Rethinking Retirement, Maximizing Wealth, and Avoiding Costly Financial Mistakes
On this week’s Money Matters, Scott and Pat kick things off with a provocative question: “Why work?” They unpack how retirement is shifting—from something we escape to something we choose. Then, they help a caller sort through a high-income life, business ventures, and costly financial products. You’ll hear smart takes on 529 plans, when to fire your advisor, and how to build real wealth without falling for fee-heavy traps. Plus, simple advice on estate planning, powers of attorney, and making sense of annuities.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
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-WORTH.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: Glad you are tuning in, hearing what we've got to talk about today, financial matters. Myself and my co-host are both long-time financial advisors and...
Pat: Yeah. Meeting with people for 35...
Scott: Helping people as we make financial discussions, decisions.
Pat: That's, okay, easy for you to say.
Scott: Yeah, yeah, yeah. Anyway.
Pat: It's an interesting time. It is an interesting time. And...
Scott: The financial markets are so stinking resilient.
Pat: Who...Scott, we had that gentleman speak, the economist, at our conference in Dallas, what, six months ago?
Scott: Oh, Paul Lopesco [SP] He's gonna be joining us next week.
Pat: Oh, it was him. He...
Scott: Talking about tariffs. We got that next week. Special guest.
Pat: Oh, perfect. Perfect, perfect. Because I always, like, when I think about the markets, the markets are all volatile. We'll talk about it next week.
Scott: Yeah, we'll talk about it next week. Anyway, it's...
Pat: That was not meant to be a teaser, but it turned into one.
Scott: I've got a few... We're gonna take some calls, as always, and... I was... I pulled into Starbucks this morning, and there's this nice fancy new pickup truck. I don't know what kind it was, but... Pickup trucks are like Cadillacs anymore now. I don't know if you've been in a nice pickup truck. They've got all the creature... Anyway. His license plate said, "Why Work?" And I've seen this. It used to be on a, like, I think it was on a Cadillac [inaudible 00:01:56]. I've seen the license plate before, because it's in the same town...
Pat: Okay.
Scott: ...and I've lived in the town for 30 years. Why work? And I thought...
Pat: Well, that's kind of...
Scott: It's...I actually thought that's probably not the kinda guy I wanna hang out with.
Pat: Mm-hmm.
Scott: Like, so, you made enough money somewhere so you don't have to work.
Pat: Is that all there is?
Scott: And I started thinking, you could also have on your license plate "Why Serve?" I mean, I think, for a lot of work, it's...
Pat: Why not just...
Scott: ...serving others?
Pat: Why care? Why care? Right?
Scott: So, it's a strange thing to have on your license plate. Not as license plate... That's his license plate that he ordered special through the department of motor vehicles.
Pat: He paid extra for it.
Scott: Yes. "Why Work?" But I thought about that, and it's an interesting time, because those... The more educated you are, the more likely you are to work in retirement. And the higher your net worth, the more likely you are to engage in work during your retirement.
Pat: Some form of work.
Scott: Some form of work. I mean, Warren Buffett just retired, just stepped aside.
Pat: Whatever that means.
Scott: Whatever that means. He was 90-some-odd years old.
Pat: I'm sure that...
Scott: Not sure how sharp he was the last year or two anyway. I don't know.
Pat: I'm sure financials come across his desk weekly, that he looks at and comments on, even though he's retired.
Scott: Oh, daily, probably.
Pat: Yes.
Scott: I would imagine. That's his love.
Pat: Yes, yes.
Scott: But as I was thinking about just the whole concept of retirement, it's a relatively new...
Pat: In the history of the world, it is...
Scott: And most of the globe. It's still non-existent.
Pat: Yeah. It's very, very...very, very new.
Scott: Yeah. Essentially, I'm gonna save up enough grain so that I can no longer have to toil any longer.
Pat: Yes. Rather than have 13 children, and live on a farm, and hope that they will support me in my [crosstalk 00:03:57] years.
Scott: That's correct. That was most of history, yes. Not all 13 are gonna make to adulthood, and those that can, and that's exactly it. It was funny. I was talking to my oldest daughter. She's 29. She's got a little...just about to hire her second employee.
Pat: Second employee?
Scott: Yeah, it's fun. She loves what she does. Loves it. And she was talking about one of her good friends, who is really focused on saving for retirement. My daughter's 29. And her friend is, "No, I can't join you guys this weekend because I wanna save my money, because I'm..." my Roth IRA, or whatever it is. And my daughter's perplexed by it. And we were having this conversation about the importance of having... Getting to a point where work's an option for you. You don't have to work, where you have enough financial security and financial assets. But she's like, "Why would someone at this age..." Like, what, she hates her job so much, she can't wait to quit working? It's, like, baffling to her.
Pat: It's problematic.
Scott: In what way?
Pat: Well, maybe she should pursue a different career.
Scott: Well, there's an interesting balance with it all. Because we need to make sure we have enough money saved in the event that we can no longer work.
Pat: Correct.
Scott: Health issue... Health issue. That's primarily, right. Or, the marketplace changes and your skills are no longer needed. Clearly, AI is gonna be changing some of what's needed in the marketplace. It just got me thinking a lot about... I think, really, the importance of saving so you don't have to be dependent upon anybody else, that's important, I think. And it's a nice luxury if you can get to a point in life where work is an option and not an obligation. Where you got the financial resources, if you wanna retire, you can retire. If you wanna do something different, you could do something different. And Pat, I think there's also been a big... We've seen it, right? Where people come to us maybe early 50s. They're running on a rat race they don't enjoy any longer.
Pat: And oftentimes, it's not good for their health.
Scott: Correct. We've seen that...
Pat: I've seen stress...
Scott: A lot of that.
Pat: ...to the point that you're just...
Scott: People are on their... They live on an airplane, practically. They travel so much. And they come to us and say, "I need to figure out how to retire," and there's still seven, eight years of, from financial savings. And then, oftentimes, we'll look at what would you be doing if you didn't do this? What would you like to do? And we see some people say, instead of retiring in seven years, I'm gonna transition to a different kind of career, and plan my retirement 15 years out.
Pat: And there's a balance.
Scott: There's a balance.
Pat: There is a balance. Yeah. Yeah. It's interesting. I don't know how hard it is to act on. I've always quit jobs I didn't like. That was just who I was.
Scott: Well, you had about... We did a segment... How many years ago was this? We did a segment on Pat's teenage jobs, or childhood jobs.
Pat: Or jobs I've had, yes.
Scott: Yeah. Jobs Pat's had. And every week, we talked about a different one.
Pat: Yes.
Scott: Because you had, like, 15 jobs growing up.
Pat: Oh, yes. Yes. Many, many jobs.
Scott: Some jobs, you didn't last [crosstalk 00:07:10]
Pat: Oh, I loved being a waiter. Sometimes I didn't like the restaurants I was working at. But being a waiter, you could go get another job.
Scott: What was it you enjoyed about being a waiter?
Pat: I liked the interaction with the people. Like the fact that most people were in a good mood when they were going out. I worked in fine dining, so... Or as close as you could get to fine dining in Carmichael, California.
Scott: Chilis? [inaudible 00:07:38] salad bar. The salad bars were popular back in the day.
Pat: Yes. Yes.
Scott: Yeah. I never had the opportunity to do that. Anyway.
Pat: It was good times. It was good times.
Scott: We love taking calls and answering your questions. And if you wanna join us, we'll schedule a time when it's convenient for both of us, all of us. Just send us an email, questions@moneymatters.com, or call the number 833-99-WORTH. Starting out here in Texas with Ahmet. Ahmet, you're with Allworth's "Money Matters."
Ahmet: Hey, guys. Thanks for taking my call. I guess, before I ask my questions, I wanted to paint my current financial picture.
Scott: Perfect.
Ahmet: My wife and I are 40 and 37, respectively. Combined gross income of $310,000 annually, from our corporate jobs. We currently have $125,000 in Roth retirement accounts, that we converted, that is managed by an advisor that charges 75 basis points, and invested very aggressively in genomics and innovation-type companies, showing healthy returns. However, we self-manage the rest of our investments, about another $200,000 in IRAs, $15,000 in a separate Roth, all primarily invested in low-cost index funds. We have about $4,000 in a 529 plan for our two kids. And then about $20,000 in an HSA, that are also invested in index funds.
Pat: Now, you...
Ahmet: I maxed out my... Go ahead.
Pat: Okay. You didn't mention a 401(k) in there. Are you going to?
Ahmet: The 401(k) is part of the $205,000 that is part of our Fidelity accounts.
Pat: Okay. Thank you.
Ahmet: We maxed out our 401(k)s. Well, my wife puts 10%. I maxed out mine.
Scott: How long have you been maxing that out?
Ahmet: I'm sorry?
Scott: How long have you been maxing that out?
Ahmet: For the last two years.
Scott: Okay.
Ahmet: We consistently save about 15% to 20% of our net pay from our corporate jobs. And then, beyond that, we own two daycare businesses. One is operational, that we are expecting to see about $120,000 annually, going forward. Second one's under construction, that, once it's fully operational, we'll get about $150,000 from that. And then my wife will manage that, at a $65,000 annual salary.
Scott: And is that where your cash has... Because you make a relatively good wage, and you don't have a lot saved relative to what your wage is.
Ahmet: Correct. The majority of our cash went into putting the down payment...
Scott: Got it.
Ahmet: ...in for the new business, which was around a little under $300,000.
Scott: Got it.
Pat: Do you own the property, or just the business?
Ahmet: The first one, we own. Both of them, we're gonna own the property and the business.
Pat: Okay.
Ahmet: So, we have some concerns, particularly regarding our VUL policies that we have with our current advisor. We were sold that, given our income, we would be phased out, and this would provide you with an opportunity to put more money, almost Roth-like. The VULs invest [crosstalk 00:11:07]
Scott: Yeah, it's variable universal life, for the [crosstalk 00:11:08]
Ahmet: ...outside of the cost of insurance, [inaudible 00:11:10] all of that goes into S&P 500 index, and we fully participate. We're not capped, and there's not a floor. We're worried about the high fees...
