Values-Based Investing, Retirement Risks, and the $10 Million Exit Strategy
On this week’s Money Matters, Scott and Pat look into “anti-woke” investment funds and explain why creating your own index might be smarter than following the crowd. They tackle one investor’s dilemma about using Securities-Backed Line of Credit for buying a home at 66, explore the surprising benefits of reverse mortgage purchases, and help a woman from Florida navigate the financial maze of buying property with her fiancé. They also talk to Allworth's Head of Wealth Planning, Victoria Bogner, who shares a masterclass in business sale strategy.
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Announcer: 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-W-O-R-T-H.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson here.
Pat: Pat McClain. Thanks for joining us.
Scott: We're gonna talk about financial matters, answer some questions from you, talk about some good financial planning stuff. That's our hope.
Pat: You be the judge.
Scott: Our objective, by the way, our objective with this program is to help educate you in matters that are of importance in your life, your specific life, so that you can make wise decisions of what you think is best for you and your family.
Pat: You.
Scott: You. And we're all different. We have different hopes and goals. We have different objectives in life. We have different risk tolerances. We have different design. I think we're all unique. And no two financial lives are the same either. So, they're all unique. And so part of it is helping you come up with what's gonna be best for you and what you're trying to accomplish in your life.
Pat: And, quite frankly, it's, to try to, I mean, it's a successful show if some of the biases that you hold about investing are actually shaved or slightly changed as a result of this program, about investing and tax planning.
Scott: I hope so.
Pat: Yeah. Because we all walk into these investments with biases.
Scott: Absolutely.
Pat: Right? And...
Scott: And if you're spending time on Twitter or X or whatever it is, those algorithms are gonna continue to load articles that confirm with your existing bias.
Pat: That's exactly it.
Scott: Confirmation bias. Then you're just like, "Well, everyone seems to believe in this is the right thing to do, so it must be."
Pat: Oh, I hate that word, "everyone." I hate that word.
Scott: Most people, and [inaudible 00:02:13]
Pat: Well, no, but that's what, we have a tendency. It's like, "Everyone believes this," you know, like...
Scott: So, maybe I'm the wrong...if I don't believe that, something's wrong with me, and I should get with the crowd.
Pat: Correct.
Scott: Yeah.
Pat: Yes.
Scott: That's human nature too.
Pat: Yes. It's, like, we look for confirmation bias, so...
Scott: And what I think is, what I love the most about our profession, Pat, the financial planning, is it's really, it's the blending of the human nature, along with empirical evidence, and the financial planning...
Pat: And then technical, when you bring in tax.
Scott: That's it's, really, and it's a [crosstalk 00:02:52]
Pat: Because tax is highly technical. You can have an opinion about tax.
Scott: Tax is easy, though, because it's black or white. [crosstalk 00:02:59] Close. Mostly. Not all that black and white.
Pat: Right. And some things that were actually...
Scott: Mostly.
Pat: ...forbidden a number of years ago, now people are doing it on a regular basis, in tax law.
Scott: Oh, yeah.
Pat: Just because the regulatory environment says yay or nay, or this is... Oftentimes, tax law is created by enforcement, rather than by legislation.
Scott: And, speaking of that, you never wanna be famous by having a tax law named after you.
Pat: That's a bad thing.
Scott: And you see this, Pat, every year, you see it. It's, someone had a really aggressive approach to, trying to avoid taxes. They get challenged in tax court. There's a case. They lose. They end up bankrupt or whatever, having to repay the IRS all this money that they no longer have. And then that sets the precedent going forward. Here's why you can't do that maneuver.
Pat: Yes. Or, or the other way, where they actually win, and then that sets a precedent as well. So...
Scott: Yeah. [crosstalk 00:03:56] Or a private letter ruling that they get the green light on, and once there's three or four private letter rulings [crosstalk 00:04:01]
Pat: [crosstalk 00:04:01] very similar.
Scott: Then I, let's all hope that I can get away with this, too.
Pat: Yes, yes.
Scott: So maybe it's not all that black and white. Most of it's black and white.
Pat: Most of it's black and white. But you're right. It's, investing's not easy. Because there's sacrifice. You have to believe in a future.
Scott: You have to believe in a future. Otherwise, what's the point?
Pat: Yeah. Exactly.
Scott: And, we know that the future, we're all gonna die, too. So we have to plan for when we're not around anymore. We accumulate some assets so we have greater options in our life.
Pat: And then?
Scott: And then, when we leave, like, all right...
Pat: What happens?
Scott: what influence are we gonna have with these dollars? And...
Pat: Yeah. And that's a very, very personal...
Scott: Extremely personal.
Pat: Especially if you're high net worth. Do I leave it to my children? Do I leave half of it to my children?
Scott: Everyone's got different opinions on it. That's right.
Pat: How do I actually pay it out? Should it go to charity? Should it go charity while I'm alive? Should it go in a charitable remainder trust, so I can take income from it? I mean, if you have significant wealth at all... And what would I call significant wealth?
Scott: Yeah, what is significant wealth?
Pat: Five million or more.
Scott: Okay.
Pat: Then you should be heavily involved in estate planning. You should know exactly...
Scott: Because you're not...
Pat: You're not... The likelihood of...
Scott: Five million, and let's say you're 60 or over.
Pat: Yes.
Scott: If you're $5 million and 40, you might spend it all.
Pat: Well, it was probably a windfall, if that were the case.
Scott: That's why I'm saying you might spend it all.
Pat: Okay. That's right.
Scott: So, if you're hitting, if you're near retirement age with $5 million dollars, it's probably a result of your saving and discipline.
Pat: And by the way, once you hit retirement, and you believe that you're gonna blow through this stuff, it's highly unusual that you actually change your behavior very much.
Scott: Yeah.
Pat: Highly unusual.
Scott: That's right. So, you...
Pat: Although, I had a...how old is he? Eighty-two? He's got a lot of money. He now flies private.
Scott: Oh. That's one way to spend your money. Doesn't take long to spend it flying private.
Pat: Well, he doesn't travel that much, but when he does, he's 82 and he's kind of in poor health. But he said, "I still wanna travel." And I said, "You know, you've got enough money here that you could fly private anywhere you wanna go." And he's like... And I said, "Well, not internationally."
Scott: You're not flying private to Europe.
Pat: But if you wanna go anywhere in the U.S., or you're in Europe, and you wanna fly... And he said, "Why would I do this?" I said, well, because you don't...
Scott: You've got more money than you're ever gonna spend in your lifetime.
Pat: Yes.
Scott: And if you want to...
Pat: Yeah, if you want to, you know... And so, it...but... I don't know why I went there.
Scott: I don't know either, because there would be others that say regardless of how much money, I don't wanna...
Pat: Well, that's the difference.
Scott: They're all personal choices.
Pat: Yeah, yeah, yeah, so... Anyway.
Scott: But it's nice to get to a point in life where you have some choices. And one of the things that we've been passionate about in our three-plus, almost four decades in doing this, is we want people to be in a place where work is an option and not an obligation, where they have freedom in their life to choose how they're gonna spend their time. I truly believe that life is about serving others, about being, taking part of other people's lives, and... Which can be done remarkably well in the marketplace, through your profession, that sort of thing. But it's pretty nice if you can be in a position in life where you get to choose what your profession's going to be. You get to choose who you serve, because you don't have to...you're not having to work for a paycheck.
Pat: And that's not uncommon.
Scott: No, not at all. [crosstalk 00:07:39] I mean, it's...
Pat: Yeah.
Scott: One of the... Yeah. [inaudible 00:07:43]
Pat: I actually had clients that opened up a...
Scott: Regardless of what you think about our current state of this country, it's a phenomenal place to be.
Pat: Yeah, I have clients that opened a girl's school in Africa. Right? They live very, very modestly. So modest that if you met them, you'd think, holy smokes. But they have the resources, and the idea is that they wanna serve this population.
Scott: And for them, it's not about having a fancier dinner, or...
Pat: Not even [crosstalk 00:08:11]
Scott: ...a wine cellar...
Pat: Or even a nice car.
Scott: That's, none of that's important to them.
Pat: None of that's important to them. But this charity... And God bless them.
Scott: Probably a nice couple to spend some time with.
Pat: Oh, they're...
Scott: Of course. Brilliant. There's certain people, like, you like to be around them, like, just hope a little of that rubs off on me. You know what I mean?
Pat: Oh, yes. Which is why I quit hanging out with the Sisters of Mercy, the Catholic Church. They make me feel bad.
Scott: You don't wanna go that far. All right. Anyway...
Pat: I did not take the vow of poverty.
Scott: We've got a great program today. We got some callers. We're also gonna have Victoria Bogner, who's our head of wealth planning here at Allworth, talking about a client story, so, looking forward to that.
Pat: And I'd like to, Scott, I'd like to talk about the anti-woke funds, which I didn't really even know they existed until recently.
Scott: Anti-woke, and what is an anti-woke fund? Is this, like, the reverse of an ESG fund?
Pat: Exactly.
Scott: ESG is environmental, social, and governance.
Pat: Whatever that means.
Scott: Which means different things to different people.
Pat: And anti-woke means not that, or whatever that means.
Scott: I don't know. Whatever that means.
Pat: Right? Or whatever that means.
Scott: Whatever, there's some progressive... I think it's some anti-progressive cause or something, I would assume anti-woke would be that.
Pat: Yes. But I'd like to talk about that later on.
Scott: I'm sure the performance of them is phenomenal.
Pat: Well, they're...
Scott: The problem with this sort of thing...
Pat: You wanna talk about it now?
Scott: Yeah.
Pat: Okay.
Scott: Talk about it now.
Pat: I thought we'd take a call, but go.
Scott: And then we'll... The problem with any of these types of things... Well, a number of... The funds themselves... Here's the problem. We all have different values. And, like, my idea of an ESG is probably different than your idea of ESG.
Pat: Oh, I know it is.
Scott: Right? And whether, like, all these sort of values. And if you say, "Well, I don't wanna invest in anything that supports alcohol," as an example. "My whole family is a bunch of alcoholics, and I don't wanna support anything with alcohol." Okay, well, maybe it's easy to say, "Let's don't own Budweiser."
Pat: Yes.
Scott: But what about the trucking company that transports?
Pat: Okay.
Scott: Or the shipping container that, like... Or the restaurants...
Pat: Or Marriott corporation? Because they serve it?
Scott: Or...
Pat: Where's the line?
Scott: Where's the line?
Pat: Where's the line? Right? That's exactly the issue. And, who draws the line? But they're fads. They're, Scott, just, like, when this ESG came out... So, my oldest son is...
Scott: They've been out. They used to call them something different. What did they call them years ago? Calvert was one of the mutual fund companies that had one of the earlier ones. Are they socially responsible investing?
Pat: That's what it was called.
Scott: No, it was called something different, I think.
Pat: No, socially responsible.
Scott: Was that what it was? Socially responsible.
Pat: Yeah, then it turned into ESG.
Scott: How can you argue if it's socially responsible?
Pat: How do you remember that, though?
Scott: You gonna have a socially irresponsible fund? You don't want that. [crosstalk 00:11:18] You need a socially responsible fund. That's a great marketing... We're a socially responsible fund.
Pat: Say it again.
Scott: Socially responsible.
Pat: But it's a great marketing...
Scott: Marketing.
Pat: That's...
Scott: Yea, so, to attract dollars. By the way, these ETF manufacturers are no different than any other type of business.
Pat: Retailers.
Scott: Yes. They're trying to create a product to attract customers, to get them to buy their product.
Pat: Because they make a management fee on it.
Scott: Yes. And the more people who buy their ETFs, the more money they make.
Pat: That's right.
Scott: Pretty simple.
Pat: Right? And so, that's why they're fads. Because, when the marketplaces, when they believe that there's a gap in the marketplace that needs filled, they will create a product to fill that. And actually, they can do it relatively easy. You can stand up a mutual fund in less than a day. Couple days. You could stand up a mutual fund in a relatively short period of time.
Scott: Is anyone still creating mutual funds? [crosstalk 00:12:13]
Pat: Or ETFs. But you could stand them up pretty easily. So, I read this article about these anti-woke funds, and I thought, "Oh, my gosh. Again." Wall Street has created just another product to feed whatever short-term...
Scott: Anti-woke. [crosstalk 00:12:29] Where do you draw the line there?
Pat: Yeah.
Scott: I'm sure people... Anti-woke, everyone's gonna have a different opinion on what that is.
