's an IUL?
Scott: Indexed universal lifestyle.
Carla: The indexed universal, yeah.
Pat: Well, like an IA is an indexed annuity. This is an IUL.
Scott: I've never recommended them. I don't own one.
Pat: I would not purchase one.
Carla: You would not purchase one.
Scott: No.
Pat: No, no.
Carla: And what would the reason...like, what are the reasons why you would say that?
Scott: I think they're gimmicky.
Pat: First of all, the first question you should ask yourself is, do you need permanent insurance or not permanent insurance, right? Let's not even talk about whether it's IUL or UL or whole life or variable universal life, VUL. We'll leave that all behind. Let's just say it was the greatest product. It was a permanent product. It was the greatest product in the world. The first question you ask is, do I need permanent life insurance? Which means, do I need life insurance for my whole entire life? Do I need it for 20 years, 30 years, 40 years? You need that. So, what are you trying to insure against? Do you have children at home?
Carla: No, they're all adults.
Pat: Okay. And so, are you retired or close to retirement age?
Carla: My husband just retired from his main job, and he's working on, like, a part-time job now. So one of our friends or family friend was talking to him about maybe thinking about doing an IUL just for saving on taxes when he starts to withdraw some money.
Pat: Okay. And so here's the pitch behind this IUL.
Scott: Let me back up. So what ends up happening, there's a lot of people...it doesn't take much to get an insurance license at all. You could do a week class, Carla, and you go down and you take the test and your insurance license, and now you can go out and go to your friends and say, "Hey, I've got this great product. Let me tell you all the wonderful things it's going to do."
Pat: Which they believe.
Scott: Yes. But what they don't know are the other 99 other products that exist out there that maybe are even better because they haven't really been trained on it.
Pat: Like, the alternatives, right?
Scott: Like a Roth IRA first.
Pat: Or an S&P 500 fund, right? So that's why you start with the premise of, do you need insurance at all? And if you do need insurance, how long do you need it for? So in your situation, the kids are out of the house. Your husband's retired. Did he retire with a pension?
Carla: Yes.
Pat: Okay.
Scott: Is there other survivor benefits on the pension?
Pat: So that if he passes away...
Carla: Yes.
Scott: Okay.
Pat: ...some money goes to you.
Scott: If you said no, then we're like, "Whoa."
Carla: I'm sorry. He actually took a lump sum and invested and has rolled it over into an IRA.
Pat: There you go.
Carla: The beneficiary on the IRA.
Pat: There you go, right? So all that money has been earned.
Scott: He didn't invest with the friends who sold him the equity indexed annuity.
Carla: No, no, but there are pitches that he can withdraw that money tax free...
Scott: Tax free. Tax free.
Carla: ...if he puts it in the IUL, and you know...
Scott: But you got to pay tax to get it out of the IRA.
Pat: Yeah. Yeah. You would never use money from an IRA and put it into a...
Scott: You can't.
Pat: I guess you could. You could pull it all out, pay taxes on it, and put it in there, but that would just be...
Scott: Idiotic.
Pat: Worse. Maybe worse than that.
Scott: Yeah, malpractice.
Pat: Yeah. So there is no conceivable world that I live in financially where you would even try to make that argument.
Carla: Okay.
Scott: And I could see a time when a variable life insurance might make some sense or a fixed life insurance, but the indexed, you know, makes no sense to me.
Pat: Well, that's because of...
Scott: I understand the mathematics. I understand how it all works behind the curtain.
Pat: The market cycles, the whole bit. So what they're selling, Carla, to you is how life insurance policies are structured, which is they go in FIFO and they come out FIFO, which is first in, first out, which means that you put your deposits in, you draw those out, then any amount remaining there, you can borrow against the policy contract, as long as the contract's in place on the date of death, then it's magic.
Scott: It's all tax free.
Pat: It's all tax free.
Scott: How about the cost of insurance?
Pat: That's without... if you've lived in a world without cost, right, then...
Carla: Then it would make sense.
Pat: Then it would. Much like it would make sense for us all to fly, travel private jet, if it wasn't for the cost. Is that a bad analogy?
Carla: Right.
Scott: Yes, I think it is.
Pat: Okay.
Carla: I get it though. I get the point.
Pat: Yeah. You have no need for this.
Scott: Not only has most people not flown private. Most people don't know anyone who flies private, unless they have a little Cessna or something.
Carla: That's true.
Scott: You're watching too much Netflix. You watched Billionaires?
Pat: I've watched Showtime's "Billions," right? And you would never use the money in the IRA. Never ever.
Carla: Okay. That makes sense.
Pat: So your husband's portfolio should probably be 60% equities, 40% bonds and cash, and then a monthly distribution set up so you can retire comfortably. That's all you need to know.
Carla: Perfect.
Pat: All-righty.
Carla: Thank you. That was my question.
Pat: All right. Thanks, Carla.
Scott: Glad you called.
Pat: Take care.
Scott: You know, it's funny, Pat. I was thinking this earlier today. I don't know why I'm thinking about these silly products, the insurance company comes up, insurance industry. Like, in this situation, if having, like, an index on the securities market works so well, why wouldn't the insurance company do that with their own portfolio?
Pat: Right?
Scott: You think they're taking any of their portfolio and say, "We're going to spend this on options in case the markets do well to hit?" No.
Pat: No.
Scott: Because long term, you're not going to make money that way.
Pat: That's an excellent point. And it ignores dividends that are paid in the underlying index.
Scott: Well, the way they're structured...
Pat: Well, actually, the fact that they create their own indexes now, it's just really amazing.
Scott: But I'm just thinking, if that strategy...I understand how they go and invest for that pool, but if it works so well, why wouldn't they do it in their own?
Pat: In their own pool.
Scott: Yeah.
Pat: It's the risk.
Scott: Yeah. Right. I understand all that stuff.
Pat: Yeah. Well, you do, but I think you're doing that for the benefit of the listeners. But just how that was pitched that you take your money out of an IRA, pay taxes, and put it into an indexed universal life just shows...what it shows is lack of experience of the person trying to sell the product.
Scott: I remember, as a college student, I went to A.L. Williams.
Pat: Did you, the coach?
Scott: Yeah. It was multi-level marketing. It was my pastor from our church, and somehow he left the church and became a multi-level marketing guy with A.L. Williams. And I went, and they said, basically, how you can be a part-time financial advisor. And I think it was a gardener who was sitting next to me and somebody else, right, and they were pitching me on being a financial planner.
Pat: And you decided to finish college instead.
Scott: Yeah, yeah. And it was all on a part-time basis. But I remember my pastor looked at me and he's trying to get us all pumped up. And he said, "Scott, if you could drive any kind of car, what kind of car would you drive?" And I remember looking at him and I thought, "You're like my pastor. You're supposed to help me to God, not think about those things. Those come naturally. Like, come on buddy." The lust of the eyes and pride of life and all that stuff. I don't need help with that.
Pat: I was born with that.
Scott: That's my first thought.
Pat: So I'm guessing you didn't sign up.
Scott: No, I didn't sign up. No. We're going to talk now with Simone Devenny, and she's doing a webinar with us on high net worth wealth strategies for 2025 and beyond. So glad to have you spend a few minutes here. First of all, give us a little bit about your background.
Simone: Sure. Thanks so much for having me. So I've spent about the last 25 years working with clients around all things related to estate planning, started off as a tax and estate attorney, and then also on investment. So really looking at holistic financial planning and wealth management from the estate planning perspective, the tax planning perspective, and everything else that would be important to our clients.
Scott: And so, what are some of the things that, like, high income, high net worth investors should be considering next year? What's actually different? I mean, I know one thing with the Trump tax laws were set to expire. There's a chance they won't expire, but that's still up in the air.
Pat: There's a chance...
Scott: A chance they will.
Pat: Yeah. Highly unlikely though.
Simone: Yeah. I think, you know, whenever we think about planning, we can't predict the future, although we wish we had a crystal ball. But what we can do is work with the current laws that we have and think about the best ways to take advantage of opportunities that exist right now. So whether they're going to change again in the future or not, we don't know for certain, but what we do know is there are plenty of things that investors can be thinking about in terms of how to take advantage of the moment that we're in, whether that means tax optimization of portfolios, things like Roth conversions, how to incorporate their charitable giving to enhance their after-tax performance, things like that. And this is really what we help clients sort of navigate, even with the uncertainty of the future.
Scott: Yeah. So you started out as a tax attorney, right?
Simone: Correct.
Scott: In your early... And I see you went to Boston College, which was where my son went, so good for you.
