Bearish Market Sentiment, Life Insurance with LTC Benefits, and Smart Tax Moves for the Wealthy
On this week’s Money Matters, Scott and Pat discuss recent reports of increased bearish sentiment in the market, reaching levels not seen in over a year. Then, they break down the complexities of life insurance policies with long-term care benefits. Are they worth the investment or are there better options? Later, they speak with Suzanne Conrad, Allworth's Director of Tax Solutions, who shares practical tax strategies for high-net-worth individuals looking to optimize their wealth.
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Man: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-WORTH.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain, thanks for joining us.
Scott: That's right. My self, my co-host, both financial advisors, certified financial planner, charter financial consultant. Been doing this stuff for a long time. I'm glad you're here with us as we talk about financial matters. And as we're getting kicked off, Pat, there was an article in "The Wall Street Journal" a week or two ago. By the way, by the time something is in the news, the markets have priced it in. Just if you read something, oh, that's actually a good idea. Maybe I should invest in that. Eh, it's probably too late. The headline, "Investors spot signs of market froth during long bull market." And it talked about the bullishness that people haven't been this bullish...I mean, sorry, bearishness. They haven't been this bearish since 2023.
Pat: I read that and I thought that's just stupid.
Scott: Okay. Maybe it was a slow news day and they're looking for an article. You saw the same thing.
Pat: Just thought, this is stupid.
Scott: Did you read the whole article?
Pat: No, I didn't read the whole article. I've been in this business long enough. I know the article.
Scott: But it just reminded me, because there's an article.
Pat: Wait. They haven't been this bearish since when?
Scott: 2023.
Pat: That's amazing. And why do they think it's bearish? It doesn't appear bearish to me.
Scott: Well, the thing that I was...the irony, if you were bearish and say, oh, I'm scared about the market, I'm going to be out of the market, you missed 2024, which is a pretty phenomenal year.
Pat: Yeah, if you were bearish in 2023.
Scott: Look, historically, the stock market's done roughly 10% a year in the last 100 years. Roughly 10%. In order to earn that 10%, you need to be invested in those great up years as well. If you miss a year, instead of 10, you might have 7% long term. It's really important that you have a...
Pat: They do call it a risk premium, which means you are being compensated, your return is compensated for the risk that you're taking over the short term. That's why it's a risk premium. The amount of money that you earn in the market...
Scott: No one speaks like risk premium. In finance class, we call it risk premium.
Pat: It's that simple. We're going to speak like this. It's that simple. In order to get a rate of return over that of the U.S. Treasury...
Scott: You have to have some risk.
Pat: You have to have risk. Now, is there risk in day to day? Yes. Is there risk in year to year? Absolutely. Three years? Certainly. Right? Remember, they're getting less. They absolutely went to certainly risk over three years. Is there risk over five years? Probably. Ten years? Almost never. Almost never.
Scott: Twenty years? There's never been a time you had...
Pat: Where you haven't been compensated above that return of the one year treasury. Never. So, your investments are all based on timelines. You can look at them every day if you want, or you can understand it and live with it. And risk premium.
Scott: I'll never forget, Pat, years ago I had a client, their daughter...their son-in-law died, I believe it was an accident. Tragic, right? She had two teenagers at the time, and he liked to trade quite a bit. He had a traditional broker, talked to his broker every week or whatever. And my client said, can you please meet with my daughter and help her out here? So I met with her. They had life insurance. They're pretty well on assets. She had a career as well. But she thought that in order to manage these assets, she needed to do it the way her husband did it, right? And so I remember having a conversation. She says, well, Friday the jobs report's coming out, so shouldn't we wait until Friday? And I remember looking at her, I said, Lisa, why in the world do you know when the jobs report's coming out? You've got your own career. You've got kids to raise. Why does that have any relevance? And I think just watching her husband, he probably did himself no favors.
Pat: Oh, correct. He probably got market returns or less.
Scott: Because the more you trade, by and large, the worse you do. So he probably did not do himself any favors, but left her with this mindset that in order to be a successful investor, that's the way to do it, which... Got her off that. Go live your life. Let us worry about the jobs report.
Pat: And she became a client.
Scott: Oh, yeah.
Pat: Oh. I was waiting for you to say that she went her own way and continued to trade.
Scott: Oh, I've had...I've talked to those people as well. I guess, we all have, Right?
Pat: Yes. Yeah.
Scott: You smoke and you go see the doctor, the doctor says quit smoking, you're saying, I'm going to find another doctor. Find a doctor who smokes. I wonder if there are many doctors that still smoke. I remember seeing an ad the other day...
Pat: Their the last one's doing commercials.
Scott: Yeah, I remember seeing an ad the other day. It wasn't that many years ago when we were having smokers...
Pat: Three out of four doctors say that this is the best cigarette for you.
Scott: Is that what it was?
Pat: Yeah. Back in the day.
Scott: Isn't that amazing? What are we going to think 20 years from now on certain things?
Pat: Oh, yes.
Scott: I think quite a bit.
Pat: Yeah. We'll think, but there are some, look, if you're interested in what's going on with like the food systems, I would recommend a couple of books by Michael Pollan, "In Defense of Food," "The Omnivore's Dilemma." Both of those are excellent on...and it all goes back to what we're talking, what RFK actually is talking about in our food systems. And these were written years and years ago about how our food systems work and the subsidy of corn for high fructose corn. It's fascinating. But I am reading a great book right now called "Frostbite." It's the history of refrigeration.
Scott: Oh, that would be interesting.
Pat: It's really interesting.
Scott: It changed our diets tremendously.
Pat: It changed everything. Yes. Yeah. First read the book, "The History of Salt," which is talking about the preservation of food and then history...
Scott: And after that, page turner...
Pat: Go to the history of refrigeration. It's called "Frostbite."
Scott: They both have to do with food.
Pat: Everything to do with food and how we actually, what we consume and why.
Scott: I did have frostbite on my foot last year. Now I have to be careful.
Pat: Wait, wait.
Scott: What?
Pat: Really?
Scott: Yeah. The tip of my toe turned black.
Pat: How? Where were you? Were you like, at the Iditarod? Where were you?
Scott: Exactly. No. I was skiing in Canada and it was a super bad cold spell. And my tip of my toe and my toenails turned all black. And then the tip of my toe came all black. I lost all my feeling in it. Peeled off. Just my toe didn't fall off or anything. It wasn't that...
Pat: You never mentioned this.
Scott: It's not that big of a deal.
Pat: I feel like I'm meeting Beck Weathers.
Scott: Well, you know, Beck and I... Beck Weathers. I don't want to talk about my frostbite.
Pat: Does it hurt?
Scott: No. And I have toe warmers I use now when I ski if it's below 25 degrees so I don't freeze my toes.
Pat: Electric?
Scott: No, I just have the basic toe warmers.
Pat: I've got electric ones.
Scott: The electric socks?
Pat: Uh-huh. They work.
Scott: I was skiing...
Pat: We sound like complete elitists now. We're just complete... First of all, I didn't grow up skiing. I'm fortunate to ski. You didn't grow up skiing.
Scott: What's that big podcast Jeffrey Sachs[SP] is on? And there's...
Pat: Go fish.
Scott: It's one of the top five podcasts and it's all these billionaire tech guys that sit around and talk. Well, I was looking and I...someone turned me on this. I'm actually watching the podcast. I usually just listen and he's at a ski resort and the skiers are skiing behind him. And I thought about elitists. What are you, in Deer Valley? Got some 10,000 foot house or something.
Pat: And there's podcasts going off in every one of them.
Scott: And he's doing a podcast with the skiers skiing behind him. It was actually a bit much for me. I'm like, uh, okay.
Pat: Well, we do sound like elitists, but we do.
Scott: I was talking about just ski guides in Canada. They all use electric socks.
Pat: Oh, they do?
Scott: They all use them now.
Pat: Oh, okay. All right. This is a financial show.
Scott: The professionals do. Yeah, by the way.
Pat: We've lost track.
Scott: Yeah. We're going to take some calls. Later in the program, we've got one of our in-house certified public accountants, Suzanne Conrad is going to talk to us about some tax strategies for high net worth individuals. So we'll talk about that later in the program, which we're looking forward to.
Pat: And this is a financial show, by the way. We should remind people. We take financial calls. We sometimes get distracted. You and I don't see much of each other anymore, so it's nice to catch up.
Scott: And the reality is, I'm an avid skier. That would be great, actually. I'm an avid skier. One of the reasons I live in Northern California at the base of the Sierra, is because Tahoe is right in our backyard. And I could drive and go skiing in the day and be back for dinner in the night. It's a great place. One of the reasons I've lived there forever.
Pat: Well, I live here because my parents moved here.
Scott: Actually, I lived here because that's where my wife's sister moved. She wanted to move the same way...
Pat: Yeah, so you can drive up and ski for the afternoon or in the morning and come home.
Scott: And my oldest daughter is a bigger skier than I am. She lives in Denver, in large part, so she can ski. I'm trying to get her back to California though, we'll see.
Pat: Really?
Scott: She told me if I bought her a house in Truckee. I laughed. I laughed. It's hilarious. Anyway, let's...
Pat: Buy me a house. Well, you've got to appreciate her asking.
Scott: Oh, she's not afraid of asking. She's 29, she'll ask for everything.
Pat: That's good for her.
Scott: And she says, well, I never know. Sometimes you say yes, which is true. She's still my little girl. All right, let's...not on the house. Let's just go to the calls here. We're talking with Jonathan. Jonathan, you're with Allworth's "Money Matters."