Scott: Yeah.
Ahmet: ...that our current investor is charging, along with just the high fees related to VULs.
Scott: Yep.
Ahmet: Our goal is to build a legacy for our children, as well as save for their college, and weddings, at some point. So, my questions are, one, are these VULs truly beneficial, or is that money better deployed elsewhere, given our concerns and our goals? The second question is, should we consider switching advisor to somebody that's a little more proactive from a tax planning perspective, and keeping track of our goals? And then my third question is, how would you structure our business entities so that they're a little more tax-efficient, as well as allowing us to maybe take advantage of depreciation, or how we should think about the management salary that my wife is ultimately gonna get?
Scott: Yeah. Great questions.
Pat: Got it. And what is your wife's income? You refer to these corporate jobs. Your wife works for a large corporation now?
Ahmet: She works for a marketing consulting company, and I work for a renewable energy company.
Pat: And what is her income? Now?
Ahmet: She makes about $95,000, and then I make about $180,000, plus my bonus.
Pat: And then you mentioned that she's going to leave that, and just run the daycare, at $65,000 a year. Is that correct?
Ahmet: She's gonna keep both.
Pat: Okay.
Ahmet: She'll manage, we'll hire directors, but she'll be there from a owner perspective.
Pat: Oh. Okay.
Ahmet: The plan is to ride both of them as much as [crosstalk 00:12:53]
Scott: By the way, wealth is created not in passive financial assets, like S&P 500, 401(k), VUL. Wealth is created in your career. Either you're very talented, and somebody pays you a boatload of money, or you create a business.
Pat: Or, in your case, both.
Scott: I mean, if you look across the spectrum of wealthy people in this country, it's, very few is it's inherited. It's primarily in your career. Either a business, or you're really good at what you do.
Pat: What did you say was in the 529 plans?
Scott: Let me rephrase that. You're really good at what you do, in an area that demands a high wage, because you might be a great violinist, and you bring a lot of joy to people's life, but you maybe you're not [crosstalk 00:13:42].
Pat: Yeah, this "follow your dream" stuff is garbage.
Scott: I don't know, garbage? You need to get paid too.
Pat: The 529 plan...
Scott: The intersection between getting paid and your dreams.
Pat: Well, how much is in the 529 plan?
Ahmet: About $4,000.
Scott: So...
Pat: And let's dig into this VUL.
Scott: Yeah.
Pat: What's the...
Scott: So, first of... Variable universal life policy. The way they're structured, like... Pat and I both started in the industry with a life insurance company, 1989 and 1990. We lasted a couple years. We learned that if you get trained in the life insurance industry, they teach you that life insurance is the solution for any financial issue you're dealing with. I don't care what it is, a life insurance policy is the answer. That's how they train all their agents and whatnot. A variable universal life policy is a policy where you put money in to this pool. You can choose how it's invested. So, you've chosen to put it in the S&P 500 fund. And then there's a cost of insurance. There's a life insurance, a death benefit. And how much is your death benefit on your policy?
Ahmet: For the parents, it's $500,000. For the kids, it's a million.
Pat: Wait, wait. Whoa, whoa, whoa. Whoa.
Scott: How many policies do you have?
Ahmet: Each of the family members have a policy, and then we, as parents, also have a separate $1 million term policy.
Pat: Okay. And is it the same advisor that sold you this, that is actually managing the Roth IRAs?
Ahmet: Part of them, yes.
Scott: Yeah, the one.
Ahmet: The rest of them, I manage.
Pat: Okay. So, let's break down all four policies. When did you purchase these?
Scott: Well, let's explain how these work.
Pat: Okay, well, thank you.
Scott: So, $500,000, a death benefit, on Ahmet's first policies he's talking about here. And so, if there's no cash in there at all, he has an insurance cost of whatever the insurance costs would be for $500,000 of death benefit. If he had $100,000 of investments in cash in the policy, he would pay...the amount of death benefit would be the difference between that $500,000 and what he's got saved there. The cost, my experience, the cost, by looking at the cost of insurance on these policies, it tends to be a lot more than it would be on pure term insurance.
Pat: Yes. So, they call that difference the delta pure insurance, and that pure insurance is expensive.
Scott: Plus...
Pat: And, once you're in, you can't requalify, because they have big surrender...most of them have big surrender charges on them.
Scott: Plus, there's, the internal costs are 2%, 3% a year.
Pat: There's a load on it, typically, and then there's a management fee inside.
Scott: Now the benefit, what they sell the benefit on these, is they grow tax-deferred, so you're not taxed at all as things grow. And then, when you die, that's tax-free. But later in life, you can withdraw your contributions first, your policy premiums first. And then after that, you can take out a loan against the policy.
Pat: And as long as you die with the insurance policy in place, it's tax-free. The problem is, most people don't die with these insurance policies, because the costs actually erode most of the value in there.
Scott: The whole concept of using these policies, funding them, and then in life, taking a withdrawal, I can't tell... Pat, I've been doing this 35 years. I cannot think of one situation where I saw someone with a sizable net nest egg, in a life insurance policy, living off the loans from it.
Pat: Well...
Scott: I've seen where they're about to implode. And if they collapse on themselves before you die, suddenly it triggers a massive taxable event of all that [crosstalk 00:17:31]
Pat: I have one client, who's a retired doctor, that this is, his VUL extremely well-funded. I didn't implement it for him. He came to me. We actually lowered the face value and increased the deposits, in order to buy less pure insurance in there. And, as you can imagine, someone that saves that well typically won't ever have to use the VUL.
Scott: That's right.
Pat: We won't use this VUL, as said. So, let's break down all four policies. You said you and your spouse each have $500,000?
Ahmet: Correct.
Pat: And what's the cash value in there?
Ahmet: The cash value for mine is around $65,000, and the cash value for my wife is around $20,000.
Scott: And how much are you putting into these?
Ahmet: Right now, we're putting in $500 a month for each person.
Pat: Okay. And you then mentioned that you had two policies, one on each child?
Ahmet: Correct.
Pat: And what's the face value on those?
Ahmet: They're are a million dollars, and we're putting in $300 a month for each child.
Pat: Holy smokes. Whatever...
Scott: How much cash is in those?
Ahmet: My eldest has a good amount, a little north of $30,000, and my youngest has been recently born, so he doesn't have much.
Scott: So, what my experience has been, the internal cost of the insurance is more than the tax liability would be.
Pat And why would you buy an insurance policy on a child?
Scott: Because it's such a great tax tool. That's what was sold [crosstalk 00:19:07]
Pat: But the 529 is completely ignored in this equation. There's $4,000 in the 529 plan, and they're putting $300 a month into these policies, for these... So, this answers...
Scott: But these do have extremely high YTBs.
Pat: Yield to broker. So, the...
Ahmet: Yeah, that's why I'm thinking about lowering my, Sids's death benefit to half of that, and then deploying that capital into a 529.
Pat: I'd cancel the children's.
Scott: What's it costing you?
Ahmet: For... The minimum amount is [inaudible 00:19:46] margin. I think it's $1,200 a year.
Pat: Yeah.
Scott: That's not marginal.
Pat: Yeah. So...
Scott: You can buy a term life policy for less than that on those kids...
Pat: Ahmet...
Scott: ...but I don't know why you'd need a million dollars of life insurance.
Pat: Ahmet, let's step back for a minute. First of all, you're an incredible saver, and you're doing really well. I would have, at age 40, I wouldn't worry about...
Scott: Well, they [inaudible 00:20:10] couple businesses going. You're doing all the right things.
Pat: You're doing... Yes.
Scott: I assume you don't have a bunch of debt. My guess is you don't have a $150,000 loan on a boat. A wake boat.
Ahmet: I don't have any debt outside of my mortgage, which is at 30-year 2.5%...
Scott: Of course it is.
Ahmet: ...and then my car, which should be paid out within a year or two [crosstalk 00:20:35]
Pat: Okay. So, I asked the question earlier. To the advisor that's managing your Roth, you said 75 basis points, right? Three-quarters of a percent.
Ahmet: Right.
Pat: Is he the same one that implemented the life insurance policies?
Ahmet: Yes.
Scott: Sold you the policies.
Pat: Fire, you know, question was, should I change my advisor?
Ahmet: Right.
Pat: And the answer is yes.
Scott: You know, it's funny, was you first started the call, and you said he's charging you three quarters of a percentage point to manage $125,000 account, and you have assets elsewhere, I'm thinking, this guy's working for peanuts.
Pat: Nine hundred dollars a year.
Scott: Why would he work for you at such little pay? If he's a good advisor, he can demand a better pay than... And now it understands why, because he's made a ton of money on this life insurance.
Pat: So, here's what I would do. Here's what I think you should do. Cancel the policies on the kids immediately, and consider it sunk cost. You're gonna lose most of the money. Or you could actually...
Scott: I don't know what it cost... There's a minimum cost every year for these things.
Pat: That's right. So, but what we do know...
Pat: You gotta kinda run the numbers. The newborn, you should cancel it.
Ahmet: Right.
Pat: The child that's got a $30,000 cash value, you might wanna lower the face value to $100,000 or maybe $50,000. And that way, you're buying less pure insurance, and then slow down or stop the deposits completely. But on the...
Ahmet: Yeah. I was trying to see what the lowest death benefit I can get to without it not being MEC.
Pat: Oh, no. You don't care if it becomes a MEC.
Ahmet: Okay.
Pat: You don't care. You don't care. Because the cost of insurance far exceeds any of the downsides of becoming a modified endowment contract.
Ahmet: Okay.
Pat: So, just throw that away. In fact, even on your own life insurance...
Scott: Well, you might wanna qualify for some more insurance before you [crosstalk 00:22:27]
Pat: Talking about the kids first.
Scott: Oh, yeah, yeah, yeah.
Pat: Okay. So, the kids. So, you're on the right path. So, just see what the lowest face value you could turn those things into.