Simone: Oh, nice.
Scott: That's the only reason I like you, Simone. [inaudible 00:32:15.075]
Simone: Thank you.
Scott: You're probably doing stuff here at Allworth.
Simone: Go, Eagles.
Scott: And how do you think about...because one of the things that, as financial advisor, we always talk with clients, like, you've got one big partner, the tax man, and we know what the tax laws are today, and we try to put some probability of what taxes could be in the future, because you got to do some sort of planning, right? And with planning, you've got some assumptions and some probability. So within your career as a tax attorney, how do you think about that?
Simone: Well, again, I think what we really want to do is think about, okay, there's always a possibility that things are going to change. We take into account sort of the unlikelihood of clawbacks or the opportunities for grandfathering, things like that. And so we really plan using the current environment that we have. Right now, we happen to have a very favorable environment, certainly from an estate planning perspective, around taxes. And so what we're doing now is encouraging clients to really think about using the favorable winds, I would say, to make sure that they're getting things in place that are going to be effective, irrespective of how those laws might change. So again, great time to be thinking about planning with what we know now and planning for the eventual possibility of change, but getting things in place now that may not be impacted by that change. And that's what we really try to navigate.
Pat: So, Simone, will you kind of give our listeners a little history when you mentioned the estate tax? I assume you're having to talk about the unified credit or the exemption amount.
Simone: Sure.
Pat: Just because I...
Scott: I was explaining this to my 28-year-old daughter just over Thanksgiving. She's like, "What? You mean to tell me they tax you when you die?" She was, like, blown away. She's like, "Why?"
Simone: You can't get away from it.
Scott: But you know, so I've been doing this a little bit longer than you, but when I first started, right, the number was about $600,000. So kind of give us a thumbnail for the rest of the listeners and why, when you said this is a favorable time historically...well, probably till the great robber barons was a better time, but give us a kind of the history of that.
Pat: If you were a robber baron. If you were 99.99% of the rest of the population, maybe not so good.
Scott: Of course, I would have been a robber baron. Come on.
Simone: Well, you have been doing this a little bit longer than me, but I've also been doing this quite a long time. I am not as young as your 28-year-old daughter, sadly. And I can tell you, back when I was at Boston College in the late '90s in law school, the exemption was about $675,000. And by exemption, you know, we talk about what you can give away as a gift or when you die or some combination, right? So $675,000, and then anything over that would be taxed at a very high rate. Right now, we're looking at a 40% tax rate. But that $675,000 is the number that keeps moving, and it's what keeps estate planning attorneys in business, okay? Because essentially, what's happened since the late '90s is it has moved all over the place, always moving up except for in 2010 when it went to...
Scott: Zero.
Simone: ...unlimited, right? Zero.
Scott: Yeah, zero tax.
Simone: But then in that year, of course, we lost the step-up in basis, which is a whole separate conversation we could have. But I think that, when I was practicing law earlier in my career, it was in the $1 million, $5 million, all over the place, but ultimately, today, and this is where the opportunity is, today, it's at $13.61 million per person. That means that a couple's got, you know, double that. Now, why do we have 0.61? The reason for that is because this was originally a $10-million number that was indexed for inflation. So it's just sort of moving along and growing at the rate of inflation. So next year, we still expect that that is going to rise. However, this very high exemption, and this is one of the things we talk about, is set to sunset or, you know, go back down to, roughly, you know, $7 million per person in January 1st of 2026. So this really summarizes sort of where the great planning opportunity exists right now for high net worth investors and high net worth clients to start doing some planning, knowing what we know now, utilizing that very high current exemption.
Pat: And with the exemption, what it means, for the listeners, is you can use any or all of it while you're living and move it to the next generation rather than wait until you die.
Scott: That's right.
Pat: And it's a great planning technique. One of the downsides to it is that, in doing that...
Scott: It's no longer your asset.
Pat: ...it's no longer your asset, and you'll lose the step-up in basis of the growth after the gifts.
Scott: Because it's not your asset.
Pat: Because it's not your asset.
Simone: And I think that's a great point. That's a great point. However, and this is where the fun comes in, there are a lot of really neat techniques that exist in sort of modern trust planning where you can actually do things, like, use things like substitution or swap powers. So working with your advisor, you can really look at optimizing the assets that you are transferring. So for example, if you gave away, let's call it, a low-basis asset to one of these trusts, you could eventually swap that out for cash or for a high-basis asset, taking it back and getting that step up. And I know this may sound a little complicated, but we can certainly simplify it when we have more time. But really excellent planning opportunities around that as well.
Scott: Yeah. So you'll be covering some of these issues in the webinar, I know, because you'll be with Victoria Bogner as well, and you're going to be talking about some interest rates and kind of outlook. What are you guys are going to be delving into there?
Simone: Yeah. So Victoria is fantastic, and she gives a really great overview of the yield curve. You know, we hear a lot about, what is this inverted yield curve, and what does it mean, and what does it mean for the economy? What does it mean for bonds? You know, how should we understand the portfolio as it relates to the current state of the yield curve? So that is something really interesting that she goes into great detail on.
Pat: And before we go, and we'll give the dates here in a second, can you explain to me why we have a step-up in basis? It never made any sense to me. What's the history behind a step-up in basis?
Simone: Well, that's fantastic. So the step-up in basis, actually, it's funny. So, what is a step-up in basis? Step-up in basis means if I buy a share of stock for $1 or a house for $1, okay, and I hold it until I die, and when I die, it's worth $100, my heirs will inherit that and their new cost basis is not the $1. It's $100. So if they sell it the day I die, they won't pay any capital gains tax, right? Now, the origins of the step-up in basis actually have more to do with sort of operational challenges, meaning that it was so challenging for people to go back and try to figure out cost basis over a lifetime that, eventually, they just made it so, "You know what, we're going to step it up and just let it go to the heirs," what's called the date of death basis.
Pat: Oh, thank you so much. I've always wondered that. I've always, because...
Simone: It's a silly thing, isn't it?
Pat: Yeah. And by the way, if you were in charge of the world and you wanted to create liquidity where the capital would move to the most efficient places, if you believe in an economic environment that allowed for that, you would get rid of the step-up in basis.
Simone: They've threatened it many times. They've threatened it many times. In fact, in fact, very recently, there were some rulings that came out that have threatened and, in fact, probably done away with that step-up in basis with some irrevocable trust. So it used to be that we thought we could plan around that, but that has changed. So yes, it is sort of the proverbial low-hanging fruit, if you will. So we should certainly be taking advantage of this step-up for as long as we have it.
Scott: Well, Simone, thanks for taking a little time out of your busy day to talk with us. And so Simone is going to be doing this webinar with Victoria Bogner, who is a guest on this program periodically. And for full details for this webinar, it's going to be Wednesday, December 11th at noon Pacific, so 3:00 Eastern, noon Pacific, Wednesday, December 11th, Saturday, December 14th, 9 a.m. Pacific, noon Eastern, so those two times. And to sign up or more information, simply go to allworthfinancial.com/workshops.
Simone: Thanks so much for having me.
Scott: All right, thank you.
Simone: I really appreciate it.
Pat: Thank you.
Scott: Thank you, Simone.
Simone: And I wish you all a wonderful holiday season. Take care.
Pat: And, Simone, thank you for being a part of the Allworth team. You are much valued.
Scott: Yeah, appreciate it.
Simone: Oh, it's my pleasure. I'm grateful to be here. Thanks so much. Take care. Bye-bye.
Pat: Well, that was... I wish I would have asked her that before about why we have that step-up in basis, but it makes sense. Well, [crosstalk 00:41:18.969].
Scott: Think of how many times you've had clients, right? And I've sold securities over the years. I know what the cost basis is, in part because I'm in the industry and I know how to make sure we track those things, but I'll give you an example. So Pat and I, when we started in this industry in the '90s, we did a lot of work with the retirees from the phone company. And the phone company, back in the day, there was one main phone company, AT&T. It was broken up in the '80s.
Pat: To eight different companies.
Scott: I think it was seven, wasn't it? Plus AT&T. Seven regional bell operating companies.
Pat: Yeah.
Scott: And so if you own shares in AT&T, suddenly, you own shares in these seven regional bell operating companies.
Pat: And then...
Scott: Then you had dividend reinvestments, you had stock splits, and people would say, "I have no idea what my cost basis is."
Pat: And oftentimes, they would actually hold the certificates, and then some of them...but then the companies actually all started merging back together again.
Scott: That's exactly right.