Jonathan: Hey, guys, how's it going?
Scott: Fantastic.
Jonathan: First of all, I'd like to thank the two of you for helping me develop my mantra. I retired in 2020. And after going through the four phases of retirement, I went back to work in 2022. And people would ask me, why are you coming back to work? And I said, work is an option, not an obligation.
Pat: Yes. Good for you.
Jonathan: Thank you so much. And I want to thank you guys for that.
Pat: It does change your mindset, though, doesn't it?
Jonathan: Absolutely. Absolutely. I went to a seminar, my wife and I, here recently. It was called, The changing world of retirement planning. And of course, first they were waiting for the pitch. But the presenter talked about old paradigms and new paradigms. And the old paradigm was that Social Security, pension, and retirement, you're saving, you're going to be okay. And the new paradigm shift was higher tax rates. Well, he went into this whole program talking about...
Pat: So life insurance.
Jonathan: Yeah, that's why I'm calling.
Pat: Is that what it was?
Jonathan: I want to know...yes, that's what it is. He said, if you're looking at long-term care, they have a new program called long-term care insurance or long-term care insurance with long-term features.
Pat: Yes.
Jonathan: Life insurance with long term features.
Pat: Yes.
Jonathan: So right away, I'm waiting for the pitch. The pitch never came the first day. So it was a two-day event. And he talked about history and taxes in 1943, the top marginal rate was 94%. It blew the class away. And in the '70s, it was 70%. And he said, right now in 2020, at 37%, you're in the best tax rate you could be in. So the next night...
Scott: But no one actually paid those rates.
Pat: Yeah, back there in the time because of the deductions that would go up against that. So anyway, but the headline is appealing.
Jonathan: Right. So the pitch was life insurance with long-term care. This is how we can protect you against loss and pay for long-term care expenses. So I was telling my wife, we can self pay. And she said, we don't have enough. We don't have enough. And I said, well, let me call Pat and Scott.
Scott: Okay. Let's back up for a minute. I want to briefly talk about the tax benefits of life insurance, because this is how it's usually pitched, and then how you might get those same tax benefits in other types of...
Pat: But Scott, and then I'd like to talk on the pros and cons of a long-term care policy in a life insurance policy, which by the way, it might surprise people. I'm not opposed to if it's used appropriately.
Scott: I'm not either.
Pat: So let's spend a minute about how they sell the life insurance because of what's called LIFO and FIFO.
Scott: Yeah. So life insurance, different than a lot of other types of investments, you invest money. We're talking about a cash savings type. So whole life, universal life, variable universal life, something that has a savings element to it, equity index, universal life or whatever. That excess money is invested and it grows tax deferred. So let's say you put in some money in a life insurance policy, whether it's on an annual basis or lump sum, it all grows tax deferred.
Pat: Okay. So can I step back for a second?
Scott: Yes.
Pat: So let's just say there you have a premium of $36,000 a year and they say, we want you to put $3,000 a month into this policy. What happens...or we want you to put $200,000 into it. What happens is a portion of that money goes to pay for the pure insurance, the mortality risk at your death. And that is a component inside the insurance. It's called pure insurance or mortality risk. So a portion of that just goes to pay for that. And then some goes to administration, some goes to commissions and then there's an excess and this is either invested in a bond fund or what they call their home office fund, whatever it is, right? It's some sort of investment in a variable universal life. You choose the investment. So you're depositing more than the cost of the insurance. Continue Scott.
Scott: Yes. And as long as you don't violate the MEC guidelines or whatever. Modify the endowment contracts. It'll grow tax deferred and then later in life you can withdraw all of your deposits without any taxes. Which sounds great. So you put it, let's say you end up putting in $100 grand into something and let's say it's worth...the cash value is worth $200 grand down the road. Just throwing some numbers up. You could say, hey, I need &50 grand for a car. I want money for this or whatever. You can pull out all of your deposits first before you have to pull out their earnings. Then once you go to your earnings, you can tell the insurance company, hey, you know what? Instead of withdrawing it, why don't you loan me my own money? And so you can borrow against the policy and therefore you never pay taxes because you technically, didn't withdraw it. And then if you own it to your death, whatever death benefits left is given to your heirs tax free and whatever loans you had are forgiven at that time.
Pat: Jonathan, does this sound familiar?
Jonathan: It sounds very familiar.
Pat: Okay, here's another way to do it. Wait, wait, wait, stop. But here's the problem with that, right? Is that if the policy collapses.
Scott: You mean, there's not enough money in there.
Pat: And the cost of pure insurance goes up as you get older. The closer I am to death, the more the mortality cost actually kicks in. So if I have drawn out all of this money, then the policy has a great risk of collapsing. And in a collapse, what it means is the policy lapse prior to death. And if it lapsed prior to death, then I owe all those taxes on the money that I borrowed from the policy.
Scott: That's right.
Pat: So while they talk about all the good things in it, what they fail to mention is the administration cost.
Scott: And I've seen that.
Pat: I've seen it too. The administration costs continue to go up and they charge you interest to borrow your own money now.
Scott: But here's another way to accomplish this. First of all, you should be maximizing any Roth opportunities you have before you buy a permanent life insurance policy. For that average family. Every once in a while it makes sense for estate planning or whatever. I'm setting that aside. But let's assume instead of doing that, you say, how about instead I'm just going to have term insurance for the years that I need insurance. And because I probably won't need it my whole life anyway, just for the years I need it. And I'm going to invest. I'm going to pick an S&P 500 fund. Right? Whether it's an ETF or mutual fund, I don't really care. You invest in that outside of a broke...outside of an IRA. Let's say that you put in &100 grand. It's worth $200 grand down the road. There's no reason you can't borrow against that as well. It's called a margin loan. Any brokerage firm would be happy to securitize that and give you a loan against that. You can borrow against it. And at your death, your heirs receive...
Pat: A full step-up in basis.
Scott: ...a full step-up in basis. So it's a very similar tax structure without all that added insurance.
Pat: So when they sell these life insurance policies, it very rarely comes to fruition that people use them the way they explain it. Now, having said all that, if you're buying a policy for long-term care and they say, okay, how much money? Let's say you bought a $300,000 policy and you put $100,000 in cash into this, Jonathan.
Scott: The death benefit is usually much lower and they usually end up being modified endowment contracts because they're overfunded the seven year test or whatever it is.
Pat: So what you're allowed to do is they actually, once you use up all your deposits for long-term care, they will actually then continue coverage for a period of time.
Scott: And here's why they work. Think about the same way we have a deductible on our automobiles. You could probably get a deductible for 100 bucks. I have a $5,000 deductible on my car because I'm not going to make a claim unless there's something pretty significant. And as a result, my insurance premiums are much less.
Pat: You took that risk on.
Scott: I took the risk. You can do the same thing with long-term care. So the real risk in long term is not a year or two in a nursing home. It's a 10-year stay with someone who's got dementia, Alzheimer's where it lasts a decade.
Pat: That's the risk to the insurance company.
Scott: But that's the risk to most families. Most families like the average day most families can deal with. It's those super long ones. So if you think about buying a long-term care policy, I mean, let's make an extreme example. Let's say you had a long-term care policy that had a two-year waiting period. It's like a deductible. So you end up needing long-term care that doesn't kick in for two years. Well, odds are you're going to be dead by then. But if you're not, if you're one of those outliers, that's where the insurance kicks in. What these life insurance policies do is in a sense provides a very long elimination period, waiting period.
Pat: You go through all your money first. The money that you put in. And once that is all used up, then the insurance kicks in. Right. And if you die, right, and you haven't used that up, then your family gets that back. But what you'll see is the cash value policies in most of these don't grow at all. And the reason they don't grow is that's what they're using to actually pay for the insurance. The insurance. I like them. I like them.
Scott: For the right circumstance.
Pat: If used for that. I hate the idea of you're using it for retirement planning. But if you came in to me, Jonathan, and you said, oh, how much money in non IRAs do you have right now?
Jonathan: $750,000.
Pat: Okay. And have they told you how much they want you to fund the life insurance policy for?
Scott: $750,000.
Jonathan: No. That was the hook. We had to give them all our information, which I wasn't going to do because I listened to you guys last week where somebody did this. They went to Arby's or Denny's and gave them all their information. So I'm 68 years old. My wife is 61. We have no children. Our home is about $600,000. We owe $250,000 on it. In retirement investment, we have about 1.7. In a brokerage account, $750,000. In a high yield saving, $100,000. We have a rental that clears about $500 a month. And I went back to work. I have a pension. I stopped my Social Security. I went back to work. I have a pension with the Department of Juvenile Justice. And I'm working part time now making $55,000 a year. And the money's coming in. And my wife is thinking about retiring. She's 61. And she said she's going to take her Social Security at 62. But I'm going to hold off until 70. So we're not hurting for anything. But I feel like we don't have enough still.
Pat: Of course you feel that way. That's why you have it. How much is your pension?
Jonathan: My pension is about $36,000 a year.
Pat: When you were working full time, how much were you earning?
Jonathan: No more than $75,000.
Scott: Between your pension and your Social Security, it about makes up.
Pat: Yeah, your earnings. This is one of those things where you just say, do I want to do it or don't?
Scott: Does your wife have any pension or any other income?
Jonathan: She's working. She works. And she makes about $60,000 a year. She has no pension. But my survival benefits, she has 100% of that.
Scott: And she has 100% of that. So this is... I mean, let's go sometime in the future. That's what you're looking at the long term. Sometime in the future. Between Social Security and your pension, there's $70,000 a year. And then you've got $2.5 million in savings, investments.