Pat: Yeah. The Americans conservative values ETF.
Scott: Yeah.
Pat: There we go. It's [crosstalk 00:12:44]
Scott: And, look, [crosstalk 00:12:45] there's another way to do... If you have maybe a couple hundred thousand dollars or more to invest, instead of buying a fund, you can buy...you can create your own index, and exclude whatever companies you want from that. And that way, it's designed specifically for you. So, if there's a particular company that you loathe... That might be. Like, "I do not like the values of this particular company, and this particular CEO. I do not wanna own that." You can have a direct index. You create your own index, that you buy, essentially, most of the companies in the S&P 500, if that's your index, to mirror that, then you say, "I wanna exclude this company and that company."
Pat: And it's really easy to do today.
Scott: Correct, with technology.
Pat: So, Scott, I helped write...
Scott: That makes tremendous sense, as opposed to putting in some ETF that, who knows who's deciding what are your values [crosstalk 00:13:40]
Pat: So, 20-plus years ago, I helped write the investment policy statement for the Catholic Diocese of Sacramento. And you had to follow the bishop's guidelines of investing, which is, there were certain companies or industries they absolutely would not invest this endowment in. So, I remember, we went to the marketplace with this investment policy statement, and there was two companies that could fulfill...
Scott: Yeah.
Pat: ...because it was so complicated. This is 20-plus years ago. It was so complicated to do. And it was expensive.
Scott: Easy now. Easy, and low-cost today.
Pat: It was expensive, and hard to do.
Scott: So, easy for an endowment, and low-cost, easy for an individual and low-cost.
Pat: Easy to do. Right? I just remember sitting and interviewing these people, and the investment companies that specialized in endowments for Catholics and religious charities. And I said to the guy, "This is unbelievably expensive." And he said, "Oh, well."
Scott: That's right. [inaudible 00:14:48] You want this or don't you want it? [inaudible 00:14:50] the only game in town.
Pat: It was... And you could have your own investment policy statement, and exclude whatever companies you want. So, you don't have to buy the American... What is it called? American conservative values.
Scott: Like, I personally don't exclude any particular companies, but I do remember, years ago, I had a family member ask me, he was looking at buying a bar. Like, a bar bar. Not like a brewery, that serves food, stuff. Like, a bar. You just go there to drink. And I'm like, "What? Why? Why do you want to invest in it? Why would you...?" Like... And I said, "I don't care what the business prospects are. Like, I personally would not want to invest in just a bar." That's just my personal...right? So, I wouldn't have invested. I don't care what it is, because with that particular family member, it wouldn't have happened, but...
Pat: Oh, he wanted you to put money in it.
Scott: He wanted me to invest.
Pat: Did he ever buy the bar?
Scott: No. [crosstalk 00:15:48] He didn't get my money.
Pat: My dad bought a bar when we were little. My mom was so mad.
Scott: Of course, she was mad. What could go wrong?
Pat: I was probably in the second or third grade. He came home and he had bought a bar.
Scott: What could go wrong? Sounds like a great idea. "Well, look, honey, I get to save money on my alcohol consumption."
Pat: We didn't own it very long.
Scott: I'm assuming he bought it without telling her.
Pat: That's right. Oh, you knew my dad.
Scott: Yeah. Oh, life is beautiful. It really is.
Pat: It really is. Just imagine, if I came home and told my wife I bought a bar, she'd leave me. My mom was a saint.
Scott: Life is interesting, though.
Pat: It wasn't just a bar. It was, like, the grungiest bar you've ever seen. Like, in Azusa, California. All right. Let's go.
Scott: All right, yeah. Let's take some calls here. By the way, I like... You could either look back at your seasons of life and think about the pain, or you could just... Life's so beautiful. It's such an interesting journey, and all those things that we go through help create us to who we are today, and...
Pat: Oh, yeah.
Scott: You know, it's [crosstalk 00:17:05]
Pat: Yeah. Yeah. Yeah.
Scott: ...an interesting journey.
Pat: [inaudible 00:17:07] when I had the sepsis and I was really sick, the doctor said to me, after I kind of could figure stuff out, he said, "You know, you were really pretty close to death." And I'm like, "Eh, it was a pretty good ride." What are you gonna do?
Scott: Well, you fight it.
Pat: Well, no [crosstalk 00:17:26]
Scott: And here, you're here. Yeah.
Pat: No, no, no. Well, you don't give up, but... Anyway.
Scott: All right. Let's take some calls. If you wanna join us, you can send us an email, and we'll set up a time to take your call, questions@moneymatters.com. We're talking to Amy. Amy, you're with Allworth's "Money Matters."
Amy: Hello.
Scott: Hi, Amy.
Amy: Hi.
Scott: Well, how can we help you?
Pat: How can we help?
Amy: Oh. I'm sorry.
Scott: No worries.
Amy: Yeah. So, I am looking at... I have some questions about SBLOCs, the security-backed line of credit, the risks, the benefits.
Scott: Okay.
Amy: [crosstalk 00:18:03] and I'm looking to buy a home, after renting a bunch of years. I'm 66 years old, and I'm not sure it's a wise idea for me.
Pat: Okay.
Amy: So, the questions would be...
Scott: Tell us about your situation. So, you're 66. Are you still working?
Amy: Sixty-six. I work full-time. I live in the Bay Area, San Francisco Bay Area. I rent now. I've been renting for about seven or eight years since I've been divorced. And I know I'm in an expensive area. I'm willing to move, although I prefer a coastal region. I'd move to the Northeast, but I'd love to stay in Northern California. My idea is to work a few more years, maybe to 70, so that I can buy a home relatively soon, with a large down payment, and start paying down the mortgage, so that once I am retired, with no income, I will have a more workable monthly amount to pay.
Scott: And do you have family near you where you are now?
Amy: I have two children in their twenties. One's in New York and one's in LA, so...
Scott: Okay.
Pat: And tell us about your...
Scott: Who knows where they're gonna be, right?
Pat: Tell us about your financial situation. One question before we get there. Are you in a rent-controlled situation?
Scott: Like, in the city?
Amy: No. No, I'm not.
Scott: Okay. Okay. And how much is your rent?
Amy: It's about $2,800 a month. I have a two-bedroom. So...
Pat: Okay. And how much do you make?
Amy: I make about $130,000 a year. And as far as my other assets go, I have about $100k in liquidity. I have about $320,000 in investments. I have about $400,000 in retirement funds. So, overall, to my name, I have about $800k, altogether.
Pat: And what does your social security benefit look like at age 70?
Amy: $3,500 a month.
Scott: And do you have a pension or a pension from your previous marriage?
Amy: No, not really. No.
Scott: And any other debts to speak of?
Amy: No.
Pat: How long have you earned this $130,000?
Amy: Since 2022. And before that, I made about $100,000, hundred and [crosstalk 00:20:32]
Pat: So, you've been in the workforce the whole time?
Amy: Yes. Well, no. I took time off to have children. I married late, and had children late, so I took about 10 years off.
Pat: Okay.
Amy: And so [inaudible 00:20:43] back into the workforce reduced my income. So, since 2016, I've moved up from about $60,000 to $130,000.
Pat: And your job's secure?
Scott: I'm sorry, when were you making $60,000?
Amy: In 2016. I jumped back [crosstalk 00:20:59] yeah.
Scott: Okay. Yeah. Good for you.
Pat: And where did you get this idea of the security-backed line of credit?
Amy: Well, instead of liquidating, you know, investments, I save on capital gains, I keep my investments. That seems like a nice idea, although I understand it has to be a variable rate, for insurance, so that scares me.
Pat: And, but, did an investment advisor or someone at a brokerage firm tell you about this, or did you find out about it on your own?
Amy: I found out about it on my own.
Pat: Okay.
Amy: And also, correct me if I'm wrong, but I understand there's some flexibility in how this money is used. It can be used [crosstalk 00:21:38]
Scott: Oh, yeah.
Pat: You can do anything you want with it. You can [crosstalk 00:21:39]
Scott: Essentially, what this is, you are pledging your securities in exchange for a loan. So, they say, well, we're not just gonna take Amy's word for it that she's good to pay us back. Tell you what, Amy. Give us your savings, your securities here. And that way, if you don't pay us back, we're just gonna take your securities and keep them for ourselves. That's the collateral, right?
Pat: And so, you can do this as a margin loan, or you could do this as a security-backed line of credit, which is typically a little bit less expensive than a margin loan.
Scott: A tad.
Pat: A little bit.
Scott: But, and regardless, you are pledging your stocks, ETFs, whatever's in your investment account. And the challenge, the concern there is one, that you've got this interest that needs to be paid, or it gets, it accumulates. And, if the markets go down, or when the markets go down, if you don't have enough in the account, they can do what's called a margin call, which means, "Hey, Amy, the value of the account went down too much. Either you give us some more cash, or we're gonna be forced to sell some of your securities."
Pat: So, these are perfect if they're short-term, right? I've used them myself. I've used them for clients. In fact, I've used, in the last two years, I used them for clients twice, to purchase a new home while the other home was in escrow or about to be sold. And so, I typically wanna minimize the exposure to what I would think to be less than six months. And even then, I don't use up all the margin, which means...
Scott: Because you never know when the next bear market's coming.
Pat: Yeah, which, even then, so, margin, if they said, "Okay, you've got this..." what did you say, investments, $320k? You should be able to get $160k out of it. I would, if I was your advisor, I'd say, "Okay, we're gonna do this. We're gonna do it for the short term, but I probably would limit this at $100,000, maybe, or $120,000, so you don't get a margin call.
Scott: So, let's back up here. So, your objective is to get another house, and you'd love to have a house paid for, so you don't have to worry about that. And you'd love to be somewhere on the coastal side, preferably Northern California. Is that what you said?
Amy: Yes. Well, I'm just trying to find something I can afford [crosstalk 00:23:56]
Scott: Yes. So...
Amy: I don't, you know, I can't... It's an affordability [crosstalk 00:24:01]
Scott: Yeah, I get it.
Pat: Oh, 100%. [crosstalk 00:24:03] California. Well, forget the Bay Area. I mean, unless you wanna move up to the north coast of California, with, they're gonna be less expensive. But anything south of, let's say... You know, we're from California, so we know the geography. Anything south of Bodega Bay is gonna be phenomenally expensive, on the coast.
Amy: Uh-huh.
Scott: How much will a home cost you?
Amy: Well, I mean, I'm seeing very small properties for as low as, you know, $450k. But they're, you know, they're not necessarily in a great neighborhood.
Pat: That's right.
Scott: Yeah.
Amy: They're not in great shape. They're not, you know, they're not... And then the HOAs, the condos, are very high, too. So, you know, what I'm looking at, really, that's available now, are mobile homes, and very, very [crosstalk 00:24:53]
Scott: So, one thing that you may not have thought about. And I'm just thinking, Amy, you're my sister, [inaudible 00:24:59] like, what's some good things to do here? One thing to consider is using a reverse mortgage to help purchase a house. So, let's say you had a house of...
Pat: Six hundred.
Scott: ...six hundred. You took the most of your cash, you took a good chunk of your investment portfolio, leave your retirement funds, and then you use a reverse mortgage to fund, I don't know, $250,000 or so, or $300,000 of the house. And the way those work is they're...a reverse mortgage, it's not like you are giving up control of the house. You still own the house. It's just, the mortgage, you're not required to make the interest payments on it. They just accumulate over time.
Pat: So, you're basically, you're pledging the equity in the home to actually pay off the interest payments over time. That's exactly how they work.
Scott: And if over the long term, the real estate appreciates faster than the interest on that loan, there's still equity in the house, even if you lived in it 30 years. And if a real estate market goes horribly wrong for a period of time, the federal government guarantees you can stay in the house until the day you die.
Pat: I would not use a security-backed loan, under no circumstance.
Scott: I mean, I really think you should consider...
Pat: I've got one more for you, Scott.
Scott: Okay.
Pat: What's your social circle like where you live? Is it big, small?
Amy: It's fairly small. I've had to move further out from the Bay Area for my job. So, you know, and as I'm getting older and I'm single, it's not as vibrant as it used to be.
Pat: Okay. Have you ever thought of moving overseas?
Amy: Yes. And that, you know, I love to travel, and, you know, again, my kids are here. They're in their mid-20s. But I love to travel. And if that's more economical and safe, and makes more sense, I'm clearly open to it.
Pat: There are... I had dinner with a couple last night that bought a second home in Spain. This is the third person I know that bought a second home in Spain.