Scott: I would look at the... If the surrender charges aren't too astronomical, I would just cash the thing out. Take... It's $30 grand, a couple grand in penalties. Take the $28 grand, throw it in the 529. That's what I would do.
Pat: That's right. That's right. That's right. That's...
Scott: And if you really want life... I don't know why you'd want life insurance on your kid, but if you want life insurance on your kid, go buy some cheap term insurance.
Pat: You have no need for life insurance on the child. Unless this child is some sort of prodigy, is making all kinds of income that's coming into the family. Life insurance is designed to replace income.
Ahmet: Well the amount of money we're spending on them, I expect them to be prodigies.
Scott: Okay.
Pat: Well, I don't know... I don't actually know...
Scott: Wait till they're teenagers.
Pat: I don't know if that's how prodigies work. I don't think you could actually spend your way to a prodigy. So, on those, I agree with Scott. I'd look at either collapsing those policies completely, or at least the oldest one, child, turning into a MEC. Your policies, I would turn them into MECs. First of all, I agree with Scott. I would actually go out and buy some term insurance. And by the way, $500,000... How much other term insurance do you have?
Scott: They got a million dollars.
Pat: Other...
Ahmet: A million for each of us.
Scott: Yeah.
Pat: That's not enough.
Scott: I would have at least $2 million.
Pat: Yeah, that's not enough.
Scott: Yeah, because $2 million of term... And if you're in reasonably good health, you're 40 years old, it's cheap.
Pat: So, for both those policies, your policies, I'd either lower that face value as low as I possibly could and turn it into a modified endowment contract, or cancel them completely, and just take the hit. The 529 is the thing that you missed.
Scott: Well, he didn't miss. He's followed this advisor.
Pat: Okay. The advisor missed. And the reason...
Scott: The advisor didn't miss. The advisor had a misalignment of his economic...I'm assuming it's a male...his economic benefits, compared to Ahmet's economic benefit. There's a misalignment. He earned a commission.
Pat: That's right.
Scott: How can you be open-minded, and actually look for the best solution, when you've got this conflict, tremendous conflict?
Pat: Oh, and Scott, I disagree. I kinda disagree. If he had done every other thing... Let's just say that he had $2 million in the... Right?
Scott: Ahh, whatever.
Pat: Let's just say we went through the list.
Scott: He's either uneducated and doesn't understand the other stuff, he's an idiot, or he's unethical. My opinion.
Pat: Or maybe all three. But the VULs are the very last thing on the list of a product that you should use. Very last thing, right?
Ahmet: Okay.
Pat: Everything else... The 529 should be fully funded...
Scott: Look, with the tax efficiency of ETFs and a synthetic index, by a direct index, like, why... Those are such...
Pat: As I said, the very last thing, after you've gone through every other thing. You're not there. So, your idea, Ahmet, of either...
Scott: Look, he followed advice.
Pat: Understand. That's what he's calling for.
Scott: I understand.
Pat: He's calling for outside advice.
Scott: I just feel bad.
Pat: But I don't have a dog in this fight. So, the 529... Look, you can convert a 529 plan to a Roth IRA if the child doesn't use it. And you talked about legacy. So, these 529 plans should be maximum funded. [inaudible 00:26:05] All the way...
Ahmet: And should I have one for both...
Scott: No.
Ahmet: ...or one total?
Pat: You can't. You have to have them separate.
Scott: Have two. And what I would do is just... How much is it gonna cost to go to education? Work backwards. How much do I need to save on an annual basis?
Ahmet: Right.
Scott: And it's like... I remember, with my two oldest kids, I had almost a perfect amount saved, but what I didn't factor in is my son was in Boston, and the trips that my wife and I would take to go visit him, and then the shopping my wife liked to do when she was in Boston, so...
Pat: So, that was...
Scott: ...I underfunded my 529 plan by that [inaudible 00:26:38]
Pat: I don't know if 529s are designed for...
Scott: No, they were not. I'm just...
Pat: Joking. Joking. So...
Scott: It was the one hidden cost I didn't foresee.
Pat: So, bring those things to zero, or turn them into MECs. Get $2 million term life insurance policy, 10-year level term, at least, on you. Fund the 529s to the maximum. And I would actually make them, I'd make them aggressive. Your wife should increase her 401(k) to the maximum. And you're doing the backdoor Roths. We can see that. I think you're doing great. I think I would clean that up. And I'd get another advisor.
Ahmet: I'm in the works of not only educating myself of the [crosstalk 00:27:24]
Scott: Clearly, yeah.
Ahmet: ...vis-a-vis the VULs, and then... Which is, that, as part of my education, I'm trying to see if I can structure my business entities optimally that allows us to take a reduced taxable income [inaudible 00:27:38]
Pat: Well, and that was your third question. So, we answered the first two, right? One was the life insurance. The other was the advisor.
Ahmet: Right.
Pat: And those were actually, were driven by the selection of the products. The businesses, oftentimes it depends on how many employees you have...
Scott: Yeah.
Pat: ...what you wanna do with those.
Ahmet: So, we don't own these outright. We're 30% or 40% partners in each of them.
Pat: Okay.
Ahmet: What I was considering was setting up a separate LLC that would effectively be set up for all of our business interests, whether it's in daycares or restaurants or whatever. And then paying my wife a salary through that, and setting up other retirement accounts that will allow us to aggressively put money [crosstalk 00:28:30]
Scott: Yeah, it doesn't... So, there's... It doesn't quite work... There's some rules on, even if you have a holding company, and...
Pat: Beneficial ownership in an LLC.
Scott: Yeah, the beneficial... It's, like, more than 5% or something.
Pat: In an LLC, then it flows through.
Scott: Or an S-Corp, same thing. They're pass-through organizations. Entities.
Pat: And by the way, that normally... I would not recommend it even if you could. Because people oftentimes will focus on, how do I get more money in retirement, and take income rather than dividend? But the problem with taking income is there's a 15.3%...
Scott: FICA. Self-employment tax.
Pat: Well, that's 13.2% self-employment tax on there. Which, oftentimes, you're better off just taking the dividend. So, even if you could do that, it won't work because of beneficial ownership. So, that sort of stuff, you won't be able to touch. It's not gonna...
Scott: Well, setting up... I mean, setting up one entity's probably not gonna...
Pat: Yeah. And, the LLC, you want that for liability.
Ahmet: Okay.
Pat: But in terms of retirement planning, there's not a lot of benefit there, based on what...
Scott: No, you're not gonna get any additional, because they're pass-through entities. You're not gonna get an additional benefit...
Pat: Yeah.
Scott: ...by having some sort of holding company.
Pat: Yeah. So...
Ahmet: Okay. So, there's really nothing else that I can do, or that I'm not doing, to kind of help, from a year-to-year perspective [crosstalk 00:29:54]
Scott: I would simplify by...these VULs. Maximize both 401(k)s. And particularly when these businesses start becoming profitable, which I... And it sounds like maybe the reason your wife is gonna get a salary because she's the one managing the business, and you have other partners, so that's...
Ahmet: Right.
Pat: That makes sense.
Scott: And then I would just save in a brokerage account. And if you... I mean, you're gonna wanna have some reserves with these businesses, and...
Ahmet: We do.
Scott: Yeah.
Pat: Yeah. And if you could buy the properties that the business operate in, perfect.
Ahmet: We do that as well.
Pat: Okay, perfect. Perfect. Perfect. Perfect. You know the tenant.
Ahmet: Okay. So I just need to fire my advisor and stop paying him. That's what I need to do.
Scott: That's what I would do. Yeah.
Pat: [inaudible 00:30:45]
Scott: Is he affiliated with an insurance company?
Ahmet: He is. Yes.
Scott: Yeah.
Pat: Yeah.
Scott: Mm-hmm.
Pat: So, all you got is a hammer, everything looks like a nail.
Ahmet: Well, I'm getting ready to pull my hammer, so...
Scott: Okay. All right.
Pat: Touche. Nice, nice, nice.
Scott: I appreciate the call. Good luck to you.
Ahmet: [crosstalk 00:31:05] boys.
Scott: All right. Thank you, sir.
Pat: Yeah, Ahmet. Hey, and by the way...
Scott: By the way, we haven't been called the boys in a long time. We were both relatively young when we started. We used to be referred to as the boys. I haven't heard that in years, so, appreciate it.
Pat: Thank you. Obviously.
Ahmet: Absolutely.
Pat: Thanks.
Scott: You know, so, on these insurance products, Pat, and you've heard me say before, the world would be better if they were never created. There are clearly uses for these VUL policies. Right?
Pat: I own one.
Scott: I own one as well.
Pat: Mine happens to be a super, super, super low cost.
Scott: Well, mine too. And let's be...full transparency. They were designed for people who are in the industry. They stripped out all the normal costs. I think the idea was...
Pat: To get us to use the product.
Scott: Get you to use the products, so you would sell it to others, but we never did that. But the reason I don't like these policies is the way the costs are structured. And the cost, it's really an element to pay the broker, the insurance agent. Right? These surrender charges that they have inside of these, it's just so the insurance company can recoup the amount of money they just paid for the commissions to the broker who sold the policy. And maybe recoup some of their costs of underwriting the policy to begin with. And they're so expensive, and it creates a misalignment. Here's an advisor. Maybe they [inaudible 00:32:30] trying to do the best job, but they know, hmm, if I recommend he puts in the 529 plan, I'm gonna make $82. If I recommend he buy these life insurance policies, I'm gonna make $8,000. There was huge commissions paid on these policies.
Pat: Oh, there's no question. There's no question.
Scott: And I wouldn't be surprised if it was more than $8 grand.
Pat: That wouldn't surprise me either. What was the premium?
Scott: Five hundred thousand dollars. I don't know how much... But paying 500 bucks a month?
Pat: Typically, it's at least...
Scott: Hundred percent of first year premiums.
Pat: First year. So, that was $6,000, $12,000...
Scott: Yeah. Maybe more. He's overfunding, so...
Pat: Fifteen thousand... Anyway. Quite a bit of money.
Scott: Yeah.
Pat: But he's, this Ahmet's a good saver.