Pat: You can self-insure.
Scott: Correct.
Pat: But if you don't want to, you can buy a policy. And you don't actually have to buy it through these guys. You can go online. You can buy a no fee, low fee life insurance policy that does exactly the same thing as the commissioned one does.
Jonathan: Okay.
Pat: But if you were sitting in my office, I'd say, do what makes you feel good.
Scott: Yeah. I mean, like your wife's younger. If your wife's concerned about this, long-term care for you, then maybe you say, we'll take 100 grand and put it in this life insurance policy. It's going to provide these benefits and gives her the peace of mind. And if you don't use it, that 100 grand will be there the day you pass away. It'll go to your wife.
Pat: You can buy them on two people too. Or at least you used to be able to.
Scott: Correct.
Pat: So that it covers both you and your wife.
Jonathan: Would I be able to go to Allianz as an individual?
Pat: Oh, yeah.
Jonathan: Or would it only take...okay. Because that's who they were...
Pat: Okay, well, that's kind of a...Look, they throw out Allianz. You could go to a no cost, low cost brokerage and buy an insurance policy. There's fee based insurance policies. Our firm has an insurance division. Right?
Scott: Yeah.
Pat: And if we make a commission, we'll tell you we make a commission.
Scott: By the way, our advisors get no commission.
Pat: Our advisors don't get commission.
Scott: We try to do fee based. There's a lot of insurance fee based now.
Pat: Yeah. And the reason we do that is just because someone like you, like if you come into my office, I'm like, nah, yeah. If it makes you feel good, if it makes your wife feel good, you're fine either way. But if you want it, here's...
Scott: It's worth looking into.
Pat: Yeah.
Jonathan: All right. Well, thank you guys.
Pat: And what did they serve? Two days.
Jonathan: They served water and peanuts.
Pat: Two days. How many hours a day?
Jonathan: That was about 90 minutes.
Pat: Oh, each day?
Jonathan: Yeah. Yes.
Scott: All right. That sounds like someone we would serve, too. Appreciate the culture. We've done hundreds of workshops over the years. And we're typically...
Pat: Iced tea and coffee and cookies. That was all.
Scott: That's it. Yeah.
Pat: Yeah. We did one. We served dinner and wine. And I hated it.
Scott: We've done hundreds, maybe more than hundreds, maybe even to a thousand.
Pat: Yeah, did a lot.
Scott: Workshops.
Pat: Mostly company based.
Scott: Specific, yeah.
Pat: Yeah, to that. Anyway, those were the good old days. Weren't they, Scott?
Scott: I had a Toyota Camry, which was a great car. By the way, still a phenomenal car. Very reliable. Good car. But I had...
Pat: Do you still own it?
Scott: No, I don't still own it. But I had a screen. Because at a hotel, if you use their stuff, they charge you quite a bit. So I had a screen that I'd carry in the back of my car and a projector thing in the trunk.
Pat: This is old school.
Scott: Correct.
Pat: An overhead projector.
Scott: Overhead projector. Because otherwise, you had to rent the screen from the hotel and the overhead projector. But it wouldn't quite fit in the back. I'd had to kind of lean it against the side door. And it was in my car so much it cut into the upholstery thing on the car, permanent mark from my screen.
Pat: It just killed the resale value of that Toyota. All right, let's go to the next call.
Scott: In some ways... And that was from when we had three, four employees.
Pat: This isn't the nostalgia hour, let's move on. We might look back upon some of this fondly, but I'd prefer not to look back at all.
Scott: Always look forward?
Pat: Mostly.
Scott: You're the one who brought up my Toyota Camry. I had two Camrys.
Pat: I was going to make fun of you, but I just got a little pang of a little...
Scott: My first Toyota Camry was a quite used one. And it was burgundy with velour interior. And I had a Volkswagen Jetta.
Pat: You know what they call that?
Scott: Living large.
Pat: Birth control.
Scott: Okay, my point. I think I was engaged. And I had a Volkswagen Jetta that had, I don't know how many miles on, a lot. And Pat and I were just...I don't know if we had started Hanson McClain and were working at the firm together. Trying to survive in the early days. And my engine fell out of my car. I was pulling into a shopping center. And the motor mounts, I guess they'd been broken for quite a while. The engine literally fell out.
Pat: And hit the ground?
Scott: Correct. And the car came to a screech. It was all sudden, quick stop. And so it was time to replace the car.
Pat: How did they tow it away? Do you have to jack up the engine or do you just drag the whole thing onto a truck?
Scott: I don't recall. I don't remember, actually.
Pat: Was there oil everywhere?
Scott: No.
Pat: Oh.
Scott: But it was clearly time to... And so I bought this used, quite used Toyota Camry. And my wife, I remember she looks at me, do we have to get...do you have to get that car? I'm like, babe, I've got...I just want the most inexpensive transportation I could have at this point. I don't, I don't...there's no extra money that I've got to pay in a car. It's the least expensive.
Pat: I'm going to spend it all on you, Valerie, the big heaps of money that you had back then.
Scott: I should remind her of those things. The sacrifices I made for her.
Pat: That's good. Go home and remind her. That'll be good. That's smart.
Scott: And I think I sold the car two years later for about the same I paid for it. Because it was already quite used when I got it with the velour...
Pat: Go home and tell her.
Scott: ...the burgundy velour interior.
Pat: It was good for a young man.
Scott: Yes. She wasn't worried about me going out on her, that's for sure. She was pretty confident that she was gonna snag me for the man.
Pat: Oh, that's right.
Scott: We were just engaged.
Pat: What a catch.
Scott: Yeah.
Pat: I mean, let's go, let's go.
Scott: All right, let's talk. Let's talk with Ron. Ron, you're with Allworth's "Money Matters."
Ron: Good afternoon, gentlemen.
Scott: Hey, Ron.
Ron: I am 78 years old. My wife and I have just celebrated our 50th anniversary with a large celebration in April. And she passed away suddenly in October.
Scott: Oh, I'm sorry. Wow.
Ron: Purely from the financial side of that happening in life, my joint and survivor retirement income was reduced from $4000 to $2,500 a month. And her $2,000 a month Social Security ceased. So then I was left with trying to figure out things based upon that, as well as what our goals had been regarding our three adult children and three adult grandchildren, one of whom has a disability. Our retirement income is, or my retirement income, is $2,500 a month from retirement. And that's Social Security of $2,450. We have rental income of approximately $5,000 and RMDs, which I don't necessarily take, of $5,500 a month.
Pat: I'm sorry, say that again?
Ron: About $5,000 a month, $5,500 a month for a total of $15,000 or approximately. I live on, now I have assessed about $7,500 a month. Our assets include $1.6 million in traditional IRA, which includes $100,000 in Vanguard, or excuse me, $100,000 in the Roth. I know I'm low, but I consider myself a quite conservative investor. So 30% of our in-stock index funds. And 55% in money market funds. We have $400,000 in bank CDs and money market funds. Our primary residence is free and clear, about $550,000. We have three rental properties of about $1.5 million. My goal remains as it was when my wife was alive. My main goal is to ensure that I leave each of our adult kids and our disabled grandson at least $500,000 plus one of the residents each, and then a smaller amount to two other well-established adult grandchildren.
Pat: Okay.
Ron: And I guess I'm looking for the way in which...I'm not quite there yet with being able to do that. And I'm looking for...obviously I'm gonna live, that's not a problem in terms of financially, but I wanna achieve that goal. And what [inaudible 00:32:10] do you have for me?
Pat: All right, so let's step back for a minute.
Scott: Maybe I missed something. So $500,000 for your three adult kids plus $500,000 for the disabled grandchild, right?
Pat: Probably in a special needs trust.
Ron: Correct. I have...that's something, that's another one of my missions is to establish the special needs trust as well.
Scott: Okay, so that's two...
Ron: He's currently in a special program for young adults with disabilities.
Scott: So that's $2 million and the value of your home's 550 and your rentals are 1.5, so just the real estate you have.
Pat: And he wants it, $2 million and in addition to that, one of the rental homes to each one of the children. To the adult children.
Ron: The primary residence is going to our grandson and the other properties are going to each one of the children.
Pat: So let's just circle back for a second and the rental properties, are they close by to where the children live?
Ron: All except one of them. And I've already discussed this, that what will happen when I'm no longer here with them, including a daughter who lives in Southern California. She's already, you know, she let me know that she wouldn't plan to sell it. She would plan to rent it out as I am.
Pat: Okay, so let's just, let's start with the portfolio. You said money markets. Have you considered short-term treasuries?
Ron: No. I'm uncomfortable with the uncertainty of it and again, I mentioned that I'm quite conservative.
Pat: I understand, understand.
Scott: But there's nothing more conservative than treasuries.
Pat: We're not talking about a risk movement here, right? I'm talking about something that is equivalent or lower risk, right? Because in your money market right now, it holds, if it's a pure money market, it holds both U.S. treasuries and corporate debt.
Ron: Okay.
Pat: Right? What happens is in that money market account, you're not getting, you're paying state income taxes on that and what state do you live in?
Ron: California.
Pat: Okay, so right now. I... I grew up in Carmichael. So right now, if I looked at your portfolio and you said how much is in your...how much is in...
Scott: You've got roughly $2 million in savings and investments.
Pat: Correct, but how many, you said 50% of your IRAs in money markets?
Ron: Fifty five percent in money markets. Okay. As well as the $400,000 from the bank CDs.
Pat: So we've got a million dollars in money markets, right? And what are they paying? One, one and a half, two?
Ron: Oh, no, no, no, no, no. Currently, it's 4.4, 4.5.