Pat: Because it was deemed a monopoly at one point in time, and then the political environment changed. And then these people said, "Oh, we can try to build a monopoly again." But we would never know the cost basis on it. It was impossible. And so what the clients would do if they wanted to sell it, we'd say, "Look, we can't give tax advice. Go talk to the accountants." And the accountants would say, "Hey, I could research it, but it's going to cost you X, Y, Z."
Scott: It would cost you more than...
Pat: Or you could guess.
Scott: Because the burden of proof for taxpayer, it's on you to prove your cost basis, whether it's a security or a property. Like, if you claim it on your tax return and you're audited, and the auditor says, "Hey, you said your cost basis is $3 a share. Show me if that's true." Then it's up to you to do it. And I think a lot of people's approach is if you're trying to be honest here and you're doing your best guess, then...
Pat: I've never seen anyone picked off in an eye.
Scott: I never have either. Never.
Pat: Ever. But that's interesting, which is actually how lots of our modern economy actually exists today is because of things that took place years and years ago that were procedural.
Scott: Procedural. You know, successful.
Pat: Anyway. But this works out with Simone. It is worth attending. If you're interested in these types of subjects at all, because I have never...every time I ever talk to Simone or Victoria, I learn something. Every time.
Scott: Yeah.
Pat: And I've been doing this a long time. And they'll have Q&A.
Scott: Even the substructural SWOT.
Pat: Yeah. I didn't know that neither, which is why we actually have tax team.
Scott: Which is why we have a whole team. I mean, we have a whole tax department and a legal department at Allworth because it's all very complicated. And the higher your net worth, the more...unless you plan on leaving 100% to charity when you die, there's issues that you got to deal with.
Pat: So, Scott, no, this is obviously self-serving, but over Thanksgiving, a relative said, "So, how many firms have joined you?" And I said, "It's 40s, 40, 41, 42." And they said, "Why would they join you?" And I said, "Because the marketplace is becoming progressively more competitive because the demands of the clients are going up." And the reality is what a client ultimately wants is a one-stop shop with wealth management and financial management, which is, "You manage my assets. You give me financial guidance, tax, and estate planning all in one shop." And that's where the industry is going.
Scott: That's where the industry is going.
Pat: And the firms that join us are typically anywhere between 5 employees and 45 employees, and they have a hard time getting to scale. And we had a hard time getting to scale without those firms joining us. Because someone like Simone or Victoria...
Scott: You have to go find... These people aren't looking for jobs. The best financial advisors aren't looking for jobs.
Pat: Yes. And someone like Simone, who has got years and years of experience in estate and tax, demands a lot of money, and you have to spread that cost over a large number of clients and advisors. So if you're with an advisor today, don't be surprised if their firm gets integrated into a larger firm just because that's where the marketplace is going.
Scott: That is where the marketplace is going. Yes.
Pat: So, Scott, I came across this article, which I felt really bad for this gentleman. This was in "The Wall Street Journal" a couple of weeks ago, and it was by Jason Zweig, who, by the way...
Scott: I always see his...they come out Friday afternoons, his opinion pieces.
Pat: They're great.
Scott: And he took a sabbatical. I didn't know what happened to him. He was gone for, like, a year, and then he came back.
Pat: Yeah. I've read his stuff for years and years. Didn't his family use to own an asset management firm?
Scott: I have no idea.
Pat: Anyway.
Scott: But he's written for "The Wall Street Journal" for many, many years.
Pat: For years and years. So this is an opinion piece, and the title is "'I Don't Know Where to Turn or What to Do.' His $763,094 Retirement Fund is in Limbo."
Scott: And Jason Zweig writes a lot about...his articles are called The Intelligent Investors, and it's often about mistakes, scams out there, unscrupulous advisors.
Pat: And as Scott says, it kind of sticks with our thesis. One of the most important things we do for our clients, not only providing them good advice, attempting to provide them good advice around their financial situation, is trying to stop them from making decisions that are completely irrevocable that would ruin their financial situation forever. So this gentleman ran into some life problems, and he was having a hard time getting by. I think he lost his job. Anyway, through a friend, he heard about a firm called Yield Wealth. They guaranteed a 15.25% return, and it was offering investors on its products. 15.25. And so when that was explained to him, he looked at it and he said, "Well, this is $100,000 a year. What could go wrong?" And you know the rest of the story.
Scott: Well, any sort of investment that claims they're going to be guaranteeing you a 15.25% of return...
Pat: Yes, you know the rest of the story.
Scott: Of course, you know it's not real.
Pat: Yes. And it goes on and on and on. But this is the thing that...
Scott: He was 60 years old.
Pat: Yes. It was in his 401(k). He took the money out of his 401(k) or his IRA to do this.
Scott: There's a company that's called Next Level. Next Level Scam is what it should be.
Pat: Yes. But, look, when I read this, I think, "I have seen this."
Scott: And it was in a retirement account. He moved his 401(k) to an IRA, used some obscure IRA custodian for it. Then when it looked like that Next Level was a scam or could be a scam, the IRA custodian said, "We're not going to be the custodian anymore."
Pat: And they kicked him off the platform.
Scott: And threw the certificates back to him. So now he's got these certificates. What are they worth? If they're worth anything, then it's a taxable distribution to him. It's a taxable withdrawal.
Pat: And he has no idea where he's at. But this is the thing...
Scott: He's not going to get any of it back.
Pat: The thing that this reminded me is anything that is guaranteed over...
Scott: Treasury bill.
Pat: A treasury bill. So think about whatever the one-year treasury bill is, it's got inherent risk. I don't care what it is. It could be a municipal bond. It could be a high-yield corporate bond. It can be an annuity. It can be anything. But any time where the risk that they state or the return that they state is guaranteed, if it's over a treasury, in fact, if it's anything but a bank CD or treasury, it's got risk. And even those have risk, right? They have risk of governmental default.
Scott: And you know, seemingly bright people will fall into this.
Pat: Or desperate. Or desperate. Because he was in a life situation where he thought he couldn't return to work.
Scott: Didn't have enough to retire.
Pat: Didn't have enough to retire. "I got to take the long shot."
Scott: He was 60, and he lost his job early. He was planning on working several more years before he retired.
Pat: Yes.
Scott: And he could fix his problem if he gets a high enough return.
Pat: Yes. And that was his thought, thinking, "Well, this is great."
Scott: I found it. I found it.
Pat: This is it. This is it.
Scott: Interesting.
Pat: Anything...
Scott: Just remember that.
Pat: I hear these ads on the radio, this, like, "We offer between 12% and 15%."
Scott: I'll take the 12.
Pat: Yeah. I always think, "Why wouldn't you take the 15 if they're offering 12 to 15?"
Scott: It's guaranteed.
Pat: If it's all guaranteed.
Scott: It's so simple.
Pat: Why? A guaranteed 12% to 15% returns. Well, they're guaranteed.
Scott: Interesting. Yeah. But I mean, when I read these articles, I feel bad for the people, on one hand, but at some point in time...
Pat: Well, Scott...
Scott: You can't regulate...you can't get rid of all bad actors in the world.
Pat: It's going to exist. It's going to exist.
Scott: People steal packages off your porch. They're bad people. You're a bad person to do that. We don't care about that anymore, apparently.
Pat: All right. Anyway, a quick side story. I almost hit an Amazon truck in my driveway yesterday.
Scott: You're backing out?
Pat: I was backing out. He was backing my driveway.
Scott: What's he doing on your private property?
Pat: No, no, he was parked in the street, but right where...like, in the middle of it. So I come out of my door.
Scott: I could see why.
Pat: It's first thing in the morning. It's dark. It was, like, 6:00.
Scott: You're not expecting. You look.
Pat: I'm not expecting.
Scott: You see if there's any light, headlamps down the road your little tiny neighborhood.
Pat: And so I come out of there, and I'm like, "Oh."
Scott: That would have been pretty...
Pat: To run into an Amazon truck in front of your house, almost worth it, worth the story.
Scott: Anyway, hey, that's all the time we've got in this week's program. We will see you again next week. This has been Scott Hanson and Pat McClain of Allworth's "Money Matters."
Man: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: And Pat McClain.
Scott: Glad you are here with us, and hope everybody had a...I think the best of last week is Thanksgiving. Here we are, back in the saddle, working. Both myself and my partner here, we're both financial advisors. And we've got some calls already on hold, so we're going to get right to the calls today. If you want to join us, you can send us an email, questions@moneymatters.com, and that's probably the simplest way, questions@moneymatters.com, or call us at 833-99-WORTH. We're starting off with Bill. Bill, you're with Allworth's "Money Matters."