Scott: One of our financial advisors at Allworth has a home in Spain.
Pat: And his buddy has the home right next door to him. [crosstalk 00:27:09] Yes. And the reason is, is they could get A-plus properties, on the beach.
Scott: Yeah, yeah, yeah.
Pat: And what you wanna look for is healthcare. [crosstalk 00:27:25]
Scott: Make sure you have access to it.
Pat: You have access to it, and it's affordable. Political stability in that particular country. And then affordability. So, my son's, my oldest son studied in Quito for five, six months.
Scott: Where's Quito?
Pat: Ecuador.
Scott: Okay.
Pat: And I went to visit him, and he brought me to Gringoville. They call it Gringoville. You would have thought you were in any suburb in the United States. It was nothing but Americans, and most of them living on social security, and that was it. Because I talked to a couple of them. So, I would, I'd, you know, it depends on how adventuresome you are. But I would certainly consider that.
Amy: Okay. Yeah, Portugal seems to be the place to go these days.
Pat: Yes. It, Portugal was... In fact, not that we travel the world, but we go on two big trips a year. We ended up in a part of Portugal, outside of Lisbon, that was, it looked like Carmel, with all the tourists and the Americans.
Amy: Well, this is great. Yeah, I had a feeling these SBLOCs were a little crazy and too risky [crosstalk 00:28:39]
Pat: Yeah.
Scott: They're too risky.
Pat: Yeah. And you cannot afford to live in coastal California. I mean, that's just the reality of it.
Amy: Yeah. Yeah. So...
Scott: I do think, to Pat's point, your social, like, finding out where's the best place for you, and sound that you've got two kids that, LA and New York, they're, probably 10 years from now, they're not gonna be in LA and New York, maybe, but you never know, right? But having the flexibility, where you can still afford to visit them periodically, I think, obviously, that's really important to you, I would assume.
Amy: Yes.
Scott: And it's thinking through those things, and maybe, in a perfect world, you have a home that's paid for, it just provides some stability long-term. But you're 66. This isn't the retirement that you had originally envisioned for yourself, but this is where you are. And I think really getting some clarity on what's going to be fulfilling for you first, and then working backwards on what options we have. And I don't like the idea of borrowing against your securities.
Pat: No, no, no, no.
Amy: Okay. Thanks. I will look into what a reverse mortgage can do.
Scott: Yeah, reverse mortgage purchase.
Pat: Yeah.
Amy: Reverse mortgage purchase.
Scott: Yeah.
Amy: Well, thank you so much. This has been hugely helpful.
Scott: All right.
Pat: And, listen, call us anytime. And if you buy a place in Spain or Portugal...
Scott: Well, how about rent something there for awhile? You might not...
Pat: You might wanna rent first. [crosstalk 00:29:59] you wanna rent.
Scott: I remember... I appreciate the call, Amy. I had a client years ago, it was in Costa Rica or Guatemala. I'm trying to remember where he lived, somewhere in Central America, but he was, like, a block from the beach. It was so cheap. He spent less than his social security. It was so cheap for him to live there.
Pat: Was he happy there?
Scott: He loved it. Well, but he came back eventually. I don't know why he came back, but whatever. I mean, you know, you're far away from family, but there's community. To your point, you can go to pockets where they're...
Pat: Yeah. Well, that's why I asked how big the social circle is. Because the bigger your social circle where you actually live, the less likely you're going to pull up and move. The harder it is.
Scott: My wife and I have lived in El Dorado Hills for 30 years.
Pat: Yes.
Scott: You have as well.
Pat: Same house.
Scott: And I have no desire to leave, actually.
Pat: I know.
Scott: Because I enjoy the social circle I've got.
Pat: That's right.
Scott: Anyway, let's continue on. We're talking to Dawn. Dawn, you're with Allworth's "Money Matters."
Dawn: Hi there. Thank you for taking my phone call.
Scott: Yeah. Glad you joined us.
Dawn: Okay. Here's my question. I own a home in Bonita, Florida, worth $500,000, and I have stocks worth $500,000. And I am interested in getting, moving, move, buying a house with my fiancé. I don't really have a job. It's, like, a part-time thing. But I, my portion would have to be $250,000. Should I take it from my stocks, or should I sell my house that I own, and get the money from that?
Scott: Do you live in this house in Florida?
Dawn: Yes.
Scott: So, what do you owe on the house?
Dawn: Nothing. I own it.
Scott: And so, you have a fiancé. You guys wanna combine... Why would you wanna keep the house in Florida?
Dawn: Well, I could probably rent it out. You know, it's a nice little house. I bought it for, like, $300,000 and now it's worth $500,000.
Pat: Okay. And so, and that was the second question. How old are you?
Dawn: I am 55.
Pat: And no income to speak of.
Dawn: Not really.
Scott: And this might be a little personal, but we're gonna ask it anyway. Is your fiancé in decent financial shape?
Dawn: Yes.
Scott: Okay.
Pat: Great financial shape?
Dawn: Yeah. I think he's good. I mean, he's good. He's a lot better. Yeah, he's good. [crosstalk 00:32:39]
Pat: I'd sell the house.
Dawn: You'd sell the house. [crosstalk 00:32:43]
Pat: Yeah. And let me tell you why.
Scott: There's a couple reasons. Yeah, go ahead.
Pat: Right. That's just not a flippant "why." One is, because it's a primary residence, there's no tax on that gain. Right? But if you converted it to a rental, then if you rented it three out of the last five years...or is it two out of the last five years?
Scott: I always forget [crosstalk 00:33:01]
Pat: Two or three out of the last five years...
Scott: Whatever it is.
Pat: Then...
Scott: It becomes investment property.
Pat: Yeah, it becomes an investment property, and your basis is $300 grand. So, let's just say you converted it, and then sold it five years from now. It's a rental. You sold it five years from now, and...
Scott: You gotta pay the capital gain [crosstalk 00:33:18]
Pat: You gotta pay the capital gains. But if you sold it today...
Scott: You can avoid it.
Pat: Yeah. And you'd be better off, actually, if you wanted an investment property, is to sell this, turn around and buy an investment property to reset your basis, and then turn it into investment property.
Scott: Which may not be a bad idea.
Dawn: Okay. So, it's a primary house, but there's no capital gains on it [crosstalk 00:33:37]
Pat: That's right.
Scott: That's right.
Pat: That's right.
Dawn: Ah, that's very interesting. [crosstalk 00:33:40]
Pat: Right. And so, it's a tax savings to you. It's somewhat of a tax savings. Probably, well, you're in Florida, so probably $40,000.
Scott: I mean, your options are, to come up with $250,000, are essentially, you either take a mortgage on your house, which, don't really like that idea, or you sell some of your stocks...
Pat: Which, you have... How long have you owned the stocks?
Dawn: Different stocks for, like, I don't know, probably, like, four years? Five years? Five years.
Pat: So, you've got gain in those stocks you'd have to actually pay tax on.
Dawn: Correct:
Pat: So, the easiest...
Scott: And do you have a 401(k) or IRA or that sort of thing?
Dawn: No. Nope.
Pat: So the easiest and the most tax-efficient place to get the money is the house. And then, I think I'd take that $250,000 in gain, and I'd put it in a high-yield money market, and just see how it is living... How long have you been dating this guy?
Dawn: Three years.
Scott: You live together now?
Pat: Have you ever lived with him?
Dawn: He's living with me now.
Pat: And it's working out?
Dawn: Yes.
Scott: Apparently. That's why she's calling.
Pat: Well, I don't know.
Scott: Otherwise it'd be, "Hey, how do I get this deadbeat out of my house?"
Pat: Yeah, you're like, "Oh, listen. You just..." Yeah, I do... I'd sell that house. And then I'd probably put the money in...
Scott: And before I got married, I would have either a trust that protects your assets, or some sort of prenup on this.
Dawn: Okay.
Pat: Yeah.
Scott: Really.
Pat: Before I actually bought the house, with a fiancé, I would actually visit an attorney.
Dawn: Okay.
Scott: And you can do it in an estate planning, so it's part of your... Do you have children?
Dawn: Yes.
Scott: Yeah.
Dawn: Two teens.
Scott: Yeah. Okay. God bless you. So, you can do this as part, with...it's just part of your estate planning, just to... You wanna protect the assets that are yours, that remain yours.
Pat: And keep it separate, including your deposit, and [crosstalk 00:35:33]
Scott: I mean, even it can be unintentionally, like, let's say somehow you were killed in an accident, and you're married, and everything goes transferred over to your new husband.
Pat: You unintentionally disinherited your own children.
Scott: Yeah.
Dawn: How do you do that? How do you... I guess that's with an estate planning [crosstalk 00:35:50]
Pat: Yeah. Estate planning attorney. So, you wanna... So, sell the house, take the money, put $250,000 into a high-yield money market. I'd just kind of wait on that. I wouldn't be in a hurry to invest that, but I would spend money on a quality attorney, to make sure that this money is considered separate, and the home is titled correctly, so... And you might wanna put a life estate on it, or, he put a life estate for you, which means if he dies first, you have the ability to live in it for the rest of your life, and then it passes to the heirs. And you might wanna do the same for him. So...
Dawn: Okay.
Scott: Or not.
Pat: Or not.
Scott: Or not.
Pat: Yeah, that's a good point. They're just...
Scott: They're complicated.
Dawn: Okay.
Pat: Yes.
Dawn: [crosstalk 00:36:33]
Pat: But that's something an estate...
Dawn: [crosstalk 00:36:34] I've got kids and he's got one kid, right.
Pat: Yeah. That's something an estate, that you wanna have a discussion with an estate planning attorney about.
Dawn: Yeah. They'll take care of that part. So, yeah. So, we're looking at maybe a house that's worth about a million dollars.
Pat: Oh.
Dawn: So, he takes care of everything else. I just put in that part. [crosstalk 00:36:52]
Scott: And you'll get a mortgage?
Dawn: [crosstalk 00:36:56]
Pat: There'll be no [inaudible 00:36:56]
Scott: He's putting in $750,000, or you're each putting in $250,000 and getting the mortgage for $500,000?
Dawn: I don't know. I don't know what his part of the plan is.
Scott: Well, I'd wanna get some clarity on that.
Pat: That's so important. Yeah. Yeah.
Scott: You're gonna want some clarity on that.
Pat: Yeah. Yep. Yep. You wanna know how much of the house you own, and what the mortgage is.
Scott: I mean, I hate to say it. I would really wanna see if, as a financial advisor, it's like, you'll wanna see his financial situation, what debt's there, and [crosstalk 00:37:25]
Pat: I don't care what kind of car he drives or how nice he dresses.
Dawn: He doesn't dress great, and he doesn't care about cars.
Pat: That's a good sign.
Dawn: And he does pretty well. Yeah, he does pretty well.
Pat: Yeah, that's a good sign. It's a good sign. It's a good sign. Those are all good signs.
Scott: I know it's hard when you're in love and all that, and you [crosstalk 00:37:43]
Pat: Yeah, I would, I'd wanna peek into the financials.
Scott: Yeah. Yes.
Dawn: Okay.
Pat: Yeah.
Scott: I would really wanna find out his plan.
Dawn: Well, I thank you so much.
Scott: All right, Dawn. wish you well.
Pat: All right. Appreciate it.
Dawn: Thank you so much for helping. I really, truly appreciate it. [crosstalk 00:37:54]
Pat: All right. Take a look at those financials. Dawn, if you were my little sister...
Scott: Oh, you would insist upon it.
Pat: Oh, I would. Wouldn't you? I'd say, "You're out of your mind."
Scott: Yeah, of course. Your little, your sister? [crosstalk 00:38:02] sisters?
Pat: Oh, yeah. Yeah.
Scott: At this stage of your life?
Pat: Yes. Which is...
Scott: [crosstalk 00:38:06] the problem. Oh.
Pat: We've. Let's go.
Scott: We don't have a long enough program to actually talk about all the ones we've seen that blew up.
Pat: I remember the widow that, oh my gosh, married this young lady with three kids. He was broke within four years.
Scott: Yeah. On both sides. I mean, not just a male/female thing. It's both.
Pat: Oh, I've seen both sides.
Scott: Yeah. Yeah. Anyway, you gotta be careful there.
Pat: Anyway...
Scott: We've got...
Pat: That's sad just thinking about it.
Scott: I know. [inaudible 00:38:42] Well, you know, it's interesting. Like, I mean, divorce is just horrible for your family finances.