Scott: You're looking for high...you're managing the cash.
Pat: All right, I would, I'd actually probably switch those to the short-term treasuries and just get a higher yield and then free of state income taxes. If you died today, your objective would be achieved.
Scott: Well, not quite, cause the taxation of the IRA.
Pat: That's right. But there's nothing you can do about that.
Scott: That's correct.
Pat: There's nothing. So here's one of the things that I would, you might wanna, here's one of the things that I would actually question, which is, if I was...I have four children and I own some rental properties as well. I will not require my children to continue to own those rental properties. Just flat out.
Ron: Well, I'm not requiring that they do with other places. The decision would be purely theirs.
Pat: Okay, thank you. Thank you, thank you.
Ron: No, I just commented that our daughter in San Diego, she had indicated to me when we discussed, because we've...I've discussed this whole plan with them.
Pat: That's right.
Ron: Except for how much cash they would receive. I've indicated that they would each receive one of the properties. And she was the one who said that, no, I would plan to continue...
Pat: Okay. Okay. You've achieved your objective. I don't...Scott, do you have anything to add? I have nothing to add.
Scott: You've got $2 million saved and you've got 500,000 times four.
Pat: Just set up that special needs trust.
Ron: Besides the property...
Pat: Yeah, correct.
Ron: Besides the property, I want 500,000 to each of them.
Pat: No, yeah, you got it. We've got it, yeah. And you wanna set up that special needs trust and you wanna do it in that conjunction with the grandchild's parents.
Ron: Well, the other part of the equation, which I didn't indicate fully, is the other two adult grandchildren, I want at least 100,000 for each of them. And I have, I'm not there yet.
Pat: Yeah, that's right.
Scott: You're not there yet. Well then, yeah, plan on living many more years and you'll have it.
Pat: Yes.
Ron: Well, I wasn't, well, regarding the...
Pat: But in your trust, you want... Wait, wait, wait. One second, Ron. In your trust, do you have these percentages of the network? In your trust, how was it designed?
Ron: Yes, I do. I have the percentages established. It's with Vanguard and with the bank. And that for the Vanguard IRA...
Scott: Do you have a current living trust? Have you done a living trust since your wife passed?
Ron: Yes. I've already had that updated.
Pat: Okay, good.
Ron: I was already guided by the tax person to get new appraisals for all the properties, which I did as well.
Pat: For the step-up in basis. Yep. You're fine.
Ron: One other question regarding your comment about the short-term treasury. You indicated about the bank, money market funds and CDs. Are you saying that as well for the IRA money market funds?
Pat: Yeah, well, first of all, it doesn't matter. The state income tax won't make any difference. You're just gonna get a little bit higher yield. Go look at the BIL.
Ron: All right.
Scott: Ticker symbol BIL, Treasury Bill. Yeah.
Ron: Are you comfortable with the 30% stock?
Pat: I think it should be higher, but I'm not you.
Ron: Well, I just think, who knows?
Pat: Well, that's what I said.
Ron: In a short period of time, and I'm thinking of what you always seem to quote of short-term, you want it in a more flexible count. And I don't wanna have all of it there and I'm going next month.
Pat: That's right. But your beneficiaries aren't necessarily gonna spend that money.
Ron: Oh no, I'm not planning to spend the money.
Pat: No, your beneficiaries.
Ron: My whole mission is just to live basically and to leave what I can to them.
Pat: Understand, but your beneficiaries, like if I...look, if I were to die today and my money...and my wife were to pass on, I wouldn't expect my children to take all this money and spend it. They would invest it. And therefore the investment should be based on the timeline of who's going to be spending the money, not the people giving it. So when you say it's 30% equities and you're saying, well, I'm worried about risk, well, how long is the timeline? It's not your life.
Scott: But if his objective...if your objective is so strong on the dollar number at the date of your death...
Pat: Then do what you need to do. You're fine either way. But you asked me what I thought about it. My opinion is that's too low. I would say move it to 50%. You're not gonna spend all this money. You would be a better steward of your money to your children if you put more equities in the portfolio.
Ron: Even considering all the chaos.
Pat: Oh, the chaos. This is the...Yeah, look at the chaos the last 30 years. We just, you know, we as people have a tendency to focus on the short term and the chaos. You think this is the first time that this government has been in this kind of chaos? Remember when Nixon resigned? Do you remember that? And they pardoned Gerald Ford. I mean, I was a kid and I was like, that's crazy. This will never, this is the...remember the oil crisis and waiting in lines and then the city's being burned down and you wanna go through?
Scott: The drill's getting underneath the desk at school because of the nuclear bomb. I don't know how the desk was gonna save us.
Pat: I always questioned that. I'm like, okay. This isn't the highest quality desk. But the point being, your question was the investment should be on timelines. And you're thinking about your life. I'm thinking about the beneficiary's lifetime. So, but keep it at 30% if it makes you happy.
Scott: I'd like to finish with one comment. Obviously, your grandchild with special needs is gonna need some help financially. My guess is your kids are looking at you and saying, dad, I know it's horrible that mom passed, but go live your life. Right? And so you're very focused on making sure that these dollars go to your kids. I'm just, maybe I'm out of line for saying this, but my guess is your kids will be like, dad, we want you to live your life. And if that means you're going on cruises and spending some of this money, we don't get quite as much, we don't care. We want you to live your life. So I'm just gonna leave it at that. And maybe I'm just out of bounds.
Pat: But I...yes, he called, asked us our opinions. So yeah. There you go. Appreciate the call.
Scott: Yeah.
Pat: And maybe you don't wanna do that. Maybe you just wanna stay on.
Scott: Maybe not. I don't know, but just throw it out there. Anyway, let's, we're gonna be joined now by our CPA expert, Suzanne Conrad. Suzanne, thanks for joining us on our program.
Suzanne: Hello, thanks for having me back.
Scott: And Suzanne, what is your role with Allworth?
Suzanne: I am the director of tax solutions. So one below the vice president, I kind of manage the Folsom team, work with all of our CPAs, enrolled agents, make sure our training's on track, make sure we put out a qualified quality product. And prepare and review returns.
Pat: How many?
Suzanne: Provide a lot of planning.
Pat: And I'm...Scott and I are no longer the acting CEOs of the company. So I ask this in all seriousness. How many enrolled agents, how many people work in that division of the company?
Suzanne: Well, I could have told you, there's nine of us here in Folsom, but we've gained some people. So I don't know the total number. I think it's around 30.
Pat: Okay. So, and the job is to support our financial advisors...
Scott: With tax guidance, tax planning, and sometimes tax preparation.
Pat: For our clients. That's the role, correct?
Suzanne: Absolutely. To provide integrated financial advice, right? So we work with the advisors, we work with the clients to make sure we're optimizing their financial future, including the tax piece.
Pat: Because if you talk...if you listen, this is for the listener, Suzanne, you know this. If you listen to our show, we talk about how important tax and estate planning is in the financial planning process.
Scott: Massive.
Pat: That's why it's integrated into the firm itself.
Scott: I don't know, frankly, and mostly big Wall Street firms, they state we cannot provide tax advice. How can you give good financial advice and ignore tax advice?
Pat: And actually, so in one of the benefits of actually becoming a larger firm and integrating these other firms is that you can get to scale and have divisions like tax solutions, insurance solutions, and estate planning. So, enough of our commercial.
Scott: Suzanne, what are some of the most overlooked tax saving strategies that individuals and families, maybe the employer they overlook, maybe focus on those with a million or more in savings.
Suzanne: Boy, that's a loaded question. My intermediate accounting teacher's favorite answer was, it depends. And that definitely, applies to this question. What are their circumstances? Are they at or near retirement? Are they a young family starting out with college costs to consider? Is the money in IRAs mostly qualified accounts? Or is it after tax investment accounts? Are they high earners? Are they retired in a low bracket before Social Security and RMDs kick in? It really is specific to the client situation. But having said that, the most obvious and frequent tax savings I see overlooked is clients not optimizing their retirement plan contributions, like not maxing out the 401(k) or whatever their employers offer if they have an employer. If they're earning income, people aren't maxing that out. And that's just such low hanging fruit. I mean, you gotta, at least, do that minimum if you're optimizing your tax situation. For me, it pains me.
Pat: Especially if there's a match.
Suzanne: Especially if there's a match. Well, of course. You can do it pre-tax or you can do Roth. A lot of employers have Roth contribution options. So you can split it depending on your situation, but you might as well at least do that if you have the cash flow for it.
Scott: And are there any specific deductions or credits that individuals or families with more than a million bucks in net worth tend to miss?
Suzanne: Yeah, a lot of the ones I see miss most often is the QCDs, right? It just...
Scott: The what?
Suzanne: The QCDs, qualified charitable distributions, coming out of IRAs. So you can do that when you hit 70 and a half. A lot of clients will make donations thinking they're gonna get a charitable deduction, but they don't itemize because the standard deduction is so high. For anybody 70 and a half, if they're charitably inclined, they really ought to do that.
Scott: And how often have you seen this missed?
Suzanne: Often.
Pat: You know what? You think of it. And because it can work for $500 or $1,000 or $1,500, even small amounts.
Scott: And this is anyone who's 70 and above...70 and a half and above, they can gift up to their qualified, their required minimum distribution, although technically, there's not there for 70 anymore, but up to the required minimum distribution to a nonprofit. And it doesn't fund, doesn't go through the tax turn at all, right? Just goes automatically there. They don't have to report it as income. And no...
Suzanne: It's actually 108,000 a year per person. So they can do quite a bit and not have that IRA withdrawal.