Scott: Well, he's... At first glance, had he not had the other businesses, I would not agree with you on that.
Pat: I know, but he did.
Scott: But he did. [inaudible 00:33:2] All right. Let's continue on here. We're talking now with John. John, you're with Allworth's "Money Matters."
John: Hi. Good day, Scott and Pat. Pleasure to talk with both of you today.
Scott: Yeah.
Pat: Thank you.
John: Long-time listener. And Scott, I used to read your articles in "The Sacramento Bee" a long time ago [crosstalk 00:33:48]
Scott: That was a long time ago. I wrote that... I wrote a weekly article for about nine years.
John: Yeah. Good stuff.
Pat: Long time ago.
Scott: Long time ago.
John: So, my question today is... I'm 51. I'm single with no dependents. I have a trust, a will, and an advanced healthcare directive. If I were to become incapacitated, how can my assets be handled? I assume with a power of attorney?
Pat: That's correct.
Scott: And maybe you guys might have some words of advice on situations like this, how best to handle that.
Pat: Well, who do you have named now?
John: So, right now, I got my father and my sister.
Pat: Okay. To manage the assets. And it can be two different... The advanced healthcare directive can be one person, and the person that actually managed the assets can be someone completely different. They don't have to be one and the same.
John: Okay.
Scott: Because I've seen family members not honor the advanced directives, because they just can't seem to... They can't say goodbye to a loved one.
John: Right.
Scott: I've seen that more than once.
John: Okay.
Pat: I hope my family feels that way.
Scott: Well, make sure you've got your advanced directive set up the way you want it.
Pat: [inaudible 00:35:16] Or maybe I should just be nicer to them.
John: So, a power of attorney...
Scott: Yeah. First of all, we're not attorneys, so we're not here to provide legal advice. But...
John: Okay.
Scott: ...obviously, these are the kind of issues that we all deal with, but...
Pat: So, who do you have named as your power of attorney?
John: I need to figure that out, to be honest. It's been a while since I set up these documents, and I need to go back and make sure I understand that, and that I...that person has full knowledge of their authority.
Pat: Okay. And, you can hire a third party professional power of attorney to, and manage your assets if you become incapacitated. It doesn't have to be someone you know.
John: Okay. Mm-hmm.
Scott: Do you have a health issue you're dealing with right now, that this is coming up? Or...
John: No, no. I'm perfectly healthy, but just starting to think of it as I get a little bit older, and [inaudible 00:36:14] could go awry, and I wanna be prepared.
Pat: Yeah. So, if you're not comfortable with a person, you can choose a professional trustee. And they'll come in and actually pay all your bills. And, actually, we work with them all the time. They hire firms like ours, that actually manage the assets and then they pay the bills and make sure that we're following a written investment policy statement.
John: Okay. Okay.
Pat: And they don't have to be one and the same, like I said. So, when was the last time your trust was updated?
John: Gosh, I had it done... That was when I turned, I think it was at 43 years old. So, that was, been eight years ago, so it's time, maybe, just to refresh, and [crosstalk 00:37:04] the documents.
Pat: Yeah. Or just go read it yourself, to make sure that it's still consistent with your thoughts today.
John: Yeah, absolutely. Good thoughts, for sure.
Pat: Yeah, yeah. But you're fine. You're fine. And I assume the rest of your financial life is in pretty, if you're worried about this stuff, the rest of your life, financial life...
Scott: Your house, just thinking, your house must be in great order. Your lawn looks perfect. Your garage is organized. I'm thinking, because these are one of those things that, it's on all of our lists, right, but it's so far down there. We're not dying today. We're not getting incapacitated today. We'll deal with it tomorrow.
Pat: I know I will only purchase a home where everyone in the whole neighborhood, their trust is up to date. It's, their lawn looks perfect.
Scott: Yeah, that's right.
Pat: Everything is, like... Like, it's the last, normally, for most people, it's close to the last thing on the list.
Scott: Yeah, of course.
Pat: But yeah, I assume the rest of your life is in pretty good order.
John: Yeah. I've been blessed, in so many ways, and that's one of the ways as well. [crosstalk 00:37:56]
Pat: Yeah. I think you're fine. But I'd just go back and read it. And then, if you're... Oftentimes...look, don't... I [inaudible 00:38:05] had this conversation with my four children last year, where we sat down with them and said, okay, look, this is your mom and dad. This is what the finances look like. Oh, by the way, this is who we're thinking of changing the trustee, to two of the four kids. And they said, you know, "We don't like that. We'd like all four of us to be trustees on it." And I said...
Scott: So we can fight nonstop.
Pat: And I said, "Well, you know, this is my thinking behind it." And I said, "This is what, the conflict it creates." But at the end of the day, we named all four of them. One's in law school, so I'm pretty sure she could close the estate. And the others have business... Three of them have degrees in business. I don't know if that makes you a good investor or not, but... But you don't have to name someone in the family, or even a close friend. It's perfectly okay to hire a professional trustee. In fact, oftentimes, it's preferable.
John: [inaudible 00:39:07]
Scott: Well, if I were 51, with no dependents, single, and I trusted my sister enough, I would probably just have my sister. Because you can hire a professional trustee, list somebody now, but odds are you're not gonna become incapacitated.
Pat: That's [crosstalk 00:39:23] you're gonna have to [crosstalk 00:39:24]
Scott: I mean, your statistical odds of becoming incapacitated are so small...
Pat: Yeah.
Scott: And I'd re-look at it again several years down the road.
Pat: I agree. I agree.
John: Good point.
Scott: So, appreciate the call.
John: Thank you very much.
Scott: All right, John. You know, it's interesting, Pat. As we were talking, before the program today, about the whole estate planning... So, here, it's, I know a number of attorneys that do estate planning, and a lot of great ones. And most states, living trusts are preferable to going through probate. So, attorneys would like to... They get people to do a trust with them. And then when somebody... Essentially, what they're doing is entering into a relationship with a family.
Pat: The attorney is.
Scott: So... The attorney, right? So, this is kind of the business model behind this. So, here's the business model behind this. We'll charge you X dollars to do a trust, $3 grand or $5 grand, or maybe more if it's complex. Then every once in a while, you'll need an update, so we can charge a little for the update. But, the real opportunity is when you pass.
Pat: To administer the estate.
Scott: To administer it. And even when the first, husband or wife, oftentimes you'll see the first death, then there's a bypass trust created at the time, AB trust, or however it's structured. And so, need to determine which assets go into which trust. So, there's a process there. And then, on the second death, most people are married, second death, there is still quite a bit of administrative work to do.
Pat: There... Yes. Yes.
Scott: And I've seen the administrative bills, post-mortem, much greater than the cost of setting up the trust originally.
Pat: Well, I know an attorney that actually, he buys people's businesses, living trusts, that have sold living trust, because he wants to capture the administrative work at the end. So, he buys retiring attorneys' business, probably about 15 or 20 of them, so that he can capture the administrative work [crosstalk 00:41:31]
Scott: He just bought my attorneys. I got a letter last week at my house.
Pat: Really? [crosstalk 00:41:35]
Scott: "I'm now part of such-and-such."
Pat: But, that...
Scott: I know who you're talking about.
Pat: Living trusts, though, because of the use of technology, and specifically AI, the costs have come down significantly.
Scott: Well, it's interesting, Pat. So, when you look at... In the past...in the past, you might have... I mean, a lot of people now are doing estate plan stuff on their own. Right? And...because there's so many tools out there, that, "here's my situation," it'll spit out, to your point, AI, it'll spit out, "here's what you need." And for someone with modest assets, that might be all they need. Or not that complicated of an estate. That might be all they need. And it's better to have some sort of estate plan in place than no estate plan in place.
Pat: That's correct. But the more complex, you most certainly need an attorney.
Scott: Yeah. I think we'll see great, even greater adoption of some of these online programs, where you can do your own kind of...
Pat: Absolutely. I mean, there...I hear ads on the radio, of financial advisors using them as loss leaders now. Like, you come in, we'll do your trust for free. "We're not attorneys." This is what the ads will say. "We're not attorneys, but we work with them."
Scott: I [inaudible 00:43:00] I've heard an ad a couple times on the radio, where it's, they're selling immediate annuities. They don't call it that on the ad. Immediate annuity is when you, it's [inaudible 00:43:10] like buying a pension. You take... And there are times when that makes sense. You take a lump sum, you turn it over to an insurance company, in exchange for a monthly income, typically for the rest of your life. You could set up so maybe there's a joint and survivor. Should you die, it goes to your spouse or whatever, or a certain amount of years, but you give up the control. And the ad says payouts of 7%, 8%, 9%, even 10%. And I'm thinking, well, if I gotta choose between 7% and 10%, why wouldn't I choose the 10%?
Pat: Why wouldn't you? I think there's a cost associated with it. I think that you've gotta be careful.
Scott: Well, and I think it has to do with also just how old you are, right? And...
Pat: A hundred. You're giving up...
Scott: Because the way these annuities work...
Pat: You're giving up the corpus, the principal.
Scott: You're 95 years old, and you wanna buy a lifetime pension of $1,000 a month, it's not gonna cost you very, much because how much longer you're gonna live. You're 45 years old, you wanna buy a lifetime pension of $1,000 a month, it's gonna cost you a great deal of money.
Pat: Yes.
Scott: So, the yield, as you get older, the yields become...
Pat: When they say "payout," they actually don't tell you what the return is. That's just what the payout is.
Scott: And, if you're looking at an immediate annuity, maybe someone's pitching you one, or you think it's part of the right, your right[inaudible 00:44:26] you might wanna look at some of these charitable annuities as well, because you can go to this large charitable organization, Salvation Army, or the church or whatever, and oftentimes they'll have a program where you can buy it through them, and you get some...they end up receiving a portion of the benefits, and the payouts could be comparable.
Pat: Yes.
Scott: So, they can make some sense as well, so... We're getting near the end of our program. Wanna let you know, if you like this show, please give us a review, follow us, and pass it on to somebody. If there's something that you heard and thought, "Hmm, I think my friend so-and-so should hear that..."