Pat: Gray divorce especially.
Scott: Yes. It just...oh, it is. It's just, and it's hard to get restarted and all that. And the last thing you wanna...fall in love with someone who's gonna drain out the finances...
Pat: Yeah.
Scott: ...and then what happens five years down the road, and all that? So...
Pat: Yes. Yes.
Scott: ...that's what we've seen. Okay.
Pat: So, there's... Hey, one more on that point. When I... And I know you do the same. When I talk to people, in order to get the most empathy out of the situation, I try to pretend as if they were a family member.
Scott: Yeah. Because I don't know anybody. Right?
Pat: So, you wanna, you can't, you've gotta, you have to include the emotion in there. You can't give advice with lack of emotion. You have to have the empathy.
Scott: Yeah. I always picture them as my sister, my parent, my child...
Pat: The brother-in-law I don't really like.
Scott: Well, if they're real jerks, then [inaudible 00:39:39]
Pat: [inaudible 00:39:41] let's go.
Scott: All right. We've got a, our guest today. Victoria Bogner has joined us. Victoria, she's been on the program a number of times. She's our head of wealth planning, and she's gonna talk about... I don't know what she's talking about. Victoria, thanks for joining us.
Victoria: Absolutely. Good to be here.
Scott: Yeah. What are we discussing today?
Victoria: Well, this is a really fun one. So, we have clients, they're both 62, and they came to us ahead of selling their family business, and they were selling it for $10 million. So, this has been a fun case to work on.
Scott: And is this a business that they started from scratch, and... I mean, have they had high income over the years, a high lifestyle, or is this, like, life-changing?
Victoria: This is gonna be pretty life-changing. This is a business that they started themselves, a business where they had contracts with builders to sell them the air conditioners and furnaces. So, very, very successful business.
Scott: Okay.
Pat: So, in a blue-collar field.
Victoria: It's a blue-collar field, and this is very common...
Scott: There's a lot... There's a lot...
Victoria: ...that we see... Yeah. Yeah. That the blue-collar businesses that they started [crosstalk 00:40:58]
Scott: Hundreds of thousands, if not millions of these [crosstalk 00:41:00]
Pat: And are they, before you go on, Victoria, are they selling to a roll-up?
Victoria: Are they selling to, I'm sorry, say that again.
Pat: Are they selling to a roll-up? A private equity...
Victoria: A roll-up.
Pat: A private equity-backed...
Scott: Some other...
Victoria: Oh, no. They're actually selling it to another investor, that's going to actually take over the business.
Pat: Okay. [crosstalk 00:41:19]
Scott: Okay.
Pat: Perfect. Perfect.
Scott: So, tell us the situation. Thanks.
Victoria: [crosstalk 00:41:22] perfect situation. Yeah. So, what's so great about this is they came to us before the sale, which gives us a lot more flexibility in what we can do than coming to us after the sale, and with a lump of cash, right? So, they're, considering their situation, they just needed $240,000 a year in spending. They wanted to support their church. And of course, they wanted to pay as little in taxes as humanly possible, like all of us. So, this is what we recommended and what we ended up doing. First, we moved 3 million of their LLC units into a charitable remainder trust, which is a really powerful vehicle, because we avoided capital gain on that part of the business, it provided them with about $150,000 of income, every year for life, and it established a future gift to their church of about a million dollars, which gave them a huge tax deduction. So, [crosstalk 00:42:22]
Scott: So, with that... So, their goal was to help their church, so that...essentially, they gift $3 million worth of their business, they get a tax deduction of a million dollars that they can use over the next five years...this year in the next five.
Victoria: Mm-hmm. Yeah.
Scott: And then they [inaudible 00:42:39]
Victoria: [crosstalk 00:42:39]
Scott: And they turn...and then they get the income off...
Pat: Yeah.
Victoria: That's correct.
Pat: Trifecta.
Victoria: And they avoided paying the capital gain.
Pat: That's, which, trifecta again. That's why it's the trifecta. The charity, the income, and the capital gain. Tri, three.
Scott: Trifecta.
Victoria: Exactly. But, here's the key. You gotta do it, if you want to avoid those capital gains, you gotta do it before you sell the business.
Pat: Oh, correct.
Scott: And, it's not always that quite clear, depending on the structure, S corp, LLC, LP, C corp, we don't always get a full deduct...full...
Victoria: Correct. Yeah.
Scott: We can't always avoid the capital gain tax.
Victoria: [crosstalk 00:43:15] with an S corp, there's a nuance there, for sure...
Scott: That's right.
Victoria: ...but their business was an LLC, so this worked out great. So, the next $2 million of it, they just took it as cash, at closing. So, that covered the first year's tax bill of around, you know, half a million dollars, and set aside a couple of years' worth of living expenses, and then gave them a buffer for any near-term needs that they had after the business sale. And then the remaining $5 million was actually a five-year, 5% installment note. So, each January, the note gives them a million bucks of principal, plus 5% interest. So that spread that remaining capital gain across five tax years. [crosstalk 00:43:58]
Scott: And how concerned were they, Victoria, how concerned were they on the new operator's ability to pay those payments [crosstalk 00:44:05]
Pat: Yeah. The credit quality of the operator.
Victoria: Well, this particular person that was buying this had their own successful, similar business.
Pat: Perfect.
Scott: So, it's...
Pat: Beautiful.
Victoria: So, there was really no issues [crosstalk 00:44:18]
Scott: It wasn't like where, it's the guy or the gal has been running the business for the last eight years, let's trust them to run it perfectly in the future.
Pat: It may have been a competitor. Was there any real estate involved in the ownership?
Victoria: Yes. They did own their warehouse. So that was part of it.
Pat: And so, did they sell the warehouse, or did they lease back to the buyer?
Victoria: They planned on just leasing it back for now.
Pat: Perfect.
Victoria: Yep. Yep. So, that worked out great. So with all of that structure in place, we have some really powerful tools, where we could run the numbers to verify their tax brackets, their deductions, how it impacted their Medicare surtax exposure. We were able to aggregate their accounts and figure out what the absolute best way was to allocate their accounts, so that their cashflow was stable, but they weren't paying a lot in tax. And then we're able to figure out, okay, as we are getting this income from the installment sale, and that's going down over time, then they of course had a bunch of tax-deferred accounts, because they were good savers to begin with. So, between their ages 63 and 69, we're gonna be able to convert about a million dollars over into Roth accounts. And so that's gonna lower their RMDs, or required minimum distributions, by about $45 grand a year, and then shift more of those assets into the tax-free bucket for their kids.
Pat: Brilliant.
Victoria: Yeah.
Pat: So, that... And, so, you actually, we use a specific, specialized software to do this, that I probably would not be able to find online if I was trying to do it myself.
Victoria: No, no. This is software that's extremely sophisticated. It's actually a suite of software that we combine, to be able to look at every facet, stress-test the portfolios. And then we use them in a way where we can look at every angle of what we're recommending, and figure out, okay, if we do this, how does it impact everything else, and what's going to be the best course of action if we make this decision? Which is something that an average investor wouldn't be able to do on their own.
Pat: So, on the sale of the business, right? On the sale of the business, you have a five-year note, but it's an experienced operator, with a successful business [crosstalk 00:46:38]
Scott: It's $5 million up front, and the next five [crosstalk 00:46:40]
Pat: And what's the interest on that?
Scott: Five percent. Five, five [crosstalk 00:46:43]
Victoria: Five percent.
Scott: Another trifecta.
Pat: So, five, five, five is the other trifecta. Did you have any role in setting the price of the business and the interest rate that the IRS would actually accept as reasonable to carry that note?
Victoria: I personally didn't. They had somebody that valued the business for them.
Pat: Okay.
Victoria: And then they had somebody else actually transact the sale and do that part of it.
Pat: Okay.
Victoria: So, our role was really in recommending how to set up the proceeds they were gonna get from that sale, ahead of the sale, so that they could maximize...
Scott: Yeah.
Victoria: ...their cashflow, their security, and also minimize tax.
Scott: And Victoria, did they have a financial advisor before come and talk with you?
Victoria: They had a financial advisor that I'm sure was amazing for the stage of life that they were in, but that advisor was not well-equipped to handle what could be done with this business sale. [crosstalk 00:47:37]
Scott: Yeah. That's super common. Like, people have a financial... Super common. People have had a financial advisor for years. Maybe it's the sorority sister from college or whatever. Like, they've known them a long time, or... And they're fine on getting the 529 plans and help them with the 401(k), and maybe the Roth IRA. But when it comes to advanced planning like this, oftentimes it makes sense for someone to upgrade their advisor.
Pat: [inaudible 00:47:57]
Victoria: Yes. That's right. And that's exactly what happened.
Pat: Was this done digitally, or have you met with these clients in person?
Victoria: This was all done over Zoom. So, we did not meet with these people in person yet. Now, once everything, you know, the dust settles from the sale and everything, we have advisors all over the country. So they'll be working with an advisor that's very close to them, and we'll be able to meet them in person.
Pat: Which is one of the benefits as we've grown over the last few years, is to get to this really sophisticated... We can serve clients all the way through to the ultra-wealthy, with the sophisticated tax planning and investment analysis.
Victoria: Yeah. What's really great as being the head of the advanced wealth planning team is that it's not just the advisor working with the client independently. They have an entire team of experts behind them, that can figure out what these complex situations call for, and then see that through to the end.
Pat: So, and this is just how it's structured. So, if someone, let's say in Bonaire Park, California, which is outside of San Francisco, meets with an advisor, and it's very complicated, that advisor kicks that case upstairs, to the advanced wealth planning team.
Scott: Or downstairs. We keep them in the basement.
Victoria: Exactly. They contact our team, and we work really closely with that advisor to formulate the best plan for the client.
Pat: I am so glad you joined our firm. How long have you been with us now?
Victoria: It's been a blast.
Pat: [inaudible 00:49:33] three years now? Is it three years?
Victoria: No, it's been two, just a little over two years. [crosstalk 00:49:38]
Scott: Oh, wow. And Victoria joined us through... A lot... Allworth has grown quite a bit just organically, by new clients joining us, but also, one of our strategies of finding the best talent in the country is by having firms partner up with us. So, Victoria was CEO of a firm. She wasn't looking for a job. Her firm folded in and became part of Allworth. And now she heads up our wealth planning. She's our head of wealth planning, so...
Pat: Yeah.
Scott: Thank you for taking some time and...
Victoria: Yeah. We're doing really cool, exciting work.
Pat: You sound so excited.
Scott: [crosstalk 00:50:11] We were talking, it's funny, Pat and I were talking before we started on the show today, just how technology has made it so that the kind of planning that was done for billionaires before can now be done for people with 10 million bucks.
Pat: Yes.
Scott: Or a million dollars.
Victoria: Yes. The point of entry has really gotten a lot lower.
Scott: Yeah. It's pretty cool.
Pat: Yes.
Victoria: Mm-hmm.
Scott: It's pretty cool the kind of stuff [crosstalk 00:50:34]
Pat: I'd like Victoria as my advisor, at least for a period of time. Right?
Scott: Of course. Yeah. Like, to formulate the plan? Well, I think Victoria's job now is to help along the team, and help with all these cases, make sure that we, looking at every available option, and so that the clients can make the best decision that's gonna work for them, so... All right. Well, thank you.
Pat: Thank you, Victoria.
Scott: Thank you, Victoria. Yeah.
Victoria: Thank you. Thanks for having me as always.
Scott: Yeah. It's always good having you. She does sound excited about what she's doing.
Pat: Yeah. She's smart, though. She's really smart. It's like, someone asked me, "Do you have an MBA?" I'm like, "No, but there's a bunch of them I work with." So I get to lean on that. My job is to take all the credit for the work.
Scott: Perfect. Yeah. Hey, as we're wrapping up, I wanna let you guys know, we have a July webinar that is really designed for those with concentrated stock positions. So, that just means you have a high percentage of your net worth in one particular company, one particular stock. So, this is advanced tactics for concentrated stock positions. Simone Devenny, who's Allworth's head of private wealth strategies, is going to be the presenter on this. It's a very specific webinar, but it's really for executives, business leaders with RSUs, and if you don't know what that is, then you probably don't have any. Restricted stock units. So, during this, you're gonna learn some tactics to unwind your positions without taking a huge tax hit, and discover five ways to unlock your portfolio's hidden potential. To join Wednesday, July 23rd at 10 a.m. Pacific, Thursday, July 24th at noon Pacific, Saturday, July 26th at 9 a.m. Pacific, for all information and to register, go to allworthfinancial.com/workshop. Been great being with you. Scott Hanson and Pat McClain of Allworth "Money Matters." We'll see you next week.