Scott: And is that the maximum or is that...?
Pat: It's the max.
Scott: But if someone has 200 grand in their 401(k), can they give 108 grand? Or is it the maximum, whatever is greater, the 108,000, I'm sorry, the lesser?
Suzanne: The 108,000, it's gotta be from an IRA. I don't believe...
Scott: I understand. But it can be above the required minimum distribution amount.
Suzanne: Correct, yes.
Pat: I didn't know that.
Scott: But it cannot go to a donor advice fund.
Pat: I know that. But I knew the maximum was 108, but I didn't know it could exceed the RMD. Mostly because there's clients typically, don't exceed their RMD with these qualified charitable distributions. So this is something that is kind of like a no-brainer. Why do they not allow it to go to a donor advice fund? It would be used so much more.
Scott: Because a lot of people don't spend the money. They put the money in the donor advice fund and they never give it away. It's probably should be more. That would be an area of legislation I would think would be helpful to...
Pat: I actually know someone like that.
Scott: You do?
Suzanne: Yeah.
Pat: Yes. We put it in there and don't give it away as fast as we should. Okay. Next question, Scott.
Scott: What other deductions or credits do people tend to miss?
Suzanne: You know, a biggie right now is the electric vehicles. People buy them and think they get the credit. And for one reason or another, they don't. So you have to be really careful. They have a lot of requirements now. There's an income limitation. So if you're over 300,000 married filing jointly and you try to take that credit, it's going to get disallowed. We actually have a client whose prior accountant took it and it didn't meet the manufacturing requirements. They owed 7,500. It's a 25% penalty on the understatement of tax. So they're going to owe like 10 grand thinking they qualified for this electric vehicle that they don't. So, you know, you have to be careful. If you're buying an EV to get the credit, just make sure you qualify for it and you do your research.
Scott: Talk to the accountant before.
Pat: So Suzanne, can we...this is a little bit off topic, but I just find it fascinating about the new tools that we're using at Allworth. I saw a story this week that someone had missed a charitable deduction and it was going to expire. But how we are able to take past year's tax returns and run it through an AI system, right? Pretty easily, that flags problems that previous accountants have made. Can you talk a little bit about how this thing works?
Suzanne: Yeah, it's, you know, it's a pretty sweet program. It takes a prior year return and it just offers some guidelines, you know, some planning guidelines like for IRMAA brackets, for Medicare, you know, you have this much room in your next tax bracket. So look at a Roth IRA conversion. It's really nice for pretty straightforward planning. You know, if you have a lot of rentals and Schedule C income, it's a little less efficient for that and you need to use some real tax planning software, but it's a really handy tool. I really like what it...you know, it pulls in the prior year return information and prints out a report that's really easy to read and understand. And so it's really a great thing that the advisors get to use now.
Pat: And how far back will you go looking at people's returns?
Suzanne: Well, the statute is three years.
Pat: Will you go back three years and ask for the last three tax returns to look to see if the previous prepared or the client themselves doing their own taxes had done it correctly?
Suzanne: Usually only if we see something. So we'll look at prior year and if there's something suspect, then we'll go back farther. Or if, you know, the client comes to us and says, I didn't really trust my prior preparer, then we'll go look. But it's usually just, you know, the prior year, unless we see something where we need to look further.
Pat: And what percentage of times do you actually find problems with prior year returns?
Scott: That's a good question.
Suzanne: Self prepared, self-prepared returns, probably 50% or more.
Scott: Okay. Are you kidding me?
Pat: Self prepared.
Scott: I heard that. So I'm just thinking the sample of client you work with, right, so you're not, and I'm not gonna mention a name, but you're not dealing with like...these are Allworth clients. So they have savings.
Pat: Yes, the money.
Scott: Right. So these are people that have saved well, they're Allworth clients, wealth management clients, and been doing the taxes themselves. And you saying that more than half the time they're making mistakes.
Suzanne: It's often. Yeah. Especially if they have like a rental or something, because usually they come to us when something changed, you know, they can't do it themselves, or they don't want to, or, you know, their partner who was doing taxes no longer can, or something like that. So yeah, it's pretty high with a self prepared, unfortunately, you know, things like QBI getting this, stuff like that.
Pat: And how about from someone that has had it professionally prepared, what percentage of the time just ballpark, do you think that you find mistakes?
Suzanne: You know, we actually just quizzed all our preparers, and I'd say it's probably 20% to 30% of the time.
Pat: From someone else brings in a tax return for another preparer. How do we guard against that?
Scott: I'm gonna say what percentage of Allworth tax returns are inaccurate?
Suzanne: None, no. You know, we do have a pretty good quality control process that's higher level. And I was gonna just say that, you know, tax season is crazy and the pace is insane. And so things do get missed, but we do have a pretty strict review process and quality control that we go through. So, you know, I personally loathe amended returns. I never want to have to prepare another one. So my goal is to not miss anything.
Pat: Are people reluctant to file extensions?
Suzanne: Very much so, yeah.
Pat: And can you talk about why someone should file an extension? I never understand why people are reluctant to file an extension. Can you explain what a tax extension actually means? When do you write the check and when the tax return actually gets done? Can you just walk us through that?
Suzanne: Yes, well, my husband has an S corp and I finally broke him and told him that no preparer files on time. So he was one of those people that hated to extend, but...
Scott: Oh, that's hilarious.
Suzanne: Yeah, as long as your planning is good, you know, you don't have...you know, what your estimated tax is gonna be. The extension just buys you an extension. It's an extension of the time to file, not an extension of the time to pay. So, you know, if you file an extension in April, you get until October to finish up your tax return, but you have to pay and, you know, what you think your tax liability is gonna be in April, or you get subject to penalties and interest. And I think that's a lot of it. You know, people don't understand tax. If they did, they probably wouldn't be having us do it. So it's involving their money. It's involving security. It's, you know, the IRS and that's scary, right? They don't wanna get a notice. And so there's a lot of emotional stuff that comes into it, but really if you're doing good planning, it's just really not a big deal, you know.
Scott: So sometimes it's just impossible to be, I mean, if you have a very simple tax return, it's easier to get it done by April 15th. You talk about your husband's got an S corp. Well, that means you gotta do the business's taxes first. And then if you've got other investments with a partner, a partnership, sometimes you don't get a K-1 until October.
Pat: So, but here's the point to the listeners, right? Is you estimate, you do a quick and dirty, this is how much I think I'm gonna pay on my taxes. And then you pay that amount and sometimes a little bit more.
Scott: Yeah, a tax on April 15th.
Pat: You pay by April 15th. And then when your accountant isn't working 18 hours a day, you go back to them in June and you say, let's do our taxes now or July or August when they're not buried and you do your taxes. And then you file the real return as late as October 15th.
Suzanne: Right. And then...
Pat: What's that?
Suzanne: And then we can give them time, right? You know, we can sit with them and walk them through every question. And yeah, it's a better result.
Pat: That and you actually get better tax planning, not just preparation in that. Which is what the advisors do. So our advisors work hand in hand with the accountants for more complicated financial situations to make sure that not only is the preparation, the preparation by the time it's done, it comes as no surprise what's happening, right? It's the tax planning where the money is made.
Scott: That planning is not happening in March and April.
Pat: That's right.
Scott: Because our entire tax team is buried doing tax reviews.
Pat: That's right, that's right. So anyway, how is it going this tax season? You buried yet?
Suzanne: You know what? It just, it feels like tax season today, but it's pretty good. It's not bad. We've got some good staff and we're getting our systems down. You know, we've had our clients for a long time. So it's all good. There were no major tax law changes. So that's always a bonus, right?
Scott: That's right.
Suzanne: The whole country wasn't impacted by disasters as Southern California was, but you know, it's been kind of a normal year. So it's going pretty well.
Scott: Good, perfect.
Pat: Thanks Suzanne, appreciate it. Thanks for being part of the team.
Scott: Yeah, glad you're here.
Suzanne: You're welcome, you guys. Thanks for having me on.
Scott: Good luck during tax time.
Suzanne: Okay.
Scott: Yeah, that's a...certain times of the year it's a tough thing.
Pat: And we see it, because we house with these accountants? And you're like, how?
Scott: Do you feel bad for them?
Pat: I mean, did you not spend any time with a career counselor? Did I say that out loud?
Scott: We are out of time. Yeah, there's not enough people going into the profession either.
Pat: There's not enough people going in there.
Scott: Anyway, we're out of time. If you appreciate this podcast, we're gonna ask you a couple of favors. One, send it off to a friend that you think could benefit. Two, give us a review. Three, be sure to follow us on wherever you get your podcasts so that you automatically get this program. You don't have to miss one. Anyway, we'll see you again next week. This has been Scott Hanson and Pat McClain. Our Allworth's "Money Matters."
Man: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain, thanks for joining us.
Scott: That's right. My self, my co-host, both financial advisors, certified financial planner, charter financial consultant. Been doing this stuff for a long time. I'm glad you're here with us as we talk about financial matters. And as we're getting kicked off, Pat, there was an article in "The Wall Street Journal" a week or two ago. By the way, by the time something is in the news, the markets have priced it in. Just if you read something, oh, that's actually a good idea. Maybe I should invest in that. Eh, it's probably too late. The headline, "Investors spot signs of market froth during long bull market." And it talked about the bullishness that people haven't been this bullish...I mean, sorry, bearishness. They haven't been this bearish since 2023.
Pat: I read that and I thought that's just stupid.
Scott: Okay. Maybe it was a slow news day and they're looking for an article. You saw the same thing.