Pat: Share it.
Scott: ...then we'd encourage you to share it and send it on, and maybe we'll capture another two or three listeners, and grow by 4%. Anyway, it's been great being with you. Scott Hanson and Pat McClain, Allworth's "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.
Pat: Pat McClain. Thanks for joining us.
Scott: Glad you are tuning in, hearing what we've got to talk about today, financial matters. Myself and my co-host are both long-time financial advisors and...
Pat: Yeah. Meeting with people for 35...
Scott: Helping people as we make financial discussions, decisions.
Pat: That's, okay, easy for you to say.
Scott: Yeah, yeah, yeah. Anyway.
Pat: It's an interesting time. It is an interesting time. And...
Scott: The financial markets are so stinking resilient.
Pat: Who...Scott, we had that gentleman speak, the economist, at our conference in Dallas, what, six months ago?
Scott: Oh, Paul Lopesco [SP] He's gonna be joining us next week.
Pat: Oh, it was him. He...
Scott: Talking about tariffs. We got that next week. Special guest.
Pat: Oh, perfect. Perfect, perfect. Because I always, like, when I think about the markets, the markets are all volatile. We'll talk about it next week.
Scott: Yeah, we'll talk about it next week. Anyway, it's...
Pat: That was not meant to be a teaser, but it turned into one.
Scott: I've got a few... We're gonna take some calls, as always, and... I was... I pulled into Starbucks this morning, and there's this nice fancy new pickup truck. I don't know what kind it was, but... Pickup trucks are like Cadillacs anymore now. I don't know if you've been in a nice pickup truck. They've got all the creature... Anyway. His license plate said, "Why Work?" And I've seen this. It used to be on a, like, I think it was on a Cadillac [inaudible 00:01:56]. I've seen the license plate before, because it's in the same town...
Pat: Okay.
Scott: ...and I've lived in the town for 30 years. Why work? And I thought...
Pat: Well, that's kind of...
Scott: It's...I actually thought that's probably not the kinda guy I wanna hang out with.
Pat: Mm-hmm.
Scott: Like, so, you made enough money somewhere so you don't have to work.
Pat: Is that all there is?
Scott: And I started thinking, you could also have on your license plate "Why Serve?" I mean, I think, for a lot of work, it's...
Pat: Why not just...
Scott: ...serving others?
Pat: Why care? Why care? Right?
Scott: So, it's a strange thing to have on your license plate. Not as license plate... That's his license plate that he ordered special through the department of motor vehicles.
Pat: He paid extra for it.
Scott: Yes. "Why Work?" But I thought about that, and it's an interesting time, because those... The more educated you are, the more likely you are to work in retirement. And the higher your net worth, the more likely you are to engage in work during your retirement.
Pat: Some form of work.
Scott: Some form of work. I mean, Warren Buffett just retired, just stepped aside.
Pat: Whatever that means.
Scott: Whatever that means. He was 90-some-odd years old.
Pat: I'm sure that...
Scott: Not sure how sharp he was the last year or two anyway. I don't know.
Pat: I'm sure financials come across his desk weekly, that he looks at and comments on, even though he's retired.
Scott: Oh, daily, probably.
Pat: Yes.
Scott: I would imagine. That's his love.
Pat: Yes, yes.
Scott: But as I was thinking about just the whole concept of retirement, it's a relatively new...
Pat: In the history of the world, it is...
Scott: And most of the globe. It's still non-existent.
Pat: Yeah. It's very, very...very, very new.
Scott: Yeah. Essentially, I'm gonna save up enough grain so that I can no longer have to toil any longer.
Pat: Yes. Rather than have 13 children, and live on a farm, and hope that they will support me in my [crosstalk 00:03:57] years.
Scott: That's correct. That was most of history, yes. Not all 13 are gonna make to adulthood, and those that can, and that's exactly it. It was funny. I was talking to my oldest daughter. She's 29. She's got a little...just about to hire her second employee.
Pat: Second employee?
Scott: Yeah, it's fun. She loves what she does. Loves it. And she was talking about one of her good friends, who is really focused on saving for retirement. My daughter's 29. And her friend is, "No, I can't join you guys this weekend because I wanna save my money, because I'm..." my Roth IRA, or whatever it is. And my daughter's perplexed by it. And we were having this conversation about the importance of having... Getting to a point where work's an option for you. You don't have to work, where you have enough financial security and financial assets. But she's like, "Why would someone at this age..." Like, what, she hates her job so much, she can't wait to quit working? It's, like, baffling to her.
Pat: It's problematic.
Scott: In what way?
Pat: Well, maybe she should pursue a different career.
Scott: Well, there's an interesting balance with it all. Because we need to make sure we have enough money saved in the event that we can no longer work.
Pat: Correct.
Scott: Health issue... Health issue. That's primarily, right. Or, the marketplace changes and your skills are no longer needed. Clearly, AI is gonna be changing some of what's needed in the marketplace. It just got me thinking a lot about... I think, really, the importance of saving so you don't have to be dependent upon anybody else, that's important, I think. And it's a nice luxury if you can get to a point in life where work is an option and not an obligation. Where you got the financial resources, if you wanna retire, you can retire. If you wanna do something different, you could do something different. And Pat, I think there's also been a big... We've seen it, right? Where people come to us maybe early 50s. They're running on a rat race they don't enjoy any longer.
Pat: And oftentimes, it's not good for their health.
Scott: Correct. We've seen that...
Pat: I've seen stress...
Scott: A lot of that.
Pat: ...to the point that you're just...
Scott: People are on their... They live on an airplane, practically. They travel so much. And they come to us and say, "I need to figure out how to retire," and there's still seven, eight years of, from financial savings. And then, oftentimes, we'll look at what would you be doing if you didn't do this? What would you like to do? And we see some people say, instead of retiring in seven years, I'm gonna transition to a different kind of career, and plan my retirement 15 years out.
Pat: And there's a balance.
Scott: There's a balance.
Pat: There is a balance. Yeah. Yeah. It's interesting. I don't know how hard it is to act on. I've always quit jobs I didn't like. That was just who I was.
Scott: Well, you had about... We did a segment... How many years ago was this? We did a segment on Pat's teenage jobs, or childhood jobs.
Pat: Or jobs I've had, yes.
Scott: Yeah. Jobs Pat's had. And every week, we talked about a different one.
Pat: Yes.
Scott: Because you had, like, 15 jobs growing up.
Pat: Oh, yes. Yes. Many, many jobs.
Scott: Some jobs, you didn't last [crosstalk 00:07:10]
Pat: Oh, I loved being a waiter. Sometimes I didn't like the restaurants I was working at. But being a waiter, you could go get another job.
Scott: What was it you enjoyed about being a waiter?
Pat: I liked the interaction with the people. Like the fact that most people were in a good mood when they were going out. I worked in fine dining, so... Or as close as you could get to fine dining in Carmichael, California.
Scott: Chilis? [inaudible 00:07:38] salad bar. The salad bars were popular back in the day.
Pat: Yes. Yes.
Scott: Yeah. I never had the opportunity to do that. Anyway.
Pat: It was good times. It was good times.
Scott: We love taking calls and answering your questions. And if you wanna join us, we'll schedule a time when it's convenient for both of us, all of us. Just send us an email, questions@moneymatters.com, or call the number 833-99-WORTH. Starting out here in Texas with Ahmet. Ahmet, you're with Allworth's "Money Matters."
Ahmet: Hey, guys. Thanks for taking my call. I guess, before I ask my questions, I wanted to paint my current financial picture.
Scott: Perfect.
Ahmet: My wife and I are 40 and 37, respectively. Combined gross income of $310,000 annually, from our corporate jobs. We currently have $125,000 in Roth retirement accounts, that we converted, that is managed by an advisor that charges 75 basis points, and invested very aggressively in genomics and innovation-type companies, showing healthy returns. However, we self-manage the rest of our investments, about another $200,000 in IRAs, $15,000 in a separate Roth, all primarily invested in low-cost index funds. We have about $4,000 in a 529 plan for our two kids. And then about $20,000 in an HSA, that are also invested in index funds.
Pat: Now, you...
Ahmet: I maxed out my... Go ahead.
Pat: Okay. You didn't mention a 401(k) in there. Are you going to?
Ahmet: The 401(k) is part of the $205,000 that is part of our Fidelity accounts.
Pat: Okay. Thank you.
Ahmet: We maxed out our 401(k)s. Well, my wife puts 10%. I maxed out mine.
Scott: How long have you been maxing that out?
Ahmet: I'm sorry?
Scott: How long have you been maxing that out?
Ahmet: For the last two years.
Scott: Okay.
Ahmet: We consistently save about 15% to 20% of our net pay from our corporate jobs. And then, beyond that, we own two daycare businesses. One is operational, that we are expecting to see about $120,000 annually, going forward. Second one's under construction, that, once it's fully operational, we'll get about $150,000 from that. And then my wife will manage that, at a $65,000 annual salary.
Scott: And is that where your cash has... Because you make a relatively good wage, and you don't have a lot saved relative to what your wage is.
Ahmet: Correct. The majority of our cash went into putting the down payment...
Scott: Got it.
Ahmet: ...in for the new business, which was around a little under $300,000.
Scott: Got it.
Pat: Do you own the property, or just the business?
Ahmet: The first one, we own. Both of them, we're gonna own the property and the business.
Pat: Okay.
Ahmet: So, we have some concerns, particularly regarding our VUL policies that we have with our current advisor. We were sold that, given our income, we would be phased out, and this would provide you with an opportunity to put more money, almost Roth-like. The VULs invest [crosstalk 00:11:07]
Scott: Yeah, it's variable universal life, for the [crosstalk 00:11:08]
Ahmet: ...outside of the cost of insurance, [inaudible 00:11:10] all of that goes into S&P 500 index, and we fully participate. We're not capped, and there's not a floor. We're worried about the high fees...
Scott: Yeah.
Ahmet: ...that our current investor is charging, along with just the high fees related to VULs.
Scott: Yep.