Bill: I'm a 70-year-old divorced male that will be retiring soon with a $1.2 million pension. And I was made aware that when I'm going to take the lump sum that I never wanted a check written in my name because I have to pay taxes on it right away. So what I like to know is what IRA account is the best one to roll it into and how to do that.
Pat: Okay. So let's step back a couple of steps. You're 72.
Bill: I'm 70. Seventy.
Pat: Seventy. You're retiring. And do you have a choice between a pension and a lump sum, or do you have a choice between a monthly income and a lump sum?
Bill: Well, yes, I do, but I was also made aware, since I'm not married, I cannot leave it to my children. So, say, I was taking a monthly sum. And then, if I were to die, they would keep the rest. So I'm really forced into taking the lump sum.
Pat: Well, no, no, no, no, no, no, no, no, no, no, no, no, no.
Bill: No? Okay.
Pat: You stepped ahead, and it may or may not be appropriate. So let's just try to determine whether you should take the pension or the lump sum, right?
Bill: Okay.
Pat: That's the first question because...
Scott: And you don't like the idea of the pension because you say, "Look, I die and there's nothing left from my heirs."
Bill: Correct.
Pat: But maybe the pension is an equivalent to an 8% or 10% return, and you decide to live with that, or maybe the pension is the equivalent of a 2% return, right? So a pension is determined...this is how they determine the size of the lump sum. They use a life expectancy, and then...
Scott: Which means, the older you get, the shorter your life expectancy.
Pat: Right. And, therefore, the larger the lump sum. And then they use an interest rate.
Scott: The smaller the lump sum, the older you get.
Pat: I'm sorry. The smaller the lump sum, the older you get. And then they use an interest rate that determines the size of the lump sum. The lower the interest rate, the bigger the lump sum. The higher the interest rate that they use... And there's all kinds of different interest rates. So if you worked at a phone company, they use the UP-1984. Some use an IRS expectancy table. There's all kinds of different. So let's understand whether we should take the pension or the lump sum. And then, if we decide the lump sum is appropriate, then we go forward. So what other money do you have outside of this pension or lump sum?
Bill: I have two annuities.
Pat: What are those worth?
Bill: They're worth about $200,000. I have...
Pat: Two hundred each or $200,000 between the two?
Bill: Between the two.
Pat: Okay.
Bill: I have the 401(k). It's about $300,000. And I got money in the bank that I've been sitting on, figuring what to do with it, about $150,000.
Pat: And do you owe anyone any money?
Bill: Yeah. I still owe in my house. And unfortunately, I still have a timeshare.
Pat: What do you owe in your home?
Bill: About $380,000.
Pat: What's the interest rate?
Bill: Two-point-five percent.
Pat: And what's the value of the home?
Bill: About $650,000.
Pat: Does anyone have a claim to your pension, like an ex-wife or anything like that?
Bill: She already received her part, yeah.
Scott: Okay. So she doesn't have...
Pat: And when did you retire?
Bill: I'm going to be retiring soon. I was figuring beginning of next year.
Pat: And what's your annual income now from work?
Bill: It's about $170,000.
Pat: And what's the monthly income you would receive from a pension if you decided to take the monthly pension?
Bill: I looked at the numbers. Of course, there's different...
Pat: You're going to look at the single life only.
Bill: The single life only, and there's 5-year, 10-year, 20-year. It's about $8,000 a month.
Pat: Eight thousand a month. So let's explain what that 5-year, 10-year, 15-, 20-year is. And so the longer you get, you'll see that that pension drops, correct?
Bill: Right. Correct.
Pat: So that is actually a guarantee to a beneficiary that you can name.
Scott: Or beneficiaries.
Pat: Or beneficiaries. So you said earlier that if you died, if you took the pension and you died, that your children would receive none of that. That's not true. That is not true. Because if you had a life with a 20-year guarantee and you retire today and go out and get run over by an Amazon van, your family or the beneficiaries would receive that pension, the remainder pension for the next 20 years.
Bill: See, that's what I was confused about because they kept mentioning spouse. They didn't say anything about anything else. If you didn't have a spouse to leave it to, then you...it didn't say anything about benefits.
Pat: The people at the pension company told you that? Who told you that?
Bill: I did a printout from the pension, and they were saying only for spouses.
Pat: That's not true.
Scott: Well, that's what...if there is...
Pat: Normally, it would be a spouse, but it doesn't have to be a spouse.
Scott: That's the whole point of the 5-, 10-, or 20-year.
Pat: Yeah. And by the way, they have other options that if you were married, it would actually cover the spouse at a full benefit, a partial benefit. There's probably about eight or nine different choices you could make.
Scott: This should be like a single life with guaranteed 20 years. So if you died the next day, it would continue to pay for 20 years.
Pat: Did you calculate the hurdle rate on this, Scott?
Scott: It's 8%. If you took the 1.2 million and you wanted to generate $8,000 a month off those dollars, you would need to earn 8%.
Pat: And what this means, this is how you determine it, I start with $1.2 million and I use a normal life expectancy for Bill. I use an IRS.
Scott: Let's back up before we get to it.
Pat: Okay.
Scott: What's your health like?
Bill: Other than having diabetes, it's good. That's why I'm still able to work.
Pat: Do you have any habits that would lessen your...
Scott: Do you think you have a normal life expectancy? If you took 100 random 70-year-olds, put them in the room, do you think you're normal?
Bill: I think so. My mom lived to 94.
Scott: Okay.
Pat: Okay.
Scott: Siblings? How long do they live?
Bill: Yes. They're younger than I, so.
Pat: Okay. All right. So what happens is...so we'll go back to how they determine this. So if I took you, Bill, and I said, "Look, Bill, give me that $1.2 million. I'm going to actually invest it, and it's going to return 8%." I would then look at a life expectancy table of Bill, and I would actually figure out the day you were going to die and that $1.2 million would be empty. We would have used, assuming it returned 8%, I ran it against your life expectancy or assumed life expectancy, at the end of your...the day you die, there'd be zero money in the pot.
Scott: Actually, the 8% figure was a hurdle rate of maintaining the principle.
Pat: Oh, got it. Got it. It was maintaining. So it's probably 6-1, 6-2. I think you should really explore...
Scott: Here's our concern. We've seen this movie a lot. If you're 60, it's much easier because the lump sum would be that much greater, right? Because the longer the life expectancy, the more money the pension plan needs to set aside to pay that 8 grand a month. The closer you get to your death, the less money it is. So the older we get, the harder it is to make a lump sum work. You're 70 and you're single. So now, the challenge...here's what my concern is, and Pat would certainly agree with me. You take this $1.2 million, you roll it over, we need to get 8 grand, somehow produce 8% a year. That's maybe realistic over a 10-year period. Not over one year, who knows what's going to happen in one year, right? So we put together a nice balanced portfolio based upon a bunch of different things, and the first year, the market, let's say it's flat. You took out 96 grand. Your 1.2 is now 1.1 million. Or worst case, market's down significantly.
Pat: Ten percent.
Scott: Ten percent. Your portfolio is down 10%, plus you pulled out 8%. Now your portfolio's down...you've lost almost...your account's down almost 200 grand. Psychologically, here's what we've seen happen, this is just the movie we've seen, people are like, "I can't handle this. This is terrible. I can't deal with this." And so they end up becoming much more conservative than the pension plan ever would have been.
Pat: That's right.
Scott: To generate that $8,000 a month.
Pat: Because the pension plan doesn't worry about it. The pension plan, you have investment professionals that understand, and they have the benefit of a pool of large employees in order to spread that risk. So in this situation, I think that, actually, probably, you know, you're going to have to take a reduction. So the life in 20-year certain, what would that pay out, $7,100 a month?
Bill: Yes.
Pat: Is that the amount? I'm just guessing.
Bill: Well, yeah, because the 5-year was $8,000. No, it was $9,000. Then, every time you extend the years, it goes down.
Scott: That's right.
Bill: I think it's about $7,500.
Pat: Okay. So look, you need...
Scott: We don't know. I mean, based upon what you've told us thus far, I don't know anything else about it. Had you said you had $2 million in your 401(k) that you've been investing all these years?
Pat: And that you were experienced in the market.
Scott: And you said 70% in stocks. Then we'd probably say, lean for the lump sum. But the biggest risk going forward is not the financial markets. The biggest risk going forward would be how you react to the financial cycles.
Bill: Right.
Scott: And the older we get, the more challenging it is to have that long term, particularly when it's your life savings and the pension that you've taken a lump sum on.