Pat: Just thought, this is stupid.
Scott: Did you read the whole article?
Pat: No, I didn't read the whole article. I've been in this business long enough. I know the article.
Scott: But it just reminded me, because there's an article.
Pat: Wait. They haven't been this bearish since when?
Scott: 2023.
Pat: That's amazing. And why do they think it's bearish? It doesn't appear bearish to me.
Scott: Well, the thing that I was...the irony, if you were bearish and say, oh, I'm scared about the market, I'm going to be out of the market, you missed 2024, which is a pretty phenomenal year.
Pat: Yeah, if you were bearish in 2023.
Scott: Look, historically, the stock market's done roughly 10% a year in the last 100 years. Roughly 10%. In order to earn that 10%, you need to be invested in those great up years as well. If you miss a year, instead of 10, you might have 7% long term. It's really important that you have a...
Pat: They do call it a risk premium, which means you are being compensated, your return is compensated for the risk that you're taking over the short term. That's why it's a risk premium. The amount of money that you earn in the market...
Scott: No one speaks like risk premium. In finance class, we call it risk premium.
Pat: It's that simple. We're going to speak like this. It's that simple. In order to get a rate of return over that of the U.S. Treasury...
Scott: You have to have some risk.
Pat: You have to have risk. Now, is there risk in day to day? Yes. Is there risk in year to year? Absolutely. Three years? Certainly. Right? Remember, they're getting less. They absolutely went to certainly risk over three years. Is there risk over five years? Probably. Ten years? Almost never. Almost never.
Scott: Twenty years? There's never been a time you had...
Pat: Where you haven't been compensated above that return of the one year treasury. Never. So, your investments are all based on timelines. You can look at them every day if you want, or you can understand it and live with it. And risk premium.
Scott: I'll never forget, Pat, years ago I had a client, their daughter...their son-in-law died, I believe it was an accident. Tragic, right? She had two teenagers at the time, and he liked to trade quite a bit. He had a traditional broker, talked to his broker every week or whatever. And my client said, can you please meet with my daughter and help her out here? So I met with her. They had life insurance. They're pretty well on assets. She had a career as well. But she thought that in order to manage these assets, she needed to do it the way her husband did it, right? And so I remember having a conversation. She says, well, Friday the jobs report's coming out, so shouldn't we wait until Friday? And I remember looking at her, I said, Lisa, why in the world do you know when the jobs report's coming out? You've got your own career. You've got kids to raise. Why does that have any relevance? And I think just watching her husband, he probably did himself no favors.
Pat: Oh, correct. He probably got market returns or less.
Scott: Because the more you trade, by and large, the worse you do. So he probably did not do himself any favors, but left her with this mindset that in order to be a successful investor, that's the way to do it, which... Got her off that. Go live your life. Let us worry about the jobs report.
Pat: And she became a client.
Scott: Oh, yeah.
Pat: Oh. I was waiting for you to say that she went her own way and continued to trade.
Scott: Oh, I've had...I've talked to those people as well. I guess, we all have, Right?
Pat: Yes. Yeah.
Scott: You smoke and you go see the doctor, the doctor says quit smoking, you're saying, I'm going to find another doctor. Find a doctor who smokes. I wonder if there are many doctors that still smoke. I remember seeing an ad the other day...
Pat: Their the last one's doing commercials.
Scott: Yeah, I remember seeing an ad the other day. It wasn't that many years ago when we were having smokers...
Pat: Three out of four doctors say that this is the best cigarette for you.
Scott: Is that what it was?
Pat: Yeah. Back in the day.
Scott: Isn't that amazing? What are we going to think 20 years from now on certain things?
Pat: Oh, yes.
Scott: I think quite a bit.
Pat: Yeah. We'll think, but there are some, look, if you're interested in what's going on with like the food systems, I would recommend a couple of books by Michael Pollan, "In Defense of Food," "The Omnivore's Dilemma." Both of those are excellent on...and it all goes back to what we're talking, what RFK actually is talking about in our food systems. And these were written years and years ago about how our food systems work and the subsidy of corn for high fructose corn. It's fascinating. But I am reading a great book right now called "Frostbite." It's the history of refrigeration.
Scott: Oh, that would be interesting.
Pat: It's really interesting.
Scott: It changed our diets tremendously.
Pat: It changed everything. Yes. Yeah. First read the book, "The History of Salt," which is talking about the preservation of food and then history...
Scott: And after that, page turner...
Pat: Go to the history of refrigeration. It's called "Frostbite."
Scott: They both have to do with food.
Pat: Everything to do with food and how we actually, what we consume and why.
Scott: I did have frostbite on my foot last year. Now I have to be careful.
Pat: Wait, wait.
Scott: What?
Pat: Really?
Scott: Yeah. The tip of my toe turned black.
Pat: How? Where were you? Were you like, at the Iditarod? Where were you?
Scott: Exactly. No. I was skiing in Canada and it was a super bad cold spell. And my tip of my toe and my toenails turned all black. And then the tip of my toe came all black. I lost all my feeling in it. Peeled off. Just my toe didn't fall off or anything. It wasn't that...
Pat: You never mentioned this.
Scott: It's not that big of a deal.
Pat: I feel like I'm meeting Beck Weathers.
Scott: Well, you know, Beck and I... Beck Weathers. I don't want to talk about my frostbite.
Pat: Does it hurt?
Scott: No. And I have toe warmers I use now when I ski if it's below 25 degrees so I don't freeze my toes.
Pat: Electric?
Scott: No, I just have the basic toe warmers.
Pat: I've got electric ones.
Scott: The electric socks?
Pat: Uh-huh. They work.
Scott: I was skiing...
Pat: We sound like complete elitists now. We're just complete... First of all, I didn't grow up skiing. I'm fortunate to ski. You didn't grow up skiing.
Scott: What's that big podcast Jeffrey Sachs[SP] is on? And there's...
Pat: Go fish.
Scott: It's one of the top five podcasts and it's all these billionaire tech guys that sit around and talk. Well, I was looking and I...someone turned me on this. I'm actually watching the podcast. I usually just listen and he's at a ski resort and the skiers are skiing behind him. And I thought about elitists. What are you, in Deer Valley? Got some 10,000 foot house or something.
Pat: And there's podcasts going off in every one of them.
Scott: And he's doing a podcast with the skiers skiing behind him. It was actually a bit much for me. I'm like, uh, okay.
Pat: Well, we do sound like elitists, but we do.
Scott: I was talking about just ski guides in Canada. They all use electric socks.
Pat: Oh, they do?
Scott: They all use them now.
Pat: Oh, okay. All right. This is a financial show.
Scott: The professionals do. Yeah, by the way.
Pat: We've lost track.
Scott: Yeah. We're going to take some calls. Later in the program, we've got one of our in-house certified public accountants, Suzanne Conrad is going to talk to us about some tax strategies for high net worth individuals. So we'll talk about that later in the program, which we're looking forward to.
Pat: And this is a financial show, by the way. We should remind people. We take financial calls. We sometimes get distracted. You and I don't see much of each other anymore, so it's nice to catch up.
Scott: And the reality is, I'm an avid skier. That would be great, actually. I'm an avid skier. One of the reasons I live in Northern California at the base of the Sierra, is because Tahoe is right in our backyard. And I could drive and go skiing in the day and be back for dinner in the night. It's a great place. One of the reasons I've lived there forever.
Pat: Well, I live here because my parents moved here.
Scott: Actually, I lived here because that's where my wife's sister moved. She wanted to move the same way...
Pat: Yeah, so you can drive up and ski for the afternoon or in the morning and come home.
Scott: And my oldest daughter is a bigger skier than I am. She lives in Denver, in large part, so she can ski. I'm trying to get her back to California though, we'll see.
Pat: Really?
Scott: She told me if I bought her a house in Truckee. I laughed. I laughed. It's hilarious. Anyway, let's...
Pat: Buy me a house. Well, you've got to appreciate her asking.
Scott: Oh, she's not afraid of asking. She's 29, she'll ask for everything.
Pat: That's good for her.
Scott: And she says, well, I never know. Sometimes you say yes, which is true. She's still my little girl. All right, let's...not on the house. Let's just go to the calls here. We're talking with Jonathan. Jonathan, you're with Allworth's "Money Matters."
Jonathan: Hey, guys, how's it going?
Scott: Fantastic.
Jonathan: First of all, I'd like to thank the two of you for helping me develop my mantra. I retired in 2020. And after going through the four phases of retirement, I went back to work in 2022. And people would ask me, why are you coming back to work? And I said, work is an option, not an obligation.
Pat: Yes. Good for you.
Jonathan: Thank you so much. And I want to thank you guys for that.
Pat: It does change your mindset, though, doesn't it?
Jonathan: Absolutely. Absolutely. I went to a seminar, my wife and I, here recently. It was called, The changing world of retirement planning. And of course, first they were waiting for the pitch. But the presenter talked about old paradigms and new paradigms. And the old paradigm was that Social Security, pension, and retirement, you're saving, you're going to be okay. And the new paradigm shift was higher tax rates. Well, he went into this whole program talking about...
Pat: So life insurance.
Jonathan: Yeah, that's why I'm calling.
Pat: Is that what it was?
Jonathan: I want to know...yes, that's what it is. He said, if you're looking at long-term care, they have a new program called long-term care insurance or long-term care insurance with long-term features.
Pat: Yes.
Jonathan: Life insurance with long term features.
Pat: Yes.