Announcer: 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 here.
Pat: Pat McClain. Thanks for joining us.
Scott: We're gonna talk about financial matters, answer some questions from you, talk about some good financial planning stuff. That's our hope.
Pat: You be the judge.
Scott: Our objective, by the way, our objective with this program is to help educate you in matters that are of importance in your life, your specific life, so that you can make wise decisions of what you think is best for you and your family.
Pat: You.
Scott: You. And we're all different. We have different hopes and goals. We have different objectives in life. We have different risk tolerances. We have different design. I think we're all unique. And no two financial lives are the same either. So, they're all unique. And so part of it is helping you come up with what's gonna be best for you and what you're trying to accomplish in your life.
Pat: And, quite frankly, it's, to try to, I mean, it's a successful show if some of the biases that you hold about investing are actually shaved or slightly changed as a result of this program, about investing and tax planning.
Scott: I hope so.
Pat: Yeah. Because we all walk into these investments with biases.
Scott: Absolutely.
Pat: Right? And...
Scott: And if you're spending time on Twitter or X or whatever it is, those algorithms are gonna continue to load articles that confirm with your existing bias.
Pat: That's exactly it.
Scott: Confirmation bias. Then you're just like, "Well, everyone seems to believe in this is the right thing to do, so it must be."
Pat: Oh, I hate that word, "everyone." I hate that word.
Scott: Most people, and [inaudible 00:02:13]
Pat: Well, no, but that's what, we have a tendency. It's like, "Everyone believes this," you know, like...
Scott: So, maybe I'm the wrong...if I don't believe that, something's wrong with me, and I should get with the crowd.
Pat: Correct.
Scott: Yeah.
Pat: Yes.
Scott: That's human nature too.
Pat: Yes. It's, like, we look for confirmation bias, so...
Scott: And what I think is, what I love the most about our profession, Pat, the financial planning, is it's really, it's the blending of the human nature, along with empirical evidence, and the financial planning...
Pat: And then technical, when you bring in tax.
Scott: That's it's, really, and it's a [crosstalk 00:02:52]
Pat: Because tax is highly technical. You can have an opinion about tax.
Scott: Tax is easy, though, because it's black or white. [crosstalk 00:02:59] Close. Mostly. Not all that black and white.
Pat: Right. And some things that were actually...
Scott: Mostly.
Pat: ...forbidden a number of years ago, now people are doing it on a regular basis, in tax law.
Scott: Oh, yeah.
Pat: Just because the regulatory environment says yay or nay, or this is... Oftentimes, tax law is created by enforcement, rather than by legislation.
Scott: And, speaking of that, you never wanna be famous by having a tax law named after you.
Pat: That's a bad thing.
Scott: And you see this, Pat, every year, you see it. It's, someone had a really aggressive approach to, trying to avoid taxes. They get challenged in tax court. There's a case. They lose. They end up bankrupt or whatever, having to repay the IRS all this money that they no longer have. And then that sets the precedent going forward. Here's why you can't do that maneuver.
Pat: Yes. Or, or the other way, where they actually win, and then that sets a precedent as well. So...
Scott: Yeah. [crosstalk 00:03:56] Or a private letter ruling that they get the green light on, and once there's three or four private letter rulings [crosstalk 00:04:01]
Pat: [crosstalk 00:04:01] very similar.
Scott: Then I, let's all hope that I can get away with this, too.
Pat: Yes, yes.
Scott: So maybe it's not all that black and white. Most of it's black and white.
Pat: Most of it's black and white. But you're right. It's, investing's not easy. Because there's sacrifice. You have to believe in a future.
Scott: You have to believe in a future. Otherwise, what's the point?
Pat: Yeah. Exactly.
Scott: And, we know that the future, we're all gonna die, too. So we have to plan for when we're not around anymore. We accumulate some assets so we have greater options in our life.
Pat: And then?
Scott: And then, when we leave, like, all right...
Pat: What happens?
Scott: what influence are we gonna have with these dollars? And...
Pat: Yeah. And that's a very, very personal...
Scott: Extremely personal.
Pat: Especially if you're high net worth. Do I leave it to my children? Do I leave half of it to my children?
Scott: Everyone's got different opinions on it. That's right.
Pat: How do I actually pay it out? Should it go to charity? Should it go charity while I'm alive? Should it go in a charitable remainder trust, so I can take income from it? I mean, if you have significant wealth at all... And what would I call significant wealth?
Scott: Yeah, what is significant wealth?
Pat: Five million or more.
Scott: Okay.
Pat: Then you should be heavily involved in estate planning. You should know exactly...
Scott: Because you're not...
Pat: You're not... The likelihood of...
Scott: Five million, and let's say you're 60 or over.
Pat: Yes.
Scott: If you're $5 million and 40, you might spend it all.
Pat: Well, it was probably a windfall, if that were the case.
Scott: That's why I'm saying you might spend it all.
Pat: Okay. That's right.
Scott: So, if you're hitting, if you're near retirement age with $5 million dollars, it's probably a result of your saving and discipline.
Pat: And by the way, once you hit retirement, and you believe that you're gonna blow through this stuff, it's highly unusual that you actually change your behavior very much.
Scott: Yeah.
Pat: Highly unusual.
Scott: That's right. So, you...
Pat: Although, I had a...how old is he? Eighty-two? He's got a lot of money. He now flies private.
Scott: Oh. That's one way to spend your money. Doesn't take long to spend it flying private.
Pat: Well, he doesn't travel that much, but when he does, he's 82 and he's kind of in poor health. But he said, "I still wanna travel." And I said, "You know, you've got enough money here that you could fly private anywhere you wanna go." And he's like... And I said, "Well, not internationally."
Scott: You're not flying private to Europe.
Pat: But if you wanna go anywhere in the U.S., or you're in Europe, and you wanna fly... And he said, "Why would I do this?" I said, well, because you don't...
Scott: You've got more money than you're ever gonna spend in your lifetime.
Pat: Yes.
Scott: And if you want to...
Pat: Yeah, if you want to, you know... And so, it...but... I don't know why I went there.
Scott: I don't know either, because there would be others that say regardless of how much money, I don't wanna...
Pat: Well, that's the difference.
Scott: They're all personal choices.
Pat: Yeah, yeah, yeah, so... Anyway.
Scott: But it's nice to get to a point in life where you have some choices. And one of the things that we've been passionate about in our three-plus, almost four decades in doing this, is we want people to be in a place where work is an option and not an obligation, where they have freedom in their life to choose how they're gonna spend their time. I truly believe that life is about serving others, about being, taking part of other people's lives, and... Which can be done remarkably well in the marketplace, through your profession, that sort of thing. But it's pretty nice if you can be in a position in life where you get to choose what your profession's going to be. You get to choose who you serve, because you don't have to...you're not having to work for a paycheck.
Pat: And that's not uncommon.
Scott: No, not at all. [crosstalk 00:07:39] I mean, it's...
Pat: Yeah.
Scott: One of the... Yeah. [inaudible 00:07:43]
Pat: I actually had clients that opened up a...
Scott: Regardless of what you think about our current state of this country, it's a phenomenal place to be.
Pat: Yeah, I have clients that opened a girl's school in Africa. Right? They live very, very modestly. So modest that if you met them, you'd think, holy smokes. But they have the resources, and the idea is that they wanna serve this population.
Scott: And for them, it's not about having a fancier dinner, or...
Pat: Not even [crosstalk 00:08:11]
Scott: ...a wine cellar...
Pat: Or even a nice car.
Scott: That's, none of that's important to them.
Pat: None of that's important to them. But this charity... And God bless them.
Scott: Probably a nice couple to spend some time with.
Pat: Oh, they're...
Scott: Of course. Brilliant. There's certain people, like, you like to be around them, like, just hope a little of that rubs off on me. You know what I mean?
Pat: Oh, yes. Which is why I quit hanging out with the Sisters of Mercy, the Catholic Church. They make me feel bad.
Scott: You don't wanna go that far. All right. Anyway...
Pat: I did not take the vow of poverty.
Scott: We've got a great program today. We got some callers. We're also gonna have Victoria Bogner, who's our head of wealth planning here at Allworth, talking about a client story, so, looking forward to that.
Pat: And I'd like to, Scott, I'd like to talk about the anti-woke funds, which I didn't really even know they existed until recently.
Scott: Anti-woke, and what is an anti-woke fund? Is this, like, the reverse of an ESG fund?
Pat: Exactly.
Scott: ESG is environmental, social, and governance.
Pat: Whatever that means.
Scott: Which means different things to different people.
Pat: And anti-woke means not that, or whatever that means.
Scott: I don't know. Whatever that means.
Pat: Right? Or whatever that means.
Scott: Whatever, there's some progressive... I think it's some anti-progressive cause or something, I would assume anti-woke would be that.
Pat: Yes. But I'd like to talk about that later on.
Scott: I'm sure the performance of them is phenomenal.
Pat: Well, they're...
Scott: The problem with this sort of thing...
Pat: You wanna talk about it now?
Scott: Yeah.
Pat: Okay.
Scott: Talk about it now.
Pat: I thought we'd take a call, but go.
Scott: And then we'll... The problem with any of these types of things... Well, a number of... The funds themselves... Here's the problem. We all have different values. And, like, my idea of an ESG is probably different than your idea of ESG.
Pat: Oh, I know it is.
Scott: Right? And whether, like, all these sort of values. And if you say, "Well, I don't wanna invest in anything that supports alcohol," as an example. "My whole family is a bunch of alcoholics, and I don't wanna support anything with alcohol." Okay, well, maybe it's easy to say, "Let's don't own Budweiser."
Pat: Yes.
Scott: But what about the trucking company that transports?
Pat: Okay.
Scott: Or the shipping container that, like... Or the restaurants...
Pat: Or Marriott corporation? Because they serve it?
Scott: Or...
Pat: Where's the line?
Scott: Where's the line?
Pat: Where's the line? Right? That's exactly the issue. And, who draws the line? But they're fads. They're, Scott, just, like, when this ESG came out... So, my oldest son is...
Scott: They've been out. They used to call them something different. What did they call them years ago? Calvert was one of the mutual fund companies that had one of the earlier ones. Are they socially responsible investing?
Pat: That's what it was called.
Scott: No, it was called something different, I think.
Pat: No, socially responsible.
Scott: Was that what it was? Socially responsible.
Pat: Yeah, then it turned into ESG.
Scott: How can you argue if it's socially responsible?
Pat: How do you remember that, though?
Scott: You gonna have a socially irresponsible fund? You don't want that. [crosstalk 00:11:18] You need a socially responsible fund. That's a great marketing... We're a socially responsible fund.
Pat: Say it again.
Scott: Socially responsible.
Pat: But it's a great marketing...
Scott: Marketing.
Pat: That's...
Scott: Yea, so, to attract dollars. By the way, these ETF manufacturers are no different than any other type of business.
Pat: Retailers.
Scott: Yes. They're trying to create a product to attract customers, to get them to buy their product.
Pat: Because they make a management fee on it.
Scott: Yes. And the more people who buy their ETFs, the more money they make.
Pat: That's right.
Scott: Pretty simple.
Pat: Right? And so, that's why they're fads. Because, when the marketplaces, when they believe that there's a gap in the marketplace that needs filled, they will create a product to fill that. And actually, they can do it relatively easy. You can stand up a mutual fund in less than a day. Couple days. You could stand up a mutual fund in a relatively short period of time.
Scott: Is anyone still creating mutual funds? [crosstalk 00:12:13]
Pat: Or ETFs. But you could stand them up pretty easily. So, I read this article about these anti-woke funds, and I thought, "Oh, my gosh. Again." Wall Street has created just another product to feed whatever short-term...
Scott: Anti-woke. [crosstalk 00:12:29] Where do you draw the line there?
Pat: Yeah.
Scott: I'm sure people... Anti-woke, everyone's gonna have a different opinion on what that is.
Pat: Yeah. The Americans conservative values ETF.
Scott: Yeah.