Pat: So this situation, you need to... Don't go to the bank and hire a wealth manager. Find an independent fiduciary advisor at a mid-size firm. And I'm not talking about the biggest firms, and I'm not talking about the smallest firms. I'm talking about a mid-size firm. And my guess is that you're going to end up with that life in 20-year certain. That's where I would go with it. Because it achieves that benefit that if you die in the next 20 years, the kids get the money. And then these annuities in the 401(k) and the bank IRAs or the bank money, then you decide whether the appropriate direction is for that at the same time. But I wouldn't take the lump sum.
Scott: Yeah, I wouldn't either, just based on your situation.
Bill: That was really enlightening because I kept thinking, "I'm going to have to do the lump sum. I'm going to have to do the lump sum."
Pat: I wouldn't do the lump sum.
Bill: It makes a lot of sense.
Pat: The life in 20...
Scott: And by the way, when you talk to a financial advisor, even if it's a fiduciary, there's a conflict of interest. So that advisor typically gets paid by managing money. So an advisor talking to you is like, "Hmm, if Bill takes the lump sum, I have $1.2 million that I can manage. I can earn fees on those dollars. If Bill takes the monthly pension, I don't have that money to manage."
Pat: Scott, I'm going to share this with Bill.
Scott: Appreciate the call, Bill.
Pat: Bill, thank you. Appreciate it, Bill. The life in 20 years is how I'd go, but I'd get the rest of it wrapped up. I had a client years ago, wanted to take the lump sum, and I was explaining to them why they shouldn't take the lump sum.
Scott: And the majority of time back in those days, you were telling people to take the lump sum. Every situation is different.
Pat: His pension plan and his friends had all taken, but he worked at a different company. It's just the internal calculation. And I argued with him for about a half hour. He's like, "Well, you told him and him to take the lump sum." I'm like, "You're not them. This is a different calculation. You have a different pension plan. You retired from a different company." And he said, "Well, I'm going to take it," the lump sum. And I said to him, "You know I get paid to manage money. You know what I do for a living. You give me that lump sum, I make more money because I'm going to charge you an annual fee to manage it."
Scott: And I'm begging you not to.
Pat: And I'm begging you not to. And he looked at me, and he said, "I don't understand why, but that makes sense to me."
Scott: We're heading to Missouri, talking to Karen. Karen, you're with Allworth's "Money Matters."
Karen: Hi, thank you for taking my call.
Scott: Hi, Karen.
Karen: Hi, I have... I was wondering, how does one go about advising, helping an aging relative with very limited means decide what to do with a vacant house in disrepair on a city lot?
Pat: Wow. Where is the house?
Karen: It's in Florida.
Pat: And when you say disrepair and vacant, how long has it been vacant?
Karen: About 20 years.
Pat: No tenants, anything?
Karen: But been checked on. Like, it's still been, like, eyes on it.
Pat: What's the value of the property approximately? Your guess.
Karen: I do not know.
Pat: How about...is it...
Scott: Thirty thousand, 300,000?
Karen: Oh, with the house being in good condition, it would be close to...
Scott: No, no, no.
Karen: Okay.
Pat: Today.
Karen: I'm sorry. Excuse me.
Scott: I mean, it's essentially worth the land, right?
Pat: That's what I'm thinking.
Karen: Yeah. Yes. Yes.
Scott: So, is it in the middle of swampland Florida where it's worth nothing, or is it...?
Karen: No. No. No, it's a city lot.
Pat: So if I looked at this house today, would I say...
Scott: It looks like a crack house.
Karen: No, not a crack house. It's just...
Pat: If I were to buy it, would I tear it down and rebuild?
Karen: Tear it down and rebuild.
Scott: Okay, so it's worth the land.
Pat: Okay, it's worth the land.
Scott: And you have no idea what that's worth.
Karen: Well, it's about close to 300 with the house in good condition. So I don't know how much the land would be because there's no vacant lands in the area.
Pat: And why do you feel the need to actually fix the house? Are you getting...?
Karen: No, it's just a question.
Pat: Okay.
Scott: I wouldn't worry about it.
Karen: Like, what decision points must be made before actions are taken? And then what kind of taxes should be expected with the sale of it?
Pat: Well, that's a different question. So the value of the house or the land is always determined by the buyer, never by the seller.
Scott: Or eminent domain.
Pat: Or eminent domain, which is...
Scott: Whatever the government agencies think it's worth.
Pat: Which is, therefore, the buyer.
Scott: And is that your concern that an agency is going to take it over?
Pat: Are you getting any letters from the city or county?
Karen: No.
Pat: Oh, perfect. Do you need to sell this, or do you want to sell this?
Karen: Well, it's an aging relative that owns it, not me.
Pat: Do they need the money?
Karen: Yes.
Scott: Okay.
Pat: Okay. Do you know what they paid? First of all, are they married?
Karen: He's single.
Pat: And were they married during the ownership of this property?
Karen: No.
Pat: Do you know what they paid for the property?
Karen: It's probably about 60 years old or 55 years old. So I'm not sure how much they paid. Not very much.
Pat: And does this aging relative have any other assets?
Karen: No.
Scott: And are you considering the sale to generate some cash to help pay for other expenses? We're trying to figure out, like...
Karen: For them. Yeah, for them.
Scott: Okay.
Pat: Okay. Well, then, you're going to take the capital gains. And the reason we ask is...
Scott: There won't be much capital gain, I can imagine.
Pat: They've owned it for 60 years.
Scott: There will be some cap, but some capital gains, there's no tax on it anyway because the income is so low.
Pat: That's right. But you may want to do a structured...it depends on what it sells for.
Scott: Yeah. I'm looking at the capital gain. Yeah. But there's so much capital gain that can get excluded.
Pat: I understand. But it depends on what they sell it for. If I were you, I wouldn't worry about the capital gain right now or the step-up in basis. I would worry about getting the money to care for the aged relative. That's what I would worry about. And you're not able to...financially, are you able to take care of the aging relative with your resources?
Karen: I don't live by them, but...
Pat: When you say by them, are there more than one?
Karen: No. By him. No, I don't.
Pat: Okay. I would...
Scott: Capital gain rate is zero if you're single and your taxable income is 47,000 or less. That's taxable after your standard deduction.
Pat: That's right. So I would...
Scott: I'd sell it. Do you have power of attorney?
Karen: No.
Pat: Does the relative...have you talked to the relative about this?
Karen: A little.
Pat: Yeah. I wouldn't put a single penny into trying to fix it.
Scott: No way.
Karen: Okay.
Pat: In fact, I might actually tear it down before I listed it. But I'd list it first.
Scott: Well, you talk to a couple of real estate agents and find out what's going on.
Pat: Yeah, I'd list it. I'd have a couple of real estate agents I'd interview and say, "We need to sell this. What's it worth? Is it worth more if we tear the house down?" Is there infill? Are they building around it? Is it one of these transitioning neighborhoods?
Karen: Oh, there's homes all around it. People are maintaining their properties.
Pat: Are they tearing down homes and building new ones? Like my son...
Scott: They must be, it's 60 years old.
Karen: Some have.
Pat: Okay. My son in Denver, a third of their house is on the street where he bought.
Scott: My daughter, third, 95% further along in the neighborhood, right? She says there's one crack house left on the street.
Pat: Perfect.
Scott: Probably some row houses or townhouses.
Pat: So it depends on whether that neighborhood is in transition. So I would absolutely sell it if I needed the resources to take care of the relative. I'd call a couple of real estate agents.
Scott: And if you're finding that the relative...if it's a situation where you're concerned about the person's health, they're not making wise choices, you could petition the court and get a guardianship and then act in his behalf.
Karen: Okay.
Pat: All right. Those are all in...
Scott: That's when you say, "Look, he's not making rational decisions. I'm concerned about his health," if that's the situation,
Pat: But if he is actually able to, you can ask him to do the documents that allow you to do it anyway to get power of attorney.
Scott: Power of attorney. Then you just take care of it all.
Pat: And then you take care of it all.
Scott: And I would just sell the capital gains. I can't imagine it'd be worth more than 50 grand if the full on houses were 300.
Pat: I have no idea. Not a clue. But that's what I would do.
Karen: And then, could he easily sell it by owner?
Pat: No, you know.
Scott: I would never sell this by owner.
Pat: No, no, no, no, no. You could, you're going to save a couple thousand dollars. I wouldn't. I'd want a professional, especially something like... I would do some research and find out who sold the most houses in that particular neighborhood and then contact that person and say, "This is the lot."