Jonathan: So right away, I'm waiting for the pitch. The pitch never came the first day. So it was a two-day event. And he talked about history and taxes in 1943, the top marginal rate was 94%. It blew the class away. And in the '70s, it was 70%. And he said, right now in 2020, at 37%, you're in the best tax rate you could be in. So the next night...
Scott: But no one actually paid those rates.
Pat: Yeah, back there in the time because of the deductions that would go up against that. So anyway, but the headline is appealing.
Jonathan: Right. So the pitch was life insurance with long-term care. This is how we can protect you against loss and pay for long-term care expenses. So I was telling my wife, we can self pay. And she said, we don't have enough. We don't have enough. And I said, well, let me call Pat and Scott.
Scott: Okay. Let's back up for a minute. I want to briefly talk about the tax benefits of life insurance, because this is how it's usually pitched, and then how you might get those same tax benefits in other types of...
Pat: But Scott, and then I'd like to talk on the pros and cons of a long-term care policy in a life insurance policy, which by the way, it might surprise people. I'm not opposed to if it's used appropriately.
Scott: I'm not either.
Pat: So let's spend a minute about how they sell the life insurance because of what's called LIFO and FIFO.
Scott: Yeah. So life insurance, different than a lot of other types of investments, you invest money. We're talking about a cash savings type. So whole life, universal life, variable universal life, something that has a savings element to it, equity index, universal life or whatever. That excess money is invested and it grows tax deferred. So let's say you put in some money in a life insurance policy, whether it's on an annual basis or lump sum, it all grows tax deferred.
Pat: Okay. So can I step back for a second?
Scott: Yes.
Pat: So let's just say there you have a premium of $36,000 a year and they say, we want you to put $3,000 a month into this policy. What happens...or we want you to put $200,000 into it. What happens is a portion of that money goes to pay for the pure insurance, the mortality risk at your death. And that is a component inside the insurance. It's called pure insurance or mortality risk. So a portion of that just goes to pay for that. And then some goes to administration, some goes to commissions and then there's an excess and this is either invested in a bond fund or what they call their home office fund, whatever it is, right? It's some sort of investment in a variable universal life. You choose the investment. So you're depositing more than the cost of the insurance. Continue Scott.
Scott: Yes. And as long as you don't violate the MEC guidelines or whatever. Modify the endowment contracts. It'll grow tax deferred and then later in life you can withdraw all of your deposits without any taxes. Which sounds great. So you put it, let's say you end up putting in $100 grand into something and let's say it's worth...the cash value is worth $200 grand down the road. Just throwing some numbers up. You could say, hey, I need &50 grand for a car. I want money for this or whatever. You can pull out all of your deposits first before you have to pull out their earnings. Then once you go to your earnings, you can tell the insurance company, hey, you know what? Instead of withdrawing it, why don't you loan me my own money? And so you can borrow against the policy and therefore you never pay taxes because you technically, didn't withdraw it. And then if you own it to your death, whatever death benefits left is given to your heirs tax free and whatever loans you had are forgiven at that time.
Pat: Jonathan, does this sound familiar?
Jonathan: It sounds very familiar.
Pat: Okay, here's another way to do it. Wait, wait, wait, stop. But here's the problem with that, right? Is that if the policy collapses.
Scott: You mean, there's not enough money in there.
Pat: And the cost of pure insurance goes up as you get older. The closer I am to death, the more the mortality cost actually kicks in. So if I have drawn out all of this money, then the policy has a great risk of collapsing. And in a collapse, what it means is the policy lapse prior to death. And if it lapsed prior to death, then I owe all those taxes on the money that I borrowed from the policy.
Scott: That's right.
Pat: So while they talk about all the good things in it, what they fail to mention is the administration cost.
Scott: And I've seen that.
Pat: I've seen it too. The administration costs continue to go up and they charge you interest to borrow your own money now.
Scott: But here's another way to accomplish this. First of all, you should be maximizing any Roth opportunities you have before you buy a permanent life insurance policy. For that average family. Every once in a while it makes sense for estate planning or whatever. I'm setting that aside. But let's assume instead of doing that, you say, how about instead I'm just going to have term insurance for the years that I need insurance. And because I probably won't need it my whole life anyway, just for the years I need it. And I'm going to invest. I'm going to pick an S&P 500 fund. Right? Whether it's an ETF or mutual fund, I don't really care. You invest in that outside of a broke...outside of an IRA. Let's say that you put in &100 grand. It's worth $200 grand down the road. There's no reason you can't borrow against that as well. It's called a margin loan. Any brokerage firm would be happy to securitize that and give you a loan against that. You can borrow against it. And at your death, your heirs receive...
Pat: A full step-up in basis.
Scott: ...a full step-up in basis. So it's a very similar tax structure without all that added insurance.
Pat: So when they sell these life insurance policies, it very rarely comes to fruition that people use them the way they explain it. Now, having said all that, if you're buying a policy for long-term care and they say, okay, how much money? Let's say you bought a $300,000 policy and you put $100,000 in cash into this, Jonathan.
Scott: The death benefit is usually much lower and they usually end up being modified endowment contracts because they're overfunded the seven year test or whatever it is.
Pat: So what you're allowed to do is they actually, once you use up all your deposits for long-term care, they will actually then continue coverage for a period of time.
Scott: And here's why they work. Think about the same way we have a deductible on our automobiles. You could probably get a deductible for 100 bucks. I have a $5,000 deductible on my car because I'm not going to make a claim unless there's something pretty significant. And as a result, my insurance premiums are much less.
Pat: You took that risk on.
Scott: I took the risk. You can do the same thing with long-term care. So the real risk in long term is not a year or two in a nursing home. It's a 10-year stay with someone who's got dementia, Alzheimer's where it lasts a decade.
Pat: That's the risk to the insurance company.
Scott: But that's the risk to most families. Most families like the average day most families can deal with. It's those super long ones. So if you think about buying a long-term care policy, I mean, let's make an extreme example. Let's say you had a long-term care policy that had a two-year waiting period. It's like a deductible. So you end up needing long-term care that doesn't kick in for two years. Well, odds are you're going to be dead by then. But if you're not, if you're one of those outliers, that's where the insurance kicks in. What these life insurance policies do is in a sense provides a very long elimination period, waiting period.
Pat: You go through all your money first. The money that you put in. And once that is all used up, then the insurance kicks in. Right. And if you die, right, and you haven't used that up, then your family gets that back. But what you'll see is the cash value policies in most of these don't grow at all. And the reason they don't grow is that's what they're using to actually pay for the insurance. The insurance. I like them. I like them.
Scott: For the right circumstance.
Pat: If used for that. I hate the idea of you're using it for retirement planning. But if you came in to me, Jonathan, and you said, oh, how much money in non IRAs do you have right now?
Jonathan: $750,000.
Pat: Okay. And have they told you how much they want you to fund the life insurance policy for?
Scott: $750,000.
Jonathan: No. That was the hook. We had to give them all our information, which I wasn't going to do because I listened to you guys last week where somebody did this. They went to Arby's or Denny's and gave them all their information. So I'm 68 years old. My wife is 61. We have no children. Our home is about $600,000. We owe $250,000 on it. In retirement investment, we have about 1.7. In a brokerage account, $750,000. In a high yield saving, $100,000. We have a rental that clears about $500 a month. And I went back to work. I have a pension. I stopped my Social Security. I went back to work. I have a pension with the Department of Juvenile Justice. And I'm working part time now making $55,000 a year. And the money's coming in. And my wife is thinking about retiring. She's 61. And she said she's going to take her Social Security at 62. But I'm going to hold off until 70. So we're not hurting for anything. But I feel like we don't have enough still.
Pat: Of course you feel that way. That's why you have it. How much is your pension?
Jonathan: My pension is about $36,000 a year.
Pat: When you were working full time, how much were you earning?
Jonathan: No more than $75,000.
Scott: Between your pension and your Social Security, it about makes up.
Pat: Yeah, your earnings. This is one of those things where you just say, do I want to do it or don't?
Scott: Does your wife have any pension or any other income?
Jonathan: She's working. She works. And she makes about $60,000 a year. She has no pension. But my survival benefits, she has 100% of that.
Scott: And she has 100% of that. So this is... I mean, let's go sometime in the future. That's what you're looking at the long term. Sometime in the future. Between Social Security and your pension, there's $70,000 a year. And then you've got $2.5 million in savings, investments.
Pat: You can self-insure.
Scott: Correct.
Pat: But if you don't want to, you can buy a policy. And you don't actually have to buy it through these guys. You can go online. You can buy a no fee, low fee life insurance policy that does exactly the same thing as the commissioned one does.
Jonathan: Okay.
Pat: But if you were sitting in my office, I'd say, do what makes you feel good.
Scott: Yeah. I mean, like your wife's younger. If your wife's concerned about this, long-term care for you, then maybe you say, we'll take 100 grand and put it in this life insurance policy. It's going to provide these benefits and gives her the peace of mind. And if you don't use it, that 100 grand will be there the day you pass away. It'll go to your wife.
Pat: You can buy them on two people too. Or at least you used to be able to.
Scott: Correct.
Pat: So that it covers both you and your wife.
Jonathan: Would I be able to go to Allianz as an individual?
Pat: Oh, yeah.
Jonathan: Or would it only take...okay. Because that's who they were...
Pat: Okay, well, that's kind of a...Look, they throw out Allianz. You could go to a no cost, low cost brokerage and buy an insurance policy. There's fee based insurance policies. Our firm has an insurance division. Right?
Scott: Yeah.
Pat: And if we make a commission, we'll tell you we make a commission.
Scott: By the way, our advisors get no commission.
Pat: Our advisors don't get commission.