Ahmet: Our goal is to build a legacy for our children, as well as save for their college, and weddings, at some point. So, my questions are, one, are these VULs truly beneficial, or is that money better deployed elsewhere, given our concerns and our goals? The second question is, should we consider switching advisor to somebody that's a little more proactive from a tax planning perspective, and keeping track of our goals? And then my third question is, how would you structure our business entities so that they're a little more tax-efficient, as well as allowing us to maybe take advantage of depreciation, or how we should think about the management salary that my wife is ultimately gonna get?
Scott: Yeah. Great questions.
Pat: Got it. And what is your wife's income? You refer to these corporate jobs. Your wife works for a large corporation now?
Ahmet: She works for a marketing consulting company, and I work for a renewable energy company.
Pat: And what is her income? Now?
Ahmet: She makes about $95,000, and then I make about $180,000, plus my bonus.
Pat: And then you mentioned that she's going to leave that, and just run the daycare, at $65,000 a year. Is that correct?
Ahmet: She's gonna keep both.
Pat: Okay.
Ahmet: She'll manage, we'll hire directors, but she'll be there from a owner perspective.
Pat: Oh. Okay.
Ahmet: The plan is to ride both of them as much as [crosstalk 00:12:53]
Scott: By the way, wealth is created not in passive financial assets, like S&P 500, 401(k), VUL. Wealth is created in your career. Either you're very talented, and somebody pays you a boatload of money, or you create a business.
Pat: Or, in your case, both.
Scott: I mean, if you look across the spectrum of wealthy people in this country, it's, very few is it's inherited. It's primarily in your career. Either a business, or you're really good at what you do.
Pat: What did you say was in the 529 plans?
Scott: Let me rephrase that. You're really good at what you do, in an area that demands a high wage, because you might be a great violinist, and you bring a lot of joy to people's life, but you maybe you're not [crosstalk 00:13:42].
Pat: Yeah, this "follow your dream" stuff is garbage.
Scott: I don't know, garbage? You need to get paid too.
Pat: The 529 plan...
Scott: The intersection between getting paid and your dreams.
Pat: Well, how much is in the 529 plan?
Ahmet: About $4,000.
Scott: So...
Pat: And let's dig into this VUL.
Scott: Yeah.
Pat: What's the...
Scott: So, first of... Variable universal life policy. The way they're structured, like... Pat and I both started in the industry with a life insurance company, 1989 and 1990. We lasted a couple years. We learned that if you get trained in the life insurance industry, they teach you that life insurance is the solution for any financial issue you're dealing with. I don't care what it is, a life insurance policy is the answer. That's how they train all their agents and whatnot. A variable universal life policy is a policy where you put money in to this pool. You can choose how it's invested. So, you've chosen to put it in the S&P 500 fund. And then there's a cost of insurance. There's a life insurance, a death benefit. And how much is your death benefit on your policy?
Ahmet: For the parents, it's $500,000. For the kids, it's a million.
Pat: Wait, wait. Whoa, whoa, whoa. Whoa.
Scott: How many policies do you have?
Ahmet: Each of the family members have a policy, and then we, as parents, also have a separate $1 million term policy.
Pat: Okay. And is it the same advisor that sold you this, that is actually managing the Roth IRAs?
Ahmet: Part of them, yes.
Scott: Yeah, the one.
Ahmet: The rest of them, I manage.
Pat: Okay. So, let's break down all four policies. When did you purchase these?
Scott: Well, let's explain how these work.
Pat: Okay, well, thank you.
Scott: So, $500,000, a death benefit, on Ahmet's first policies he's talking about here. And so, if there's no cash in there at all, he has an insurance cost of whatever the insurance costs would be for $500,000 of death benefit. If he had $100,000 of investments in cash in the policy, he would pay...the amount of death benefit would be the difference between that $500,000 and what he's got saved there. The cost, my experience, the cost, by looking at the cost of insurance on these policies, it tends to be a lot more than it would be on pure term insurance.
Pat: Yes. So, they call that difference the delta pure insurance, and that pure insurance is expensive.
Scott: Plus...
Pat: And, once you're in, you can't requalify, because they have big surrender...most of them have big surrender charges on them.
Scott: Plus, there's, the internal costs are 2%, 3% a year.
Pat: There's a load on it, typically, and then there's a management fee inside.
Scott: Now the benefit, what they sell the benefit on these, is they grow tax-deferred, so you're not taxed at all as things grow. And then, when you die, that's tax-free. But later in life, you can withdraw your contributions first, your policy premiums first. And then after that, you can take out a loan against the policy.
Pat: And as long as you die with the insurance policy in place, it's tax-free. The problem is, most people don't die with these insurance policies, because the costs actually erode most of the value in there.
Scott: The whole concept of using these policies, funding them, and then in life, taking a withdrawal, I can't tell... Pat, I've been doing this 35 years. I cannot think of one situation where I saw someone with a sizable net nest egg, in a life insurance policy, living off the loans from it.
Pat: Well...
Scott: I've seen where they're about to implode. And if they collapse on themselves before you die, suddenly it triggers a massive taxable event of all that [crosstalk 00:17:31]
Pat: I have one client, who's a retired doctor, that this is, his VUL extremely well-funded. I didn't implement it for him. He came to me. We actually lowered the face value and increased the deposits, in order to buy less pure insurance in there. And, as you can imagine, someone that saves that well typically won't ever have to use the VUL.
Scott: That's right.
Pat: We won't use this VUL, as said. So, let's break down all four policies. You said you and your spouse each have $500,000?
Ahmet: Correct.
Pat: And what's the cash value in there?
Ahmet: The cash value for mine is around $65,000, and the cash value for my wife is around $20,000.
Scott: And how much are you putting into these?
Ahmet: Right now, we're putting in $500 a month for each person.
Pat: Okay. And you then mentioned that you had two policies, one on each child?
Ahmet: Correct.
Pat: And what's the face value on those?
Ahmet: They're are a million dollars, and we're putting in $300 a month for each child.
Pat: Holy smokes. Whatever...
Scott: How much cash is in those?
Ahmet: My eldest has a good amount, a little north of $30,000, and my youngest has been recently born, so he doesn't have much.
Scott: So, what my experience has been, the internal cost of the insurance is more than the tax liability would be.
Pat And why would you buy an insurance policy on a child?
Scott: Because it's such a great tax tool. That's what was sold [crosstalk 00:19:07]
Pat: But the 529 is completely ignored in this equation. There's $4,000 in the 529 plan, and they're putting $300 a month into these policies, for these... So, this answers...
Scott: But these do have extremely high YTBs.
Pat: Yield to broker. So, the...
Ahmet: Yeah, that's why I'm thinking about lowering my, Sids's death benefit to half of that, and then deploying that capital into a 529.
Pat: I'd cancel the children's.
Scott: What's it costing you?
Ahmet: For... The minimum amount is [inaudible 00:19:46] margin. I think it's $1,200 a year.
Pat: Yeah.
Scott: That's not marginal.
Pat: Yeah. So...
Scott: You can buy a term life policy for less than that on those kids...
Pat: Ahmet...
Scott: ...but I don't know why you'd need a million dollars of life insurance.
Pat: Ahmet, let's step back for a minute. First of all, you're an incredible saver, and you're doing really well. I would have, at age 40, I wouldn't worry about...
Scott: Well, they [inaudible 00:20:10] couple businesses going. You're doing all the right things.
Pat: You're doing... Yes.
Scott: I assume you don't have a bunch of debt. My guess is you don't have a $150,000 loan on a boat. A wake boat.
Ahmet: I don't have any debt outside of my mortgage, which is at 30-year 2.5%...
Scott: Of course it is.
Ahmet: ...and then my car, which should be paid out within a year or two [crosstalk 00:20:35]
Pat: Okay. So, I asked the question earlier. To the advisor that's managing your Roth, you said 75 basis points, right? Three-quarters of a percent.
Ahmet: Right.
Pat: Is he the same one that implemented the life insurance policies?
Ahmet: Yes.
Scott: Sold you the policies.
Pat: Fire, you know, question was, should I change my advisor?
Ahmet: Right.
Pat: And the answer is yes.
Scott: You know, it's funny, was you first started the call, and you said he's charging you three quarters of a percentage point to manage $125,000 account, and you have assets elsewhere, I'm thinking, this guy's working for peanuts.
Pat: Nine hundred dollars a year.
Scott: Why would he work for you at such little pay? If he's a good advisor, he can demand a better pay than... And now it understands why, because he's made a ton of money on this life insurance.
Pat: So, here's what I would do. Here's what I think you should do. Cancel the policies on the kids immediately, and consider it sunk cost. You're gonna lose most of the money. Or you could actually...
Scott: I don't know what it cost... There's a minimum cost every year for these things.
Pat: That's right. So, but what we do know...
Pat: You gotta kinda run the numbers. The newborn, you should cancel it.
Ahmet: Right.
Pat: The child that's got a $30,000 cash value, you might wanna lower the face value to $100,000 or maybe $50,000. And that way, you're buying less pure insurance, and then slow down or stop the deposits completely. But on the...
Ahmet: Yeah. I was trying to see what the lowest death benefit I can get to without it not being MEC.
Pat: Oh, no. You don't care if it becomes a MEC.
Ahmet: Okay.
Pat: You don't care. You don't care. Because the cost of insurance far exceeds any of the downsides of becoming a modified endowment contract.
Ahmet: Okay.
Pat: So, just throw that away. In fact, even on your own life insurance...
Scott: Well, you might wanna qualify for some more insurance before you [crosstalk 00:22:27]
Pat: Talking about the kids first.
Scott: Oh, yeah, yeah, yeah.
Pat: Okay. So, the kids. So, you're on the right path. So, just see what the lowest face value you could turn those things into.
Scott: I would look at the... If the surrender charges aren't too astronomical, I would just cash the thing out. Take... It's $30 grand, a couple grand in penalties. Take the $28 grand, throw it in the 529. That's what I would do.
Pat: That's right. That's right. That's right. That's...
Scott: And if you really want life... I don't know why you'd want life insurance on your kid, but if you want life insurance on your kid, go buy some cheap term insurance.