Scott: No way would I sell this by owner. You don't even know, there's time to find disclosure forms and stuff.
Pat: Yeah, your different area, different state.
Scott: Appreciate the call, Karen. We're talking now with Carla. Carla, you're with Allworth's "Money Matters."
Carla: Hi, guys. I love your show.
Scott: Thank you.
Carla: I listen to it every Saturday.
Scott: Awesome.
Carla: So my question is, actually, I'm speaking on behalf of my husband, regarding IULs and what you guys think about them, good, bad.
Pat: What's an IUL?
Scott: Indexed universal lifestyle.
Carla: The indexed universal, yeah.
Pat: Well, like an IA is an indexed annuity. This is an IUL.
Scott: I've never recommended them. I don't own one.
Pat: I would not purchase one.
Carla: You would not purchase one.
Scott: No.
Pat: No, no.
Carla: And what would the reason...like, what are the reasons why you would say that?
Scott: I think they're gimmicky.
Pat: First of all, the first question you should ask yourself is, do you need permanent insurance or not permanent insurance, right? Let's not even talk about whether it's IUL or UL or whole life or variable universal life, VUL. We'll leave that all behind. Let's just say it was the greatest product. It was a permanent product. It was the greatest product in the world. The first question you ask is, do I need permanent life insurance? Which means, do I need life insurance for my whole entire life? Do I need it for 20 years, 30 years, 40 years? You need that. So, what are you trying to insure against? Do you have children at home?
Carla: No, they're all adults.
Pat: Okay. And so, are you retired or close to retirement age?
Carla: My husband just retired from his main job, and he's working on, like, a part-time job now. So one of our friends or family friend was talking to him about maybe thinking about doing an IUL just for saving on taxes when he starts to withdraw some money.
Pat: Okay. And so here's the pitch behind this IUL.
Scott: Let me back up. So what ends up happening, there's a lot of people...it doesn't take much to get an insurance license at all. You could do a week class, Carla, and you go down and you take the test and your insurance license, and now you can go out and go to your friends and say, "Hey, I've got this great product. Let me tell you all the wonderful things it's going to do."
Pat: Which they believe.
Scott: Yes. But what they don't know are the other 99 other products that exist out there that maybe are even better because they haven't really been trained on it.
Pat: Like, the alternatives, right?
Scott: Like a Roth IRA first.
Pat: Or an S&P 500 fund, right? So that's why you start with the premise of, do you need insurance at all? And if you do need insurance, how long do you need it for? So in your situation, the kids are out of the house. Your husband's retired. Did he retire with a pension?
Carla: Yes.
Pat: Okay.
Scott: Is there other survivor benefits on the pension?
Pat: So that if he passes away...
Carla: Yes.
Scott: Okay.
Pat: ...some money goes to you.
Scott: If you said no, then we're like, "Whoa."
Carla: I'm sorry. He actually took a lump sum and invested and has rolled it over into an IRA.
Pat: There you go.
Carla: The beneficiary on the IRA.
Pat: There you go, right? So all that money has been earned.
Scott: He didn't invest with the friends who sold him the equity indexed annuity.
Carla: No, no, but there are pitches that he can withdraw that money tax free...
Scott: Tax free. Tax free.
Carla: ...if he puts it in the IUL, and you know...
Scott: But you got to pay tax to get it out of the IRA.
Pat: Yeah. Yeah. You would never use money from an IRA and put it into a...
Scott: You can't.
Pat: I guess you could. You could pull it all out, pay taxes on it, and put it in there, but that would just be...
Scott: Idiotic.
Pat: Worse. Maybe worse than that.
Scott: Yeah, malpractice.
Pat: Yeah. So there is no conceivable world that I live in financially where you would even try to make that argument.
Carla: Okay.
Scott: And I could see a time when a variable life insurance might make some sense or a fixed life insurance, but the indexed, you know, makes no sense to me.
Pat: Well, that's because of...
Scott: I understand the mathematics. I understand how it all works behind the curtain.
Pat: The market cycles, the whole bit. So what they're selling, Carla, to you is how life insurance policies are structured, which is they go in FIFO and they come out FIFO, which is first in, first out, which means that you put your deposits in, you draw those out, then any amount remaining there, you can borrow against the policy contract, as long as the contract's in place on the date of death, then it's magic.
Scott: It's all tax free.
Pat: It's all tax free.
Scott: How about the cost of insurance?
Pat: That's without... if you've lived in a world without cost, right, then...
Carla: Then it would make sense.
Pat: Then it would. Much like it would make sense for us all to fly, travel private jet, if it wasn't for the cost. Is that a bad analogy?
Carla: Right.
Scott: Yes, I think it is.
Pat: Okay.
Carla: I get it though. I get the point.
Pat: Yeah. You have no need for this.
Scott: Not only has most people not flown private. Most people don't know anyone who flies private, unless they have a little Cessna or something.
Carla: That's true.
Scott: You're watching too much Netflix. You watched Billionaires?
Pat: I've watched Showtime's "Billions," right? And you would never use the money in the IRA. Never ever.
Carla: Okay. That makes sense.
Pat: So your husband's portfolio should probably be 60% equities, 40% bonds and cash, and then a monthly distribution set up so you can retire comfortably. That's all you need to know.
Carla: Perfect.
Pat: All-righty.
Carla: Thank you. That was my question.
Pat: All right. Thanks, Carla.
Scott: Glad you called.
Pat: Take care.
Scott: You know, it's funny, Pat. I was thinking this earlier today. I don't know why I'm thinking about these silly products, the insurance company comes up, insurance industry. Like, in this situation, if having, like, an index on the securities market works so well, why wouldn't the insurance company do that with their own portfolio?
Pat: Right?
Scott: You think they're taking any of their portfolio and say, "We're going to spend this on options in case the markets do well to hit?" No.
Pat: No.
Scott: Because long term, you're not going to make money that way.
Pat: That's an excellent point. And it ignores dividends that are paid in the underlying index.
Scott: Well, the way they're structured...
Pat: Well, actually, the fact that they create their own indexes now, it's just really amazing.
Scott: But I'm just thinking, if that strategy...I understand how they go and invest for that pool, but if it works so well, why wouldn't they do it in their own?
Pat: In their own pool.
Scott: Yeah.
Pat: It's the risk.
Scott: Yeah. Right. I understand all that stuff.
Pat: Yeah. Well, you do, but I think you're doing that for the benefit of the listeners. But just how that was pitched that you take your money out of an IRA, pay taxes, and put it into an indexed universal life just shows...what it shows is lack of experience of the person trying to sell the product.
Scott: I remember, as a college student, I went to A.L. Williams.
Pat: Did you, the coach?
Scott: Yeah. It was multi-level marketing. It was my pastor from our church, and somehow he left the church and became a multi-level marketing guy with A.L. Williams. And I went, and they said, basically, how you can be a part-time financial advisor. And I think it was a gardener who was sitting next to me and somebody else, right, and they were pitching me on being a financial planner.
Pat: And you decided to finish college instead.
Scott: Yeah, yeah. And it was all on a part-time basis. But I remember my pastor looked at me and he's trying to get us all pumped up. And he said, "Scott, if you could drive any kind of car, what kind of car would you drive?" And I remember looking at him and I thought, "You're like my pastor. You're supposed to help me to God, not think about those things. Those come naturally. Like, come on buddy." The lust of the eyes and pride of life and all that stuff. I don't need help with that.
Pat: I was born with that.
Scott: That's my first thought.
Pat: So I'm guessing you didn't sign up.
Scott: No, I didn't sign up. No. We're going to talk now with Simone Devenny, and she's doing a webinar with us on high net worth wealth strategies for 2025 and beyond. So glad to have you spend a few minutes here. First of all, give us a little bit about your background.
Simone: Sure. Thanks so much for having me. So I've spent about the last 25 years working with clients around all things related to estate planning, started off as a tax and estate attorney, and then also on investment. So really looking at holistic financial planning and wealth management from the estate planning perspective, the tax planning perspective, and everything else that would be important to our clients.
Scott: And so, what are some of the things that, like, high income, high net worth investors should be considering next year? What's actually different? I mean, I know one thing with the Trump tax laws were set to expire. There's a chance they won't expire, but that's still up in the air.
Pat: There's a chance...
Scott: A chance they will.
Pat: Yeah. Highly unlikely though.