Pat: There we go. It's [crosstalk 00:12:44]
Scott: And, look, [crosstalk 00:12:45] there's another way to do... If you have maybe a couple hundred thousand dollars or more to invest, instead of buying a fund, you can buy...you can create your own index, and exclude whatever companies you want from that. And that way, it's designed specifically for you. So, if there's a particular company that you loathe... That might be. Like, "I do not like the values of this particular company, and this particular CEO. I do not wanna own that." You can have a direct index. You create your own index, that you buy, essentially, most of the companies in the S&P 500, if that's your index, to mirror that, then you say, "I wanna exclude this company and that company."
Pat: And it's really easy to do today.
Scott: Correct, with technology.
Pat: So, Scott, I helped write...
Scott: That makes tremendous sense, as opposed to putting in some ETF that, who knows who's deciding what are your values [crosstalk 00:13:40]
Pat: So, 20-plus years ago, I helped write the investment policy statement for the Catholic Diocese of Sacramento. And you had to follow the bishop's guidelines of investing, which is, there were certain companies or industries they absolutely would not invest this endowment in. So, I remember, we went to the marketplace with this investment policy statement, and there was two companies that could fulfill...
Scott: Yeah.
Pat: ...because it was so complicated. This is 20-plus years ago. It was so complicated to do. And it was expensive.
Scott: Easy now. Easy, and low-cost today.
Pat: It was expensive, and hard to do.
Scott: So, easy for an endowment, and low-cost, easy for an individual and low-cost.
Pat: Easy to do. Right? I just remember sitting and interviewing these people, and the investment companies that specialized in endowments for Catholics and religious charities. And I said to the guy, "This is unbelievably expensive." And he said, "Oh, well."
Scott: That's right. [inaudible 00:14:48] You want this or don't you want it? [inaudible 00:14:50] the only game in town.
Pat: It was... And you could have your own investment policy statement, and exclude whatever companies you want. So, you don't have to buy the American... What is it called? American conservative values.
Scott: Like, I personally don't exclude any particular companies, but I do remember, years ago, I had a family member ask me, he was looking at buying a bar. Like, a bar bar. Not like a brewery, that serves food, stuff. Like, a bar. You just go there to drink. And I'm like, "What? Why? Why do you want to invest in it? Why would you...?" Like... And I said, "I don't care what the business prospects are. Like, I personally would not want to invest in just a bar." That's just my personal...right? So, I wouldn't have invested. I don't care what it is, because with that particular family member, it wouldn't have happened, but...
Pat: Oh, he wanted you to put money in it.
Scott: He wanted me to invest.
Pat: Did he ever buy the bar?
Scott: No. [crosstalk 00:15:48] He didn't get my money.
Pat: My dad bought a bar when we were little. My mom was so mad.
Scott: Of course, she was mad. What could go wrong?
Pat: I was probably in the second or third grade. He came home and he had bought a bar.
Scott: What could go wrong? Sounds like a great idea. "Well, look, honey, I get to save money on my alcohol consumption."
Pat: We didn't own it very long.
Scott: I'm assuming he bought it without telling her.
Pat: That's right. Oh, you knew my dad.
Scott: Yeah. Oh, life is beautiful. It really is.
Pat: It really is. Just imagine, if I came home and told my wife I bought a bar, she'd leave me. My mom was a saint.
Scott: Life is interesting, though.
Pat: It wasn't just a bar. It was, like, the grungiest bar you've ever seen. Like, in Azusa, California. All right. Let's go.
Scott: All right, yeah. Let's take some calls here. By the way, I like... You could either look back at your seasons of life and think about the pain, or you could just... Life's so beautiful. It's such an interesting journey, and all those things that we go through help create us to who we are today, and...
Pat: Oh, yeah.
Scott: You know, it's [crosstalk 00:17:05]
Pat: Yeah. Yeah. Yeah.
Scott: ...an interesting journey.
Pat: [inaudible 00:17:07] when I had the sepsis and I was really sick, the doctor said to me, after I kind of could figure stuff out, he said, "You know, you were really pretty close to death." And I'm like, "Eh, it was a pretty good ride." What are you gonna do?
Scott: Well, you fight it.
Pat: Well, no [crosstalk 00:17:26]
Scott: And here, you're here. Yeah.
Pat: No, no, no. Well, you don't give up, but... Anyway.
Scott: All right. Let's take some calls. If you wanna join us, you can send us an email, and we'll set up a time to take your call, questions@moneymatters.com. We're talking to Amy. Amy, you're with Allworth's "Money Matters."
Amy: Hello.
Scott: Hi, Amy.
Amy: Hi.
Scott: Well, how can we help you?
Pat: How can we help?
Amy: Oh. I'm sorry.
Scott: No worries.
Amy: Yeah. So, I am looking at... I have some questions about SBLOCs, the security-backed line of credit, the risks, the benefits.
Scott: Okay.
Amy: [crosstalk 00:18:03] and I'm looking to buy a home, after renting a bunch of years. I'm 66 years old, and I'm not sure it's a wise idea for me.
Pat: Okay.
Amy: So, the questions would be...
Scott: Tell us about your situation. So, you're 66. Are you still working?
Amy: Sixty-six. I work full-time. I live in the Bay Area, San Francisco Bay Area. I rent now. I've been renting for about seven or eight years since I've been divorced. And I know I'm in an expensive area. I'm willing to move, although I prefer a coastal region. I'd move to the Northeast, but I'd love to stay in Northern California. My idea is to work a few more years, maybe to 70, so that I can buy a home relatively soon, with a large down payment, and start paying down the mortgage, so that once I am retired, with no income, I will have a more workable monthly amount to pay.
Scott: And do you have family near you where you are now?
Amy: I have two children in their twenties. One's in New York and one's in LA, so...
Scott: Okay.
Pat: And tell us about your...
Scott: Who knows where they're gonna be, right?
Pat: Tell us about your financial situation. One question before we get there. Are you in a rent-controlled situation?
Scott: Like, in the city?
Amy: No. No, I'm not.
Scott: Okay. Okay. And how much is your rent?
Amy: It's about $2,800 a month. I have a two-bedroom. So...
Pat: Okay. And how much do you make?
Amy: I make about $130,000 a year. And as far as my other assets go, I have about $100k in liquidity. I have about $320,000 in investments. I have about $400,000 in retirement funds. So, overall, to my name, I have about $800k, altogether.
Pat: And what does your social security benefit look like at age 70?
Amy: $3,500 a month.
Scott: And do you have a pension or a pension from your previous marriage?
Amy: No, not really. No.
Scott: And any other debts to speak of?
Amy: No.
Pat: How long have you earned this $130,000?
Amy: Since 2022. And before that, I made about $100,000, hundred and [crosstalk 00:20:32]
Pat: So, you've been in the workforce the whole time?
Amy: Yes. Well, no. I took time off to have children. I married late, and had children late, so I took about 10 years off.
Pat: Okay.
Amy: And so [inaudible 00:20:43] back into the workforce reduced my income. So, since 2016, I've moved up from about $60,000 to $130,000.
Pat: And your job's secure?
Scott: I'm sorry, when were you making $60,000?
Amy: In 2016. I jumped back [crosstalk 00:20:59] yeah.
Scott: Okay. Yeah. Good for you.
Pat: And where did you get this idea of the security-backed line of credit?
Amy: Well, instead of liquidating, you know, investments, I save on capital gains, I keep my investments. That seems like a nice idea, although I understand it has to be a variable rate, for insurance, so that scares me.
Pat: And, but, did an investment advisor or someone at a brokerage firm tell you about this, or did you find out about it on your own?
Amy: I found out about it on my own.
Pat: Okay.
Amy: And also, correct me if I'm wrong, but I understand there's some flexibility in how this money is used. It can be used [crosstalk 00:21:38]
Scott: Oh, yeah.
Pat: You can do anything you want with it. You can [crosstalk 00:21:39]
Scott: Essentially, what this is, you are pledging your securities in exchange for a loan. So, they say, well, we're not just gonna take Amy's word for it that she's good to pay us back. Tell you what, Amy. Give us your savings, your securities here. And that way, if you don't pay us back, we're just gonna take your securities and keep them for ourselves. That's the collateral, right?
Pat: And so, you can do this as a margin loan, or you could do this as a security-backed line of credit, which is typically a little bit less expensive than a margin loan.
Scott: A tad.
Pat: A little bit.
Scott: But, and regardless, you are pledging your stocks, ETFs, whatever's in your investment account. And the challenge, the concern there is one, that you've got this interest that needs to be paid, or it gets, it accumulates. And, if the markets go down, or when the markets go down, if you don't have enough in the account, they can do what's called a margin call, which means, "Hey, Amy, the value of the account went down too much. Either you give us some more cash, or we're gonna be forced to sell some of your securities."
Pat: So, these are perfect if they're short-term, right? I've used them myself. I've used them for clients. In fact, I've used, in the last two years, I used them for clients twice, to purchase a new home while the other home was in escrow or about to be sold. And so, I typically wanna minimize the exposure to what I would think to be less than six months. And even then, I don't use up all the margin, which means...
Scott: Because you never know when the next bear market's coming.
Pat: Yeah, which, even then, so, margin, if they said, "Okay, you've got this..." what did you say, investments, $320k? You should be able to get $160k out of it. I would, if I was your advisor, I'd say, "Okay, we're gonna do this. We're gonna do it for the short term, but I probably would limit this at $100,000, maybe, or $120,000, so you don't get a margin call.
Scott: So, let's back up here. So, your objective is to get another house, and you'd love to have a house paid for, so you don't have to worry about that. And you'd love to be somewhere on the coastal side, preferably Northern California. Is that what you said?
Amy: Yes. Well, I'm just trying to find something I can afford [crosstalk 00:23:56]
Scott: Yes. So...
Amy: I don't, you know, I can't... It's an affordability [crosstalk 00:24:01]
Scott: Yeah, I get it.
Pat: Oh, 100%. [crosstalk 00:24:03] California. Well, forget the Bay Area. I mean, unless you wanna move up to the north coast of California, with, they're gonna be less expensive. But anything south of, let's say... You know, we're from California, so we know the geography. Anything south of Bodega Bay is gonna be phenomenally expensive, on the coast.
Amy: Uh-huh.
Scott: How much will a home cost you?
Amy: Well, I mean, I'm seeing very small properties for as low as, you know, $450k. But they're, you know, they're not necessarily in a great neighborhood.
Pat: That's right.
Scott: Yeah.
Amy: They're not in great shape. They're not, you know, they're not... And then the HOAs, the condos, are very high, too. So, you know, what I'm looking at, really, that's available now, are mobile homes, and very, very [crosstalk 00:24:53]
Scott: So, one thing that you may not have thought about. And I'm just thinking, Amy, you're my sister, [inaudible 00:24:59] like, what's some good things to do here? One thing to consider is using a reverse mortgage to help purchase a house. So, let's say you had a house of...
Pat: Six hundred.
Scott: ...six hundred. You took the most of your cash, you took a good chunk of your investment portfolio, leave your retirement funds, and then you use a reverse mortgage to fund, I don't know, $250,000 or so, or $300,000 of the house. And the way those work is they're...a reverse mortgage, it's not like you are giving up control of the house. You still own the house. It's just, the mortgage, you're not required to make the interest payments on it. They just accumulate over time.
Pat: So, you're basically, you're pledging the equity in the home to actually pay off the interest payments over time. That's exactly how they work.
Scott: And if over the long term, the real estate appreciates faster than the interest on that loan, there's still equity in the house, even if you lived in it 30 years. And if a real estate market goes horribly wrong for a period of time, the federal government guarantees you can stay in the house until the day you die.
Pat: I would not use a security-backed loan, under no circumstance.
Scott: I mean, I really think you should consider...
Pat: I've got one more for you, Scott.
Scott: Okay.
Pat: What's your social circle like where you live? Is it big, small?
Amy: It's fairly small. I've had to move further out from the Bay Area for my job. So, you know, and as I'm getting older and I'm single, it's not as vibrant as it used to be.
Pat: Okay. Have you ever thought of moving overseas?
Amy: Yes. And that, you know, I love to travel, and, you know, again, my kids are here. They're in their mid-20s. But I love to travel. And if that's more economical and safe, and makes more sense, I'm clearly open to it.
Pat: There are... I had dinner with a couple last night that bought a second home in Spain. This is the third person I know that bought a second home in Spain.
Scott: One of our financial advisors at Allworth has a home in Spain.
Pat: And his buddy has the home right next door to him. [crosstalk 00:27:09] Yes. And the reason is, is they could get A-plus properties, on the beach.
Scott: Yeah, yeah, yeah.