Pat: You have no need for life insurance on the child. Unless this child is some sort of prodigy, is making all kinds of income that's coming into the family. Life insurance is designed to replace income.
Ahmet: Well the amount of money we're spending on them, I expect them to be prodigies.
Scott: Okay.
Pat: Well, I don't know... I don't actually know...
Scott: Wait till they're teenagers.
Pat: I don't know if that's how prodigies work. I don't think you could actually spend your way to a prodigy. So, on those, I agree with Scott. I'd look at either collapsing those policies completely, or at least the oldest one, child, turning into a MEC. Your policies, I would turn them into MECs. First of all, I agree with Scott. I would actually go out and buy some term insurance. And by the way, $500,000... How much other term insurance do you have?
Scott: They got a million dollars.
Pat: Other...
Ahmet: A million for each of us.
Scott: Yeah.
Pat: That's not enough.
Scott: I would have at least $2 million.
Pat: Yeah, that's not enough.
Scott: Yeah, because $2 million of term... And if you're in reasonably good health, you're 40 years old, it's cheap.
Pat: So, for both those policies, your policies, I'd either lower that face value as low as I possibly could and turn it into a modified endowment contract, or cancel them completely, and just take the hit. The 529 is the thing that you missed.
Scott: Well, he didn't miss. He's followed this advisor.
Pat: Okay. The advisor missed. And the reason...
Scott: The advisor didn't miss. The advisor had a misalignment of his economic...I'm assuming it's a male...his economic benefits, compared to Ahmet's economic benefit. There's a misalignment. He earned a commission.
Pat: That's right.
Scott: How can you be open-minded, and actually look for the best solution, when you've got this conflict, tremendous conflict?
Pat: Oh, and Scott, I disagree. I kinda disagree. If he had done every other thing... Let's just say that he had $2 million in the... Right?
Scott: Ahh, whatever.
Pat: Let's just say we went through the list.
Scott: He's either uneducated and doesn't understand the other stuff, he's an idiot, or he's unethical. My opinion.
Pat: Or maybe all three. But the VULs are the very last thing on the list of a product that you should use. Very last thing, right?
Ahmet: Okay.
Pat: Everything else... The 529 should be fully funded...
Scott: Look, with the tax efficiency of ETFs and a synthetic index, by a direct index, like, why... Those are such...
Pat: As I said, the very last thing, after you've gone through every other thing. You're not there. So, your idea, Ahmet, of either...
Scott: Look, he followed advice.
Pat: Understand. That's what he's calling for.
Scott: I understand.
Pat: He's calling for outside advice.
Scott: I just feel bad.
Pat: But I don't have a dog in this fight. So, the 529... Look, you can convert a 529 plan to a Roth IRA if the child doesn't use it. And you talked about legacy. So, these 529 plans should be maximum funded. [inaudible 00:26:05] All the way...
Ahmet: And should I have one for both...
Scott: No.
Ahmet: ...or one total?
Pat: You can't. You have to have them separate.
Scott: Have two. And what I would do is just... How much is it gonna cost to go to education? Work backwards. How much do I need to save on an annual basis?
Ahmet: Right.
Scott: And it's like... I remember, with my two oldest kids, I had almost a perfect amount saved, but what I didn't factor in is my son was in Boston, and the trips that my wife and I would take to go visit him, and then the shopping my wife liked to do when she was in Boston, so...
Pat: So, that was...
Scott: ...I underfunded my 529 plan by that [inaudible 00:26:38]
Pat: I don't know if 529s are designed for...
Scott: No, they were not. I'm just...
Pat: Joking. Joking. So...
Scott: It was the one hidden cost I didn't foresee.
Pat: So, bring those things to zero, or turn them into MECs. Get $2 million term life insurance policy, 10-year level term, at least, on you. Fund the 529s to the maximum. And I would actually make them, I'd make them aggressive. Your wife should increase her 401(k) to the maximum. And you're doing the backdoor Roths. We can see that. I think you're doing great. I think I would clean that up. And I'd get another advisor.
Ahmet: I'm in the works of not only educating myself of the [crosstalk 00:27:24]
Scott: Clearly, yeah.
Ahmet: ...vis-a-vis the VULs, and then... Which is, that, as part of my education, I'm trying to see if I can structure my business entities optimally that allows us to take a reduced taxable income [inaudible 00:27:38]
Pat: Well, and that was your third question. So, we answered the first two, right? One was the life insurance. The other was the advisor.
Ahmet: Right.
Pat: And those were actually, were driven by the selection of the products. The businesses, oftentimes it depends on how many employees you have...
Scott: Yeah.
Pat: ...what you wanna do with those.
Ahmet: So, we don't own these outright. We're 30% or 40% partners in each of them.
Pat: Okay.
Ahmet: What I was considering was setting up a separate LLC that would effectively be set up for all of our business interests, whether it's in daycares or restaurants or whatever. And then paying my wife a salary through that, and setting up other retirement accounts that will allow us to aggressively put money [crosstalk 00:28:30]
Scott: Yeah, it doesn't... So, there's... It doesn't quite work... There's some rules on, even if you have a holding company, and...
Pat: Beneficial ownership in an LLC.
Scott: Yeah, the beneficial... It's, like, more than 5% or something.
Pat: In an LLC, then it flows through.
Scott: Or an S-Corp, same thing. They're pass-through organizations. Entities.
Pat: And by the way, that normally... I would not recommend it even if you could. Because people oftentimes will focus on, how do I get more money in retirement, and take income rather than dividend? But the problem with taking income is there's a 15.3%...
Scott: FICA. Self-employment tax.
Pat: Well, that's 13.2% self-employment tax on there. Which, oftentimes, you're better off just taking the dividend. So, even if you could do that, it won't work because of beneficial ownership. So, that sort of stuff, you won't be able to touch. It's not gonna...
Scott: Well, setting up... I mean, setting up one entity's probably not gonna...
Pat: Yeah. And, the LLC, you want that for liability.
Ahmet: Okay.
Pat: But in terms of retirement planning, there's not a lot of benefit there, based on what...
Scott: No, you're not gonna get any additional, because they're pass-through entities. You're not gonna get an additional benefit...
Pat: Yeah.
Scott: ...by having some sort of holding company.
Pat: Yeah. So...
Ahmet: Okay. So, there's really nothing else that I can do, or that I'm not doing, to kind of help, from a year-to-year perspective [crosstalk 00:29:54]
Scott: I would simplify by...these VULs. Maximize both 401(k)s. And particularly when these businesses start becoming profitable, which I... And it sounds like maybe the reason your wife is gonna get a salary because she's the one managing the business, and you have other partners, so that's...
Ahmet: Right.
Pat: That makes sense.
Scott: And then I would just save in a brokerage account. And if you... I mean, you're gonna wanna have some reserves with these businesses, and...
Ahmet: We do.
Scott: Yeah.
Pat: Yeah. And if you could buy the properties that the business operate in, perfect.
Ahmet: We do that as well.
Pat: Okay, perfect. Perfect. Perfect. Perfect. You know the tenant.
Ahmet: Okay. So I just need to fire my advisor and stop paying him. That's what I need to do.
Scott: That's what I would do. Yeah.
Pat: [inaudible 00:30:45]
Scott: Is he affiliated with an insurance company?
Ahmet: He is. Yes.
Scott: Yeah.
Pat: Yeah.
Scott: Mm-hmm.
Pat: So, all you got is a hammer, everything looks like a nail.
Ahmet: Well, I'm getting ready to pull my hammer, so...
Scott: Okay. All right.
Pat: Touche. Nice, nice, nice.
Scott: I appreciate the call. Good luck to you.
Ahmet: [crosstalk 00:31:05] boys.
Scott: All right. Thank you, sir.
Pat: Yeah, Ahmet. Hey, and by the way...
Scott: By the way, we haven't been called the boys in a long time. We were both relatively young when we started. We used to be referred to as the boys. I haven't heard that in years, so, appreciate it.
Pat: Thank you. Obviously.
Ahmet: Absolutely.
Pat: Thanks.
Scott: You know, so, on these insurance products, Pat, and you've heard me say before, the world would be better if they were never created. There are clearly uses for these VUL policies. Right?
Pat: I own one.
Scott: I own one as well.
Pat: Mine happens to be a super, super, super low cost.
Scott: Well, mine too. And let's be...full transparency. They were designed for people who are in the industry. They stripped out all the normal costs. I think the idea was...
Pat: To get us to use the product.
Scott: Get you to use the products, so you would sell it to others, but we never did that. But the reason I don't like these policies is the way the costs are structured. And the cost, it's really an element to pay the broker, the insurance agent. Right? These surrender charges that they have inside of these, it's just so the insurance company can recoup the amount of money they just paid for the commissions to the broker who sold the policy. And maybe recoup some of their costs of underwriting the policy to begin with. And they're so expensive, and it creates a misalignment. Here's an advisor. Maybe they [inaudible 00:32:30] trying to do the best job, but they know, hmm, if I recommend he puts in the 529 plan, I'm gonna make $82. If I recommend he buy these life insurance policies, I'm gonna make $8,000. There was huge commissions paid on these policies.
Pat: Oh, there's no question. There's no question.
Scott: And I wouldn't be surprised if it was more than $8 grand.
Pat: That wouldn't surprise me either. What was the premium?
Scott: Five hundred thousand dollars. I don't know how much... But paying 500 bucks a month?
Pat: Typically, it's at least...
Scott: Hundred percent of first year premiums.
Pat: First year. So, that was $6,000, $12,000...
Scott: Yeah. Maybe more. He's overfunding, so...
Pat: Fifteen thousand... Anyway. Quite a bit of money.
Scott: Yeah.
Pat: But he's, this Ahmet's a good saver.
Scott: Well, he's... At first glance, had he not had the other businesses, I would not agree with you on that.
Pat: I know, but he did.
Scott: But he did. [inaudible 00:33:2] All right. Let's continue on here. We're talking now with John. John, you're with Allworth's "Money Matters."