Scott: We try to do fee based. There's a lot of insurance fee based now.
Pat: Yeah. And the reason we do that is just because someone like you, like if you come into my office, I'm like, nah, yeah. If it makes you feel good, if it makes your wife feel good, you're fine either way. But if you want it, here's...
Scott: It's worth looking into.
Pat: Yeah.
Jonathan: All right. Well, thank you guys.
Pat: And what did they serve? Two days.
Jonathan: They served water and peanuts.
Pat: Two days. How many hours a day?
Jonathan: That was about 90 minutes.
Pat: Oh, each day?
Jonathan: Yeah. Yes.
Scott: All right. That sounds like someone we would serve, too. Appreciate the culture. We've done hundreds of workshops over the years. And we're typically...
Pat: Iced tea and coffee and cookies. That was all.
Scott: That's it. Yeah.
Pat: Yeah. We did one. We served dinner and wine. And I hated it.
Scott: We've done hundreds, maybe more than hundreds, maybe even to a thousand.
Pat: Yeah, did a lot.
Scott: Workshops.
Pat: Mostly company based.
Scott: Specific, yeah.
Pat: Yeah, to that. Anyway, those were the good old days. Weren't they, Scott?
Scott: I had a Toyota Camry, which was a great car. By the way, still a phenomenal car. Very reliable. Good car. But I had...
Pat: Do you still own it?
Scott: No, I don't still own it. But I had a screen. Because at a hotel, if you use their stuff, they charge you quite a bit. So I had a screen that I'd carry in the back of my car and a projector thing in the trunk.
Pat: This is old school.
Scott: Correct.
Pat: An overhead projector.
Scott: Overhead projector. Because otherwise, you had to rent the screen from the hotel and the overhead projector. But it wouldn't quite fit in the back. I'd had to kind of lean it against the side door. And it was in my car so much it cut into the upholstery thing on the car, permanent mark from my screen.
Pat: It just killed the resale value of that Toyota. All right, let's go to the next call.
Scott: In some ways... And that was from when we had three, four employees.
Pat: This isn't the nostalgia hour, let's move on. We might look back upon some of this fondly, but I'd prefer not to look back at all.
Scott: Always look forward?
Pat: Mostly.
Scott: You're the one who brought up my Toyota Camry. I had two Camrys.
Pat: I was going to make fun of you, but I just got a little pang of a little...
Scott: My first Toyota Camry was a quite used one. And it was burgundy with velour interior. And I had a Volkswagen Jetta.
Pat: You know what they call that?
Scott: Living large.
Pat: Birth control.
Scott: Okay, my point. I think I was engaged. And I had a Volkswagen Jetta that had, I don't know how many miles on, a lot. And Pat and I were just...I don't know if we had started Hanson McClain and were working at the firm together. Trying to survive in the early days. And my engine fell out of my car. I was pulling into a shopping center. And the motor mounts, I guess they'd been broken for quite a while. The engine literally fell out.
Pat: And hit the ground?
Scott: Correct. And the car came to a screech. It was all sudden, quick stop. And so it was time to replace the car.
Pat: How did they tow it away? Do you have to jack up the engine or do you just drag the whole thing onto a truck?
Scott: I don't recall. I don't remember, actually.
Pat: Was there oil everywhere?
Scott: No.
Pat: Oh.
Scott: But it was clearly time to... And so I bought this used, quite used Toyota Camry. And my wife, I remember she looks at me, do we have to get...do you have to get that car? I'm like, babe, I've got...I just want the most inexpensive transportation I could have at this point. I don't, I don't...there's no extra money that I've got to pay in a car. It's the least expensive.
Pat: I'm going to spend it all on you, Valerie, the big heaps of money that you had back then.
Scott: I should remind her of those things. The sacrifices I made for her.
Pat: That's good. Go home and remind her. That'll be good. That's smart.
Scott: And I think I sold the car two years later for about the same I paid for it. Because it was already quite used when I got it with the velour...
Pat: Go home and tell her.
Scott: ...the burgundy velour interior.
Pat: It was good for a young man.
Scott: Yes. She wasn't worried about me going out on her, that's for sure. She was pretty confident that she was gonna snag me for the man.
Pat: Oh, that's right.
Scott: We were just engaged.
Pat: What a catch.
Scott: Yeah.
Pat: I mean, let's go, let's go.
Scott: All right, let's talk. Let's talk with Ron. Ron, you're with Allworth's "Money Matters."
Ron: Good afternoon, gentlemen.
Scott: Hey, Ron.
Ron: I am 78 years old. My wife and I have just celebrated our 50th anniversary with a large celebration in April. And she passed away suddenly in October.
Scott: Oh, I'm sorry. Wow.
Ron: Purely from the financial side of that happening in life, my joint and survivor retirement income was reduced from $4000 to $2,500 a month. And her $2,000 a month Social Security ceased. So then I was left with trying to figure out things based upon that, as well as what our goals had been regarding our three adult children and three adult grandchildren, one of whom has a disability. Our retirement income is, or my retirement income, is $2,500 a month from retirement. And that's Social Security of $2,450. We have rental income of approximately $5,000 and RMDs, which I don't necessarily take, of $5,500 a month.
Pat: I'm sorry, say that again?
Ron: About $5,000 a month, $5,500 a month for a total of $15,000 or approximately. I live on, now I have assessed about $7,500 a month. Our assets include $1.6 million in traditional IRA, which includes $100,000 in Vanguard, or excuse me, $100,000 in the Roth. I know I'm low, but I consider myself a quite conservative investor. So 30% of our in-stock index funds. And 55% in money market funds. We have $400,000 in bank CDs and money market funds. Our primary residence is free and clear, about $550,000. We have three rental properties of about $1.5 million. My goal remains as it was when my wife was alive. My main goal is to ensure that I leave each of our adult kids and our disabled grandson at least $500,000 plus one of the residents each, and then a smaller amount to two other well-established adult grandchildren.
Pat: Okay.
Ron: And I guess I'm looking for the way in which...I'm not quite there yet with being able to do that. And I'm looking for...obviously I'm gonna live, that's not a problem in terms of financially, but I wanna achieve that goal. And what [inaudible 00:32:10] do you have for me?
Pat: All right, so let's step back for a minute.
Scott: Maybe I missed something. So $500,000 for your three adult kids plus $500,000 for the disabled grandchild, right?
Pat: Probably in a special needs trust.
Ron: Correct. I have...that's something, that's another one of my missions is to establish the special needs trust as well.
Scott: Okay, so that's two...
Ron: He's currently in a special program for young adults with disabilities.
Scott: So that's $2 million and the value of your home's 550 and your rentals are 1.5, so just the real estate you have.
Pat: And he wants it, $2 million and in addition to that, one of the rental homes to each one of the children. To the adult children.
Ron: The primary residence is going to our grandson and the other properties are going to each one of the children.
Pat: So let's just circle back for a second and the rental properties, are they close by to where the children live?
Ron: All except one of them. And I've already discussed this, that what will happen when I'm no longer here with them, including a daughter who lives in Southern California. She's already, you know, she let me know that she wouldn't plan to sell it. She would plan to rent it out as I am.
Pat: Okay, so let's just, let's start with the portfolio. You said money markets. Have you considered short-term treasuries?
Ron: No. I'm uncomfortable with the uncertainty of it and again, I mentioned that I'm quite conservative.
Pat: I understand, understand.
Scott: But there's nothing more conservative than treasuries.
Pat: We're not talking about a risk movement here, right? I'm talking about something that is equivalent or lower risk, right? Because in your money market right now, it holds, if it's a pure money market, it holds both U.S. treasuries and corporate debt.
Ron: Okay.
Pat: Right? What happens is in that money market account, you're not getting, you're paying state income taxes on that and what state do you live in?
Ron: California.
Pat: Okay, so right now. I... I grew up in Carmichael. So right now, if I looked at your portfolio and you said how much is in your...how much is in...
Scott: You've got roughly $2 million in savings and investments.
Pat: Correct, but how many, you said 50% of your IRAs in money markets?
Ron: Fifty five percent in money markets. Okay. As well as the $400,000 from the bank CDs.
Pat: So we've got a million dollars in money markets, right? And what are they paying? One, one and a half, two?
Ron: Oh, no, no, no, no, no. Currently, it's 4.4, 4.5.
Scott: You're looking for high...you're managing the cash.
Pat: All right, I would, I'd actually probably switch those to the short-term treasuries and just get a higher yield and then free of state income taxes. If you died today, your objective would be achieved.
Scott: Well, not quite, cause the taxation of the IRA.
Pat: That's right. But there's nothing you can do about that.
Scott: That's correct.
Pat: There's nothing. So here's one of the things that I would, you might wanna, here's one of the things that I would actually question, which is, if I was...I have four children and I own some rental properties as well. I will not require my children to continue to own those rental properties. Just flat out.
Ron: Well, I'm not requiring that they do with other places. The decision would be purely theirs.
Pat: Okay, thank you. Thank you, thank you.
Ron: No, I just commented that our daughter in San Diego, she had indicated to me when we discussed, because we've...I've discussed this whole plan with them.
Pat: That's right.
Ron: Except for how much cash they would receive. I've indicated that they would each receive one of the properties. And she was the one who said that, no, I would plan to continue...
Pat: Okay. Okay. You've achieved your objective. I don't...Scott, do you have anything to add? I have nothing to add.
Scott: You've got $2 million saved and you've got 500,000 times four.
Pat: Just set up that special needs trust.
Ron: Besides the property...
Pat: Yeah, correct.
Ron: Besides the