Pat: And what you wanna look for is healthcare. [crosstalk 00:27:25]
Scott: Make sure you have access to it.
Pat: You have access to it, and it's affordable. Political stability in that particular country. And then affordability. So, my son's, my oldest son studied in Quito for five, six months.
Scott: Where's Quito?
Pat: Ecuador.
Scott: Okay.
Pat: And I went to visit him, and he brought me to Gringoville. They call it Gringoville. You would have thought you were in any suburb in the United States. It was nothing but Americans, and most of them living on social security, and that was it. Because I talked to a couple of them. So, I would, I'd, you know, it depends on how adventuresome you are. But I would certainly consider that.
Amy: Okay. Yeah, Portugal seems to be the place to go these days.
Pat: Yes. It, Portugal was... In fact, not that we travel the world, but we go on two big trips a year. We ended up in a part of Portugal, outside of Lisbon, that was, it looked like Carmel, with all the tourists and the Americans.
Amy: Well, this is great. Yeah, I had a feeling these SBLOCs were a little crazy and too risky [crosstalk 00:28:39]
Pat: Yeah.
Scott: They're too risky.
Pat: Yeah. And you cannot afford to live in coastal California. I mean, that's just the reality of it.
Amy: Yeah. Yeah. So...
Scott: I do think, to Pat's point, your social, like, finding out where's the best place for you, and sound that you've got two kids that, LA and New York, they're, probably 10 years from now, they're not gonna be in LA and New York, maybe, but you never know, right? But having the flexibility, where you can still afford to visit them periodically, I think, obviously, that's really important to you, I would assume.
Amy: Yes.
Scott: And it's thinking through those things, and maybe, in a perfect world, you have a home that's paid for, it just provides some stability long-term. But you're 66. This isn't the retirement that you had originally envisioned for yourself, but this is where you are. And I think really getting some clarity on what's going to be fulfilling for you first, and then working backwards on what options we have. And I don't like the idea of borrowing against your securities.
Pat: No, no, no, no.
Amy: Okay. Thanks. I will look into what a reverse mortgage can do.
Scott: Yeah, reverse mortgage purchase.
Pat: Yeah.
Amy: Reverse mortgage purchase.
Scott: Yeah.
Amy: Well, thank you so much. This has been hugely helpful.
Scott: All right.
Pat: And, listen, call us anytime. And if you buy a place in Spain or Portugal...
Scott: Well, how about rent something there for awhile? You might not...
Pat: You might wanna rent first. [crosstalk 00:29:59] you wanna rent.
Scott: I remember... I appreciate the call, Amy. I had a client years ago, it was in Costa Rica or Guatemala. I'm trying to remember where he lived, somewhere in Central America, but he was, like, a block from the beach. It was so cheap. He spent less than his social security. It was so cheap for him to live there.
Pat: Was he happy there?
Scott: He loved it. Well, but he came back eventually. I don't know why he came back, but whatever. I mean, you know, you're far away from family, but there's community. To your point, you can go to pockets where they're...
Pat: Yeah. Well, that's why I asked how big the social circle is. Because the bigger your social circle where you actually live, the less likely you're going to pull up and move. The harder it is.
Scott: My wife and I have lived in El Dorado Hills for 30 years.
Pat: Yes.
Scott: You have as well.
Pat: Same house.
Scott: And I have no desire to leave, actually.
Pat: I know.
Scott: Because I enjoy the social circle I've got.
Pat: That's right.
Scott: Anyway, let's continue on. We're talking to Dawn. Dawn, you're with Allworth's "Money Matters."
Dawn: Hi there. Thank you for taking my phone call.
Scott: Yeah. Glad you joined us.
Dawn: Okay. Here's my question. I own a home in Bonita, Florida, worth $500,000, and I have stocks worth $500,000. And I am interested in getting, moving, move, buying a house with my fiancé. I don't really have a job. It's, like, a part-time thing. But I, my portion would have to be $250,000. Should I take it from my stocks, or should I sell my house that I own, and get the money from that?
Scott: Do you live in this house in Florida?
Dawn: Yes.
Scott: So, what do you owe on the house?
Dawn: Nothing. I own it.
Scott: And so, you have a fiancé. You guys wanna combine... Why would you wanna keep the house in Florida?
Dawn: Well, I could probably rent it out. You know, it's a nice little house. I bought it for, like, $300,000 and now it's worth $500,000.
Pat: Okay. And so, and that was the second question. How old are you?
Dawn: I am 55.
Pat: And no income to speak of.
Dawn: Not really.
Scott: And this might be a little personal, but we're gonna ask it anyway. Is your fiancé in decent financial shape?
Dawn: Yes.
Scott: Okay.
Pat: Great financial shape?
Dawn: Yeah. I think he's good. I mean, he's good. He's a lot better. Yeah, he's good. [crosstalk 00:32:39]
Pat: I'd sell the house.
Dawn: You'd sell the house. [crosstalk 00:32:43]
Pat: Yeah. And let me tell you why.
Scott: There's a couple reasons. Yeah, go ahead.
Pat: Right. That's just not a flippant "why." One is, because it's a primary residence, there's no tax on that gain. Right? But if you converted it to a rental, then if you rented it three out of the last five years...or is it two out of the last five years?
Scott: I always forget [crosstalk 00:33:01]
Pat: Two or three out of the last five years...
Scott: Whatever it is.
Pat: Then...
Scott: It becomes investment property.
Pat: Yeah, it becomes an investment property, and your basis is $300 grand. So, let's just say you converted it, and then sold it five years from now. It's a rental. You sold it five years from now, and...
Scott: You gotta pay the capital gain [crosstalk 00:33:18]
Pat: You gotta pay the capital gains. But if you sold it today...
Scott: You can avoid it.
Pat: Yeah. And you'd be better off, actually, if you wanted an investment property, is to sell this, turn around and buy an investment property to reset your basis, and then turn it into investment property.
Scott: Which may not be a bad idea.
Dawn: Okay. So, it's a primary house, but there's no capital gains on it [crosstalk 00:33:37]
Pat: That's right.
Scott: That's right.
Pat: That's right.
Dawn: Ah, that's very interesting. [crosstalk 00:33:40]
Pat: Right. And so, it's a tax savings to you. It's somewhat of a tax savings. Probably, well, you're in Florida, so probably $40,000.
Scott: I mean, your options are, to come up with $250,000, are essentially, you either take a mortgage on your house, which, don't really like that idea, or you sell some of your stocks...
Pat: Which, you have... How long have you owned the stocks?
Dawn: Different stocks for, like, I don't know, probably, like, four years? Five years? Five years.
Pat: So, you've got gain in those stocks you'd have to actually pay tax on.
Dawn: Correct:
Pat: So, the easiest...
Scott: And do you have a 401(k) or IRA or that sort of thing?
Dawn: No. Nope.
Pat: So the easiest and the most tax-efficient place to get the money is the house. And then, I think I'd take that $250,000 in gain, and I'd put it in a high-yield money market, and just see how it is living... How long have you been dating this guy?
Dawn: Three years.
Scott: You live together now?
Pat: Have you ever lived with him?
Dawn: He's living with me now.
Pat: And it's working out?
Dawn: Yes.
Scott: Apparently. That's why she's calling.
Pat: Well, I don't know.
Scott: Otherwise it'd be, "Hey, how do I get this deadbeat out of my house?"
Pat: Yeah, you're like, "Oh, listen. You just..." Yeah, I do... I'd sell that house. And then I'd probably put the money in...
Scott: And before I got married, I would have either a trust that protects your assets, or some sort of prenup on this.
Dawn: Okay.
Pat: Yeah.
Scott: Really.
Pat: Before I actually bought the house, with a fiancé, I would actually visit an attorney.
Dawn: Okay.
Scott: And you can do it in an estate planning, so it's part of your... Do you have children?
Dawn: Yes.
Scott: Yeah.
Dawn: Two teens.
Scott: Yeah. Okay. God bless you. So, you can do this as part, with...it's just part of your estate planning, just to... You wanna protect the assets that are yours, that remain yours.
Pat: And keep it separate, including your deposit, and [crosstalk 00:35:33]
Scott: I mean, even it can be unintentionally, like, let's say somehow you were killed in an accident, and you're married, and everything goes transferred over to your new husband.
Pat: You unintentionally disinherited your own children.
Scott: Yeah.
Dawn: How do you do that? How do you... I guess that's with an estate planning [crosstalk 00:35:50]
Pat: Yeah. Estate planning attorney. So, you wanna... So, sell the house, take the money, put $250,000 into a high-yield money market. I'd just kind of wait on that. I wouldn't be in a hurry to invest that, but I would spend money on a quality attorney, to make sure that this money is considered separate, and the home is titled correctly, so... And you might wanna put a life estate on it, or, he put a life estate for you, which means if he dies first, you have the ability to live in it for the rest of your life, and then it passes to the heirs. And you might wanna do the same for him. So...
Dawn: Okay.
Scott: Or not.
Pat: Or not.
Scott: Or not.
Pat: Yeah, that's a good point. They're just...
Scott: They're complicated.
Dawn: Okay.
Pat: Yes.
Dawn: [crosstalk 00:36:33]
Pat: But that's something an estate...
Dawn: [crosstalk 00:36:34] I've got kids and he's got one kid, right.
Pat: Yeah. That's something an estate, that you wanna have a discussion with an estate planning attorney about.
Dawn: Yeah. They'll take care of that part. So, yeah. So, we're looking at maybe a house that's worth about a million dollars.
Pat: Oh.
Dawn: So, he takes care of everything else. I just put in that part. [crosstalk 00:36:52]
Scott: And you'll get a mortgage?
Dawn: [crosstalk 00:36:56]
Pat: There'll be no [inaudible 00:36:56]
Scott: He's putting in $750,000, or you're each putting in $250,000 and getting the mortgage for $500,000?
Dawn: I don't know. I don't know what his part of the plan is.
Scott: Well, I'd wanna get some clarity on that.
Pat: That's so important. Yeah. Yeah.
Scott: You're gonna want some clarity on that.
Pat: Yeah. Yep. Yep. You wanna know how much of the house you own, and what the mortgage is.
Scott: I mean, I hate to say it. I would really wanna see if, as a financial advisor, it's like, you'll wanna see his financial situation, what debt's there, and [crosstalk 00:37:25]
Pat: I don't care what kind of car he drives or how nice he dresses.
Dawn: He doesn't dress great, and he doesn't care about cars.
Pat: That's a good sign.
Dawn: And he does pretty well. Yeah, he does pretty well.
Pat: Yeah, that's a good sign. It's a good sign. It's a good sign. Those are all good signs.
Scott: I know it's hard when you're in love and all that, and you [crosstalk 00:37:43]
Pat: Yeah, I would, I'd wanna peek into the financials.
Scott: Yeah. Yes.
Dawn: Okay.
Pat: Yeah.
Scott: I would really wanna find out his plan.
Dawn: Well, I thank you so much.
Scott: All right, Dawn. wish you well.
Pat: All right. Appreciate it.
Dawn: Thank you so much for helping. I really, truly appreciate it. [crosstalk 00:37:54]
Pat: All right. Take a look at those financials. Dawn, if you were my little sister...
Scott: Oh, you would insist upon it.
Pat: Oh, I would. Wouldn't you? I'd say, "You're out of your mind."
Scott: Yeah, of course. Your little, your sister? [crosstalk 00:38:02] sisters?
Pat: Oh, yeah. Yeah.
Scott: At this stage of your life?
Pat: Yes. Which is...
Scott: [crosstalk 00:38:06] the problem. Oh.
Pat: We've. Let's go.
Scott: We don't have a long enough program to actually talk about all the ones we've seen that blew up.
Pat: I remember the widow that, oh my gosh, married this young lady with three kids. He was broke within four years.
Scott: Yeah. On both sides. I mean, not just a male/female thing. It's both.
Pat: Oh, I've seen both sides.
Scott: Yeah. Yeah. Anyway, you gotta be careful there.
Pat: Anyway...
Scott: We've got...
Pat: That's sad just thinking about it.
Scott: I know. [inaudible 00:38:42] Well, you know, it's interesting. Like, I mean, divorce is just horrible for your family finances.
Pat: Gray divorce especially.
Scott: Yes. It just...oh, it is. It's just, and it's hard to get restarted and all that. And the last thing you wanna...fall in love with someone who's gonna drain out the finances...
Pat: Yeah.