John: Hi. Good day, Scott and Pat. Pleasure to talk with both of you today.
Scott: Yeah.
Pat: Thank you.
John: Long-time listener. And Scott, I used to read your articles in "The Sacramento Bee" a long time ago [crosstalk 00:33:48]
Scott: That was a long time ago. I wrote that... I wrote a weekly article for about nine years.
John: Yeah. Good stuff.
Pat: Long time ago.
Scott: Long time ago.
John: So, my question today is... I'm 51. I'm single with no dependents. I have a trust, a will, and an advanced healthcare directive. If I were to become incapacitated, how can my assets be handled? I assume with a power of attorney?
Pat: That's correct.
Scott: And maybe you guys might have some words of advice on situations like this, how best to handle that.
Pat: Well, who do you have named now?
John: So, right now, I got my father and my sister.
Pat: Okay. To manage the assets. And it can be two different... The advanced healthcare directive can be one person, and the person that actually managed the assets can be someone completely different. They don't have to be one and the same.
John: Okay.
Scott: Because I've seen family members not honor the advanced directives, because they just can't seem to... They can't say goodbye to a loved one.
John: Right.
Scott: I've seen that more than once.
John: Okay.
Pat: I hope my family feels that way.
Scott: Well, make sure you've got your advanced directive set up the way you want it.
Pat: [inaudible 00:35:16] Or maybe I should just be nicer to them.
John: So, a power of attorney...
Scott: Yeah. First of all, we're not attorneys, so we're not here to provide legal advice. But...
John: Okay.
Scott: ...obviously, these are the kind of issues that we all deal with, but...
Pat: So, who do you have named as your power of attorney?
John: I need to figure that out, to be honest. It's been a while since I set up these documents, and I need to go back and make sure I understand that, and that I...that person has full knowledge of their authority.
Pat: Okay. And, you can hire a third party professional power of attorney to, and manage your assets if you become incapacitated. It doesn't have to be someone you know.
John: Okay. Mm-hmm.
Scott: Do you have a health issue you're dealing with right now, that this is coming up? Or...
John: No, no. I'm perfectly healthy, but just starting to think of it as I get a little bit older, and [inaudible 00:36:14] could go awry, and I wanna be prepared.
Pat: Yeah. So, if you're not comfortable with a person, you can choose a professional trustee. And they'll come in and actually pay all your bills. And, actually, we work with them all the time. They hire firms like ours, that actually manage the assets and then they pay the bills and make sure that we're following a written investment policy statement.
John: Okay. Okay.
Pat: And they don't have to be one and the same, like I said. So, when was the last time your trust was updated?
John: Gosh, I had it done... That was when I turned, I think it was at 43 years old. So, that was, been eight years ago, so it's time, maybe, just to refresh, and [crosstalk 00:37:04] the documents.
Pat: Yeah. Or just go read it yourself, to make sure that it's still consistent with your thoughts today.
John: Yeah, absolutely. Good thoughts, for sure.
Pat: Yeah, yeah. But you're fine. You're fine. And I assume the rest of your financial life is in pretty, if you're worried about this stuff, the rest of your life, financial life...
Scott: Your house, just thinking, your house must be in great order. Your lawn looks perfect. Your garage is organized. I'm thinking, because these are one of those things that, it's on all of our lists, right, but it's so far down there. We're not dying today. We're not getting incapacitated today. We'll deal with it tomorrow.
Pat: I know I will only purchase a home where everyone in the whole neighborhood, their trust is up to date. It's, their lawn looks perfect.
Scott: Yeah, that's right.
Pat: Everything is, like... Like, it's the last, normally, for most people, it's close to the last thing on the list.
Scott: Yeah, of course.
Pat: But yeah, I assume the rest of your life is in pretty good order.
John: Yeah. I've been blessed, in so many ways, and that's one of the ways as well. [crosstalk 00:37:56]
Pat: Yeah. I think you're fine. But I'd just go back and read it. And then, if you're... Oftentimes...look, don't... I [inaudible 00:38:05] had this conversation with my four children last year, where we sat down with them and said, okay, look, this is your mom and dad. This is what the finances look like. Oh, by the way, this is who we're thinking of changing the trustee, to two of the four kids. And they said, you know, "We don't like that. We'd like all four of us to be trustees on it." And I said...
Scott: So we can fight nonstop.
Pat: And I said, "Well, you know, this is my thinking behind it." And I said, "This is what, the conflict it creates." But at the end of the day, we named all four of them. One's in law school, so I'm pretty sure she could close the estate. And the others have business... Three of them have degrees in business. I don't know if that makes you a good investor or not, but... But you don't have to name someone in the family, or even a close friend. It's perfectly okay to hire a professional trustee. In fact, oftentimes, it's preferable.
John: [inaudible 00:39:07]
Scott: Well, if I were 51, with no dependents, single, and I trusted my sister enough, I would probably just have my sister. Because you can hire a professional trustee, list somebody now, but odds are you're not gonna become incapacitated.
Pat: That's [crosstalk 00:39:23] you're gonna have to [crosstalk 00:39:24]
Scott: I mean, your statistical odds of becoming incapacitated are so small...
Pat: Yeah.
Scott: And I'd re-look at it again several years down the road.
Pat: I agree. I agree.
John: Good point.
Scott: So, appreciate the call.
John: Thank you very much.
Scott: All right, John. You know, it's interesting, Pat. As we were talking, before the program today, about the whole estate planning... So, here, it's, I know a number of attorneys that do estate planning, and a lot of great ones. And most states, living trusts are preferable to going through probate. So, attorneys would like to... They get people to do a trust with them. And then when somebody... Essentially, what they're doing is entering into a relationship with a family.
Pat: The attorney is.
Scott: So... The attorney, right? So, this is kind of the business model behind this. So, here's the business model behind this. We'll charge you X dollars to do a trust, $3 grand or $5 grand, or maybe more if it's complex. Then every once in a while, you'll need an update, so we can charge a little for the update. But, the real opportunity is when you pass.
Pat: To administer the estate.
Scott: To administer it. And even when the first, husband or wife, oftentimes you'll see the first death, then there's a bypass trust created at the time, AB trust, or however it's structured. And so, need to determine which assets go into which trust. So, there's a process there. And then, on the second death, most people are married, second death, there is still quite a bit of administrative work to do.
Pat: There... Yes. Yes.
Scott: And I've seen the administrative bills, post-mortem, much greater than the cost of setting up the trust originally.
Pat: Well, I know an attorney that actually, he buys people's businesses, living trusts, that have sold living trust, because he wants to capture the administrative work at the end. So, he buys retiring attorneys' business, probably about 15 or 20 of them, so that he can capture the administrative work [crosstalk 00:41:31]
Scott: He just bought my attorneys. I got a letter last week at my house.
Pat: Really? [crosstalk 00:41:35]
Scott: "I'm now part of such-and-such."
Pat: But, that...
Scott: I know who you're talking about.
Pat: Living trusts, though, because of the use of technology, and specifically AI, the costs have come down significantly.
Scott: Well, it's interesting, Pat. So, when you look at... In the past...in the past, you might have... I mean, a lot of people now are doing estate plan stuff on their own. Right? And...because there's so many tools out there, that, "here's my situation," it'll spit out, to your point, AI, it'll spit out, "here's what you need." And for someone with modest assets, that might be all they need. Or not that complicated of an estate. That might be all they need. And it's better to have some sort of estate plan in place than no estate plan in place.
Pat: That's correct. But the more complex, you most certainly need an attorney.
Scott: Yeah. I think we'll see great, even greater adoption of some of these online programs, where you can do your own kind of...
Pat: Absolutely. I mean, there...I hear ads on the radio, of financial advisors using them as loss leaders now. Like, you come in, we'll do your trust for free. "We're not attorneys." This is what the ads will say. "We're not attorneys, but we work with them."
Scott: I [inaudible 00:43:00] I've heard an ad a couple times on the radio, where it's, they're selling immediate annuities. They don't call it that on the ad. Immediate annuity is when you, it's [inaudible 00:43:10] like buying a pension. You take... And there are times when that makes sense. You take a lump sum, you turn it over to an insurance company, in exchange for a monthly income, typically for the rest of your life. You could set up so maybe there's a joint and survivor. Should you die, it goes to your spouse or whatever, or a certain amount of years, but you give up the control. And the ad says payouts of 7%, 8%, 9%, even 10%. And I'm thinking, well, if I gotta choose between 7% and 10%, why wouldn't I choose the 10%?
Pat: Why wouldn't you? I think there's a cost associated with it. I think that you've gotta be careful.
Scott: Well, and I think it has to do with also just how old you are, right? And...
Pat: A hundred. You're giving up...
Scott: Because the way these annuities work...
Pat: You're giving up the corpus, the principal.
Scott: You're 95 years old, and you wanna buy a lifetime pension of $1,000 a month, it's not gonna cost you very, much because how much longer you're gonna live. You're 45 years old, you wanna buy a lifetime pension of $1,000 a month, it's gonna cost you a great deal of money.
Pat: Yes.
Scott: So, the yield, as you get older, the yields become...
Pat: When they say "payout," they actually don't tell you what the return is. That's just what the payout is.
Scott: And, if you're looking at an immediate annuity, maybe someone's pitching you one, or you think it's part of the right, your right[inaudible 00:44:26] you might wanna look at some of these charitable annuities as well, because you can go to this large charitable organization, Salvation Army, or the church or whatever, and oftentimes they'll have a program where you can buy it through them, and you get some...they end up receiving a portion of the benefits, and the payouts could be comparable.
Pat: Yes.
Scott: So, they can make some sense as well, so... We're getting near the end of our program. Wanna let you know, if you like this show, please give us a review, follow us, and pass it on to somebody. If there's something that you heard and thought, "Hmm, I think my friend so-and-so should hear that..."
Pat: Share it.
Scott: ...then we'd encourage you to share it and send it on, and maybe we'll capture another two or three listeners, and grow by 4%. Anyway, it's been great being with you. Scott Hanson and Pat McClain, Allworth's "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.