Simone: Yeah. I think, you know, whenever we think about planning, we can't predict the future, although we wish we had a crystal ball. But what we can do is work with the current laws that we have and think about the best ways to take advantage of opportunities that exist right now. So whether they're going to change again in the future or not, we don't know for certain, but what we do know is there are plenty of things that investors can be thinking about in terms of how to take advantage of the moment that we're in, whether that means tax optimization of portfolios, things like Roth conversions, how to incorporate their charitable giving to enhance their after-tax performance, things like that. And this is really what we help clients sort of navigate, even with the uncertainty of the future.
Scott: Yeah. So you started out as a tax attorney, right?
Simone: Correct.
Scott: In your early... And I see you went to Boston College, which was where my son went, so good for you.
Simone: Oh, nice.
Scott: That's the only reason I like you, Simone. [inaudible 00:32:15.075]
Simone: Thank you.
Scott: You're probably doing stuff here at Allworth.
Simone: Go, Eagles.
Scott: And how do you think about...because one of the things that, as financial advisor, we always talk with clients, like, you've got one big partner, the tax man, and we know what the tax laws are today, and we try to put some probability of what taxes could be in the future, because you got to do some sort of planning, right? And with planning, you've got some assumptions and some probability. So within your career as a tax attorney, how do you think about that?
Simone: Well, again, I think what we really want to do is think about, okay, there's always a possibility that things are going to change. We take into account sort of the unlikelihood of clawbacks or the opportunities for grandfathering, things like that. And so we really plan using the current environment that we have. Right now, we happen to have a very favorable environment, certainly from an estate planning perspective, around taxes. And so what we're doing now is encouraging clients to really think about using the favorable winds, I would say, to make sure that they're getting things in place that are going to be effective, irrespective of how those laws might change. So again, great time to be thinking about planning with what we know now and planning for the eventual possibility of change, but getting things in place now that may not be impacted by that change. And that's what we really try to navigate.
Pat: So, Simone, will you kind of give our listeners a little history when you mentioned the estate tax? I assume you're having to talk about the unified credit or the exemption amount.
Simone: Sure.
Pat: Just because I...
Scott: I was explaining this to my 28-year-old daughter just over Thanksgiving. She's like, "What? You mean to tell me they tax you when you die?" She was, like, blown away. She's like, "Why?"
Simone: You can't get away from it.
Scott: But you know, so I've been doing this a little bit longer than you, but when I first started, right, the number was about $600,000. So kind of give us a thumbnail for the rest of the listeners and why, when you said this is a favorable time historically...well, probably till the great robber barons was a better time, but give us a kind of the history of that.
Pat: If you were a robber baron. If you were 99.99% of the rest of the population, maybe not so good.
Scott: Of course, I would have been a robber baron. Come on.
Simone: Well, you have been doing this a little bit longer than me, but I've also been doing this quite a long time. I am not as young as your 28-year-old daughter, sadly. And I can tell you, back when I was at Boston College in the late '90s in law school, the exemption was about $675,000. And by exemption, you know, we talk about what you can give away as a gift or when you die or some combination, right? So $675,000, and then anything over that would be taxed at a very high rate. Right now, we're looking at a 40% tax rate. But that $675,000 is the number that keeps moving, and it's what keeps estate planning attorneys in business, okay? Because essentially, what's happened since the late '90s is it has moved all over the place, always moving up except for in 2010 when it went to...
Scott: Zero.
Simone: ...unlimited, right? Zero.
Scott: Yeah, zero tax.
Simone: But then in that year, of course, we lost the step-up in basis, which is a whole separate conversation we could have. But I think that, when I was practicing law earlier in my career, it was in the $1 million, $5 million, all over the place, but ultimately, today, and this is where the opportunity is, today, it's at $13.61 million per person. That means that a couple's got, you know, double that. Now, why do we have 0.61? The reason for that is because this was originally a $10-million number that was indexed for inflation. So it's just sort of moving along and growing at the rate of inflation. So next year, we still expect that that is going to rise. However, this very high exemption, and this is one of the things we talk about, is set to sunset or, you know, go back down to, roughly, you know, $7 million per person in January 1st of 2026. So this really summarizes sort of where the great planning opportunity exists right now for high net worth investors and high net worth clients to start doing some planning, knowing what we know now, utilizing that very high current exemption.
Pat: And with the exemption, what it means, for the listeners, is you can use any or all of it while you're living and move it to the next generation rather than wait until you die.
Scott: That's right.
Pat: And it's a great planning technique. One of the downsides to it is that, in doing that...
Scott: It's no longer your asset.
Pat: ...it's no longer your asset, and you'll lose the step-up in basis of the growth after the gifts.
Scott: Because it's not your asset.
Pat: Because it's not your asset.
Simone: And I think that's a great point. That's a great point. However, and this is where the fun comes in, there are a lot of really neat techniques that exist in sort of modern trust planning where you can actually do things, like, use things like substitution or swap powers. So working with your advisor, you can really look at optimizing the assets that you are transferring. So for example, if you gave away, let's call it, a low-basis asset to one of these trusts, you could eventually swap that out for cash or for a high-basis asset, taking it back and getting that step up. And I know this may sound a little complicated, but we can certainly simplify it when we have more time. But really excellent planning opportunities around that as well.
Scott: Yeah. So you'll be covering some of these issues in the webinar, I know, because you'll be with Victoria Bogner as well, and you're going to be talking about some interest rates and kind of outlook. What are you guys are going to be delving into there?
Simone: Yeah. So Victoria is fantastic, and she gives a really great overview of the yield curve. You know, we hear a lot about, what is this inverted yield curve, and what does it mean, and what does it mean for the economy? What does it mean for bonds? You know, how should we understand the portfolio as it relates to the current state of the yield curve? So that is something really interesting that she goes into great detail on.
Pat: And before we go, and we'll give the dates here in a second, can you explain to me why we have a step-up in basis? It never made any sense to me. What's the history behind a step-up in basis?
Simone: Well, that's fantastic. So the step-up in basis, actually, it's funny. So, what is a step-up in basis? Step-up in basis means if I buy a share of stock for $1 or a house for $1, okay, and I hold it until I die, and when I die, it's worth $100, my heirs will inherit that and their new cost basis is not the $1. It's $100. So if they sell it the day I die, they won't pay any capital gains tax, right? Now, the origins of the step-up in basis actually have more to do with sort of operational challenges, meaning that it was so challenging for people to go back and try to figure out cost basis over a lifetime that, eventually, they just made it so, "You know what, we're going to step it up and just let it go to the heirs," what's called the date of death basis.
Pat: Oh, thank you so much. I've always wondered that. I've always, because...
Simone: It's a silly thing, isn't it?
Pat: Yeah. And by the way, if you were in charge of the world and you wanted to create liquidity where the capital would move to the most efficient places, if you believe in an economic environment that allowed for that, you would get rid of the step-up in basis.
Simone: They've threatened it many times. They've threatened it many times. In fact, in fact, very recently, there were some rulings that came out that have threatened and, in fact, probably done away with that step-up in basis with some irrevocable trust. So it used to be that we thought we could plan around that, but that has changed. So yes, it is sort of the proverbial low-hanging fruit, if you will. So we should certainly be taking advantage of this step-up for as long as we have it.
Scott: Well, Simone, thanks for taking a little time out of your busy day to talk with us. And so Simone is going to be doing this webinar with Victoria Bogner, who is a guest on this program periodically. And for full details for this webinar, it's going to be Wednesday, December 11th at noon Pacific, so 3:00 Eastern, noon Pacific, Wednesday, December 11th, Saturday, December 14th, 9 a.m. Pacific, noon Eastern, so those two times. And to sign up or more information, simply go to allworthfinancial.com/workshops.
Simone: Thanks so much for having me.
Scott: All right, thank you.
Simone: I really appreciate it.
Pat: Thank you.
Scott: Thank you, Simone.
Simone: And I wish you all a wonderful holiday season. Take care.
Pat: And, Simone, thank you for being a part of the Allworth team. You are much valued.
Scott: Yeah, appreciate it.
Simone: Oh, it's my pleasure. I'm grateful to be here. Thanks so much. Take care. Bye-bye.
Pat: Well, that was... I wish I would have asked her that before about why we have that step-up in basis, but it makes sense. Well, [crosstalk 00:41:18.969].
Scott: Think of how many times you've had clients, right? And I've sold securities over the years. I know what the cost basis is, in part because I'm in the industry and I know how to make sure we track those things, but I'll give you an example. So Pat and I, when we started in this industry in the '90s, we did a lot of work with the retirees from the phone company. And the phone company, back in the day, there was one main phone company, AT&T. It was broken up in the '80s.
Pat: To eight different companies.
Scott: I think it was seven, wasn't it? Plus AT&T. Seven regional bell operating companies.