Scott: ...and then what happens five years down the road, and all that? So...
Pat: Yes. Yes.
Scott: ...that's what we've seen. Okay.
Pat: So, there's... Hey, one more on that point. When I... And I know you do the same. When I talk to people, in order to get the most empathy out of the situation, I try to pretend as if they were a family member.
Scott: Yeah. Because I don't know anybody. Right?
Pat: So, you wanna, you can't, you've gotta, you have to include the emotion in there. You can't give advice with lack of emotion. You have to have the empathy.
Scott: Yeah. I always picture them as my sister, my parent, my child...
Pat: The brother-in-law I don't really like.
Scott: Well, if they're real jerks, then [inaudible 00:39:39]
Pat: [inaudible 00:39:41] let's go.
Scott: All right. We've got a, our guest today. Victoria Bogner has joined us. Victoria, she's been on the program a number of times. She's our head of wealth planning, and she's gonna talk about... I don't know what she's talking about. Victoria, thanks for joining us.
Victoria: Absolutely. Good to be here.
Scott: Yeah. What are we discussing today?
Victoria: Well, this is a really fun one. So, we have clients, they're both 62, and they came to us ahead of selling their family business, and they were selling it for $10 million. So, this has been a fun case to work on.
Scott: And is this a business that they started from scratch, and... I mean, have they had high income over the years, a high lifestyle, or is this, like, life-changing?
Victoria: This is gonna be pretty life-changing. This is a business that they started themselves, a business where they had contracts with builders to sell them the air conditioners and furnaces. So, very, very successful business.
Scott: Okay.
Pat: So, in a blue-collar field.
Victoria: It's a blue-collar field, and this is very common...
Scott: There's a lot... There's a lot...
Victoria: ...that we see... Yeah. Yeah. That the blue-collar businesses that they started [crosstalk 00:40:58]
Scott: Hundreds of thousands, if not millions of these [crosstalk 00:41:00]
Pat: And are they, before you go on, Victoria, are they selling to a roll-up?
Victoria: Are they selling to, I'm sorry, say that again.
Pat: Are they selling to a roll-up? A private equity...
Victoria: A roll-up.
Pat: A private equity-backed...
Scott: Some other...
Victoria: Oh, no. They're actually selling it to another investor, that's going to actually take over the business.
Pat: Okay. [crosstalk 00:41:19]
Scott: Okay.
Pat: Perfect. Perfect.
Scott: So, tell us the situation. Thanks.
Victoria: [crosstalk 00:41:22] perfect situation. Yeah. So, what's so great about this is they came to us before the sale, which gives us a lot more flexibility in what we can do than coming to us after the sale, and with a lump of cash, right? So, they're, considering their situation, they just needed $240,000 a year in spending. They wanted to support their church. And of course, they wanted to pay as little in taxes as humanly possible, like all of us. So, this is what we recommended and what we ended up doing. First, we moved 3 million of their LLC units into a charitable remainder trust, which is a really powerful vehicle, because we avoided capital gain on that part of the business, it provided them with about $150,000 of income, every year for life, and it established a future gift to their church of about a million dollars, which gave them a huge tax deduction. So, [crosstalk 00:42:22]
Scott: So, with that... So, their goal was to help their church, so that...essentially, they gift $3 million worth of their business, they get a tax deduction of a million dollars that they can use over the next five years...this year in the next five.
Victoria: Mm-hmm. Yeah.
Scott: And then they [inaudible 00:42:39]
Victoria: [crosstalk 00:42:39]
Scott: And they turn...and then they get the income off...
Pat: Yeah.
Victoria: That's correct.
Pat: Trifecta.
Victoria: And they avoided paying the capital gain.
Pat: That's, which, trifecta again. That's why it's the trifecta. The charity, the income, and the capital gain. Tri, three.
Scott: Trifecta.
Victoria: Exactly. But, here's the key. You gotta do it, if you want to avoid those capital gains, you gotta do it before you sell the business.
Pat: Oh, correct.
Scott: And, it's not always that quite clear, depending on the structure, S corp, LLC, LP, C corp, we don't always get a full deduct...full...
Victoria: Correct. Yeah.
Scott: We can't always avoid the capital gain tax.
Victoria: [crosstalk 00:43:15] with an S corp, there's a nuance there, for sure...
Scott: That's right.
Victoria: ...but their business was an LLC, so this worked out great. So, the next $2 million of it, they just took it as cash, at closing. So, that covered the first year's tax bill of around, you know, half a million dollars, and set aside a couple of years' worth of living expenses, and then gave them a buffer for any near-term needs that they had after the business sale. And then the remaining $5 million was actually a five-year, 5% installment note. So, each January, the note gives them a million bucks of principal, plus 5% interest. So that spread that remaining capital gain across five tax years. [crosstalk 00:43:58]
Scott: And how concerned were they, Victoria, how concerned were they on the new operator's ability to pay those payments [crosstalk 00:44:05]
Pat: Yeah. The credit quality of the operator.
Victoria: Well, this particular person that was buying this had their own successful, similar business.
Pat: Perfect.
Scott: So, it's...
Pat: Beautiful.
Victoria: So, there was really no issues [crosstalk 00:44:18]
Scott: It wasn't like where, it's the guy or the gal has been running the business for the last eight years, let's trust them to run it perfectly in the future.
Pat: It may have been a competitor. Was there any real estate involved in the ownership?
Victoria: Yes. They did own their warehouse. So that was part of it.
Pat: And so, did they sell the warehouse, or did they lease back to the buyer?
Victoria: They planned on just leasing it back for now.
Pat: Perfect.
Victoria: Yep. Yep. So, that worked out great. So with all of that structure in place, we have some really powerful tools, where we could run the numbers to verify their tax brackets, their deductions, how it impacted their Medicare surtax exposure. We were able to aggregate their accounts and figure out what the absolute best way was to allocate their accounts, so that their cashflow was stable, but they weren't paying a lot in tax. And then we're able to figure out, okay, as we are getting this income from the installment sale, and that's going down over time, then they of course had a bunch of tax-deferred accounts, because they were good savers to begin with. So, between their ages 63 and 69, we're gonna be able to convert about a million dollars over into Roth accounts. And so that's gonna lower their RMDs, or required minimum distributions, by about $45 grand a year, and then shift more of those assets into the tax-free bucket for their kids.
Pat: Brilliant.
Victoria: Yeah.
Pat: So, that... And, so, you actually, we use a specific, specialized software to do this, that I probably would not be able to find online if I was trying to do it myself.
Victoria: No, no. This is software that's extremely sophisticated. It's actually a suite of software that we combine, to be able to look at every facet, stress-test the portfolios. And then we use them in a way where we can look at every angle of what we're recommending, and figure out, okay, if we do this, how does it impact everything else, and what's going to be the best course of action if we make this decision? Which is something that an average investor wouldn't be able to do on their own.
Pat: So, on the sale of the business, right? On the sale of the business, you have a five-year note, but it's an experienced operator, with a successful business [crosstalk 00:46:38]
Scott: It's $5 million up front, and the next five [crosstalk 00:46:40]
Pat: And what's the interest on that?
Scott: Five percent. Five, five [crosstalk 00:46:43]
Victoria: Five percent.
Scott: Another trifecta.
Pat: So, five, five, five is the other trifecta. Did you have any role in setting the price of the business and the interest rate that the IRS would actually accept as reasonable to carry that note?
Victoria: I personally didn't. They had somebody that valued the business for them.
Pat: Okay.
Victoria: And then they had somebody else actually transact the sale and do that part of it.
Pat: Okay.
Victoria: So, our role was really in recommending how to set up the proceeds they were gonna get from that sale, ahead of the sale, so that they could maximize...
Scott: Yeah.
Victoria: ...their cashflow, their security, and also minimize tax.
Scott: And Victoria, did they have a financial advisor before come and talk with you?
Victoria: They had a financial advisor that I'm sure was amazing for the stage of life that they were in, but that advisor was not well-equipped to handle what could be done with this business sale. [crosstalk 00:47:37]
Scott: Yeah. That's super common. Like, people have a financial... Super common. People have had a financial advisor for years. Maybe it's the sorority sister from college or whatever. Like, they've known them a long time, or... And they're fine on getting the 529 plans and help them with the 401(k), and maybe the Roth IRA. But when it comes to advanced planning like this, oftentimes it makes sense for someone to upgrade their advisor.
Pat: [inaudible 00:47:57]
Victoria: Yes. That's right. And that's exactly what happened.
Pat: Was this done digitally, or have you met with these clients in person?
Victoria: This was all done over Zoom. So, we did not meet with these people in person yet. Now, once everything, you know, the dust settles from the sale and everything, we have advisors all over the country. So they'll be working with an advisor that's very close to them, and we'll be able to meet them in person.
Pat: Which is one of the benefits as we've grown over the last few years, is to get to this really sophisticated... We can serve clients all the way through to the ultra-wealthy, with the sophisticated tax planning and investment analysis.
Victoria: Yeah. What's really great as being the head of the advanced wealth planning team is that it's not just the advisor working with the client independently. They have an entire team of experts behind them, that can figure out what these complex situations call for, and then see that through to the end.
Pat: So, and this is just how it's structured. So, if someone, let's say in Bonaire Park, California, which is outside of San Francisco, meets with an advisor, and it's very complicated, that advisor kicks that case upstairs, to the advanced wealth planning team.
Scott: Or downstairs. We keep them in the basement.
Victoria: Exactly. They contact our team, and we work really closely with that advisor to formulate the best plan for the client.
Pat: I am so glad you joined our firm. How long have you been with us now?
Victoria: It's been a blast.
Pat: [inaudible 00:49:33] three years now? Is it three years?
Victoria: No, it's been two, just a little over two years. [crosstalk 00:49:38]
Scott: Oh, wow. And Victoria joined us through... A lot... Allworth has grown quite a bit just organically, by new clients joining us, but also, one of our strategies of finding the best talent in the country is by having firms partner up with us. So, Victoria was CEO of a firm. She wasn't looking for a job. Her firm folded in and became part of Allworth. And now she heads up our wealth planning. She's our head of wealth planning, so...
Pat: Yeah.
Scott: Thank you for taking some time and...
Victoria: Yeah. We're doing really cool, exciting work.
Pat: You sound so excited.
Scott: [crosstalk 00:50:11] We were talking, it's funny, Pat and I were talking before we started on the show today, just how technology has made it so that the kind of planning that was done for billionaires before can now be done for people with 10 million bucks.
Pat: Yes.
Scott: Or a million dollars.
Victoria: Yes. The point of entry has really gotten a lot lower.
Scott: Yeah. It's pretty cool.
Pat: Yes.
Victoria: Mm-hmm.
Scott: It's pretty cool the kind of stuff [crosstalk 00:50:34]
Pat: I'd like Victoria as my advisor, at least for a period of time. Right?
Scott: Of course. Yeah. Like, to formulate the plan? Well, I think Victoria's job now is to help along the team, and help with all these cases, make sure that we, looking at every available option, and so that the clients can make the best decision that's gonna work for them, so... All right. Well, thank you.
Pat: Thank you, Victoria.
Scott: Thank you, Victoria. Yeah.
Victoria: Thank you. Thanks for having me as always.
Scott: Yeah. It's always good having you. She does sound excited about what she's doing.
Pat: Yeah. She's smart, though. She's really smart. It's like, someone asked me, "Do you have an MBA?" I'm like, "No, but there's a bunch of them I work with." So I get to lean on that. My job is to take all the credit for the work.
Scott: Perfect. Yeah. Hey, as we're wrapping up, I wanna let you guys know, we have a July webinar that is really designed for those with concentrated stock positions. So, that just means you have a high percentage of your net worth in one particular company, one particular stock. So, this is advanced tactics for concentrated stock positions. Simone Devenny, who's Allworth's head of private wealth strategies, is going to be the presenter on this. It's a very specific webinar, but it's really for executives, business leaders with RSUs, and if you don't know what that is, then you probably don't have any. Restricted stock units. So, during this, you're gonna learn some tactics to unwind your positions without taking a huge tax hit, and discover five ways to unlock your portfolio's hidden potential. To join Wednesday, July 23rd at 10 a.m. Pacific, Thursday, July 24th at noon Pacific, Saturday, July 26th at 9 a.m. Pacific, for all information and to register, go to allworthfinancial.com/workshop. Been great being with you. Scott Hanson and Pat McClain of Allworth "Money Matters." We'll see you next week.
Announcer: 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.