Pat: Yeah.
Scott: And so if you own shares in AT&T, suddenly, you own shares in these seven regional bell operating companies.
Pat: And then...
Scott: Then you had dividend reinvestments, you had stock splits, and people would say, "I have no idea what my cost basis is."
Pat: And oftentimes, they would actually hold the certificates, and then some of them...but then the companies actually all started merging back together again.
Scott: That's exactly right.
Pat: Because it was deemed a monopoly at one point in time, and then the political environment changed. And then these people said, "Oh, we can try to build a monopoly again." But we would never know the cost basis on it. It was impossible. And so what the clients would do if they wanted to sell it, we'd say, "Look, we can't give tax advice. Go talk to the accountants." And the accountants would say, "Hey, I could research it, but it's going to cost you X, Y, Z."
Scott: It would cost you more than...
Pat: Or you could guess.
Scott: Because the burden of proof for taxpayer, it's on you to prove your cost basis, whether it's a security or a property. Like, if you claim it on your tax return and you're audited, and the auditor says, "Hey, you said your cost basis is $3 a share. Show me if that's true." Then it's up to you to do it. And I think a lot of people's approach is if you're trying to be honest here and you're doing your best guess, then...
Pat: I've never seen anyone picked off in an eye.
Scott: I never have either. Never.
Pat: Ever. But that's interesting, which is actually how lots of our modern economy actually exists today is because of things that took place years and years ago that were procedural.
Scott: Procedural. You know, successful.
Pat: Anyway. But this works out with Simone. It is worth attending. If you're interested in these types of subjects at all, because I have never...every time I ever talk to Simone or Victoria, I learn something. Every time.
Scott: Yeah.
Pat: And I've been doing this a long time. And they'll have Q&A.
Scott: Even the substructural SWOT.
Pat: Yeah. I didn't know that neither, which is why we actually have tax team.
Scott: Which is why we have a whole team. I mean, we have a whole tax department and a legal department at Allworth because it's all very complicated. And the higher your net worth, the more...unless you plan on leaving 100% to charity when you die, there's issues that you got to deal with.
Pat: So, Scott, no, this is obviously self-serving, but over Thanksgiving, a relative said, "So, how many firms have joined you?" And I said, "It's 40s, 40, 41, 42." And they said, "Why would they join you?" And I said, "Because the marketplace is becoming progressively more competitive because the demands of the clients are going up." And the reality is what a client ultimately wants is a one-stop shop with wealth management and financial management, which is, "You manage my assets. You give me financial guidance, tax, and estate planning all in one shop." And that's where the industry is going.
Scott: That's where the industry is going.
Pat: And the firms that join us are typically anywhere between 5 employees and 45 employees, and they have a hard time getting to scale. And we had a hard time getting to scale without those firms joining us. Because someone like Simone or Victoria...
Scott: You have to go find... These people aren't looking for jobs. The best financial advisors aren't looking for jobs.
Pat: Yes. And someone like Simone, who has got years and years of experience in estate and tax, demands a lot of money, and you have to spread that cost over a large number of clients and advisors. So if you're with an advisor today, don't be surprised if their firm gets integrated into a larger firm just because that's where the marketplace is going.
Scott: That is where the marketplace is going. Yes.
Pat: So, Scott, I came across this article, which I felt really bad for this gentleman. This was in "The Wall Street Journal" a couple of weeks ago, and it was by Jason Zweig, who, by the way...
Scott: I always see his...they come out Friday afternoons, his opinion pieces.
Pat: They're great.
Scott: And he took a sabbatical. I didn't know what happened to him. He was gone for, like, a year, and then he came back.
Pat: Yeah. I've read his stuff for years and years. Didn't his family use to own an asset management firm?
Scott: I have no idea.
Pat: Anyway.
Scott: But he's written for "The Wall Street Journal" for many, many years.
Pat: For years and years. So this is an opinion piece, and the title is "'I Don't Know Where to Turn or What to Do.' His $763,094 Retirement Fund is in Limbo."
Scott: And Jason Zweig writes a lot about...his articles are called The Intelligent Investors, and it's often about mistakes, scams out there, unscrupulous advisors.
Pat: And as Scott says, it kind of sticks with our thesis. One of the most important things we do for our clients, not only providing them good advice, attempting to provide them good advice around their financial situation, is trying to stop them from making decisions that are completely irrevocable that would ruin their financial situation forever. So this gentleman ran into some life problems, and he was having a hard time getting by. I think he lost his job. Anyway, through a friend, he heard about a firm called Yield Wealth. They guaranteed a 15.25% return, and it was offering investors on its products. 15.25. And so when that was explained to him, he looked at it and he said, "Well, this is $100,000 a year. What could go wrong?" And you know the rest of the story.
Scott: Well, any sort of investment that claims they're going to be guaranteeing you a 15.25% of return...
Pat: Yes, you know the rest of the story.
Scott: Of course, you know it's not real.
Pat: Yes. And it goes on and on and on. But this is the thing that...
Scott: He was 60 years old.
Pat: Yes. It was in his 401(k). He took the money out of his 401(k) or his IRA to do this.
Scott: There's a company that's called Next Level. Next Level Scam is what it should be.
Pat: Yes. But, look, when I read this, I think, "I have seen this."
Scott: And it was in a retirement account. He moved his 401(k) to an IRA, used some obscure IRA custodian for it. Then when it looked like that Next Level was a scam or could be a scam, the IRA custodian said, "We're not going to be the custodian anymore."
Pat: And they kicked him off the platform.
Scott: And threw the certificates back to him. So now he's got these certificates. What are they worth? If they're worth anything, then it's a taxable distribution to him. It's a taxable withdrawal.
Pat: And he has no idea where he's at. But this is the thing...
Scott: He's not going to get any of it back.
Pat: The thing that this reminded me is anything that is guaranteed over...
Scott: Treasury bill.
Pat: A treasury bill. So think about whatever the one-year treasury bill is, it's got inherent risk. I don't care what it is. It could be a municipal bond. It could be a high-yield corporate bond. It can be an annuity. It can be anything. But any time where the risk that they state or the return that they state is guaranteed, if it's over a treasury, in fact, if it's anything but a bank CD or treasury, it's got risk. And even those have risk, right? They have risk of governmental default.
Scott: And you know, seemingly bright people will fall into this.
Pat: Or desperate. Or desperate. Because he was in a life situation where he thought he couldn't return to work.
Scott: Didn't have enough to retire.
Pat: Didn't have enough to retire. "I got to take the long shot."
Scott: He was 60, and he lost his job early. He was planning on working several more years before he retired.
Pat: Yes.
Scott: And he could fix his problem if he gets a high enough return.
Pat: Yes. And that was his thought, thinking, "Well, this is great."
Scott: I found it. I found it.
Pat: This is it. This is it.
Scott: Interesting.
Pat: Anything...
Scott: Just remember that.
Pat: I hear these ads on the radio, this, like, "We offer between 12% and 15%."
Scott: I'll take the 12.
Pat: Yeah. I always think, "Why wouldn't you take the 15 if they're offering 12 to 15?"
Scott: It's guaranteed.
Pat: If it's all guaranteed.
Scott: It's so simple.
Pat: Why? A guaranteed 12% to 15% returns. Well, they're guaranteed.
Scott: Interesting. Yeah. But I mean, when I read these articles, I feel bad for the people, on one hand, but at some point in time...
Pat: Well, Scott...
Scott: You can't regulate...you can't get rid of all bad actors in the world.
Pat: It's going to exist. It's going to exist.
Scott: People steal packages off your porch. They're bad people. You're a bad person to do that. We don't care about that anymore, apparently.
Pat: All right. Anyway, a quick side story. I almost hit an Amazon truck in my driveway yesterday.
Scott: You're backing out?
Pat: I was backing out. He was backing my driveway.
Scott: What's he doing on your private property?
Pat: No, no, he was parked in the street, but right where...like, in the middle of it. So I come out of my door.
Scott: I could see why.
Pat: It's first thing in the morning. It's dark. It was, like, 6:00.
Scott: You're not expecting. You look.
Pat: I'm not expecting.
Scott: You see if there's any light, headlamps down the road your little tiny neighborhood.
Pat: And so I come out of there, and I'm like, "Oh."
Scott: That would have been pretty...
Pat: To run into an Amazon truck in front of your house, almost worth it, worth the story.
Scott: Anyway, hey, that's all the time we've got in this week's program. We will see you again next week. This has been Scott Hanson and Pat McClain of Allworth's "Money Matters."
Man: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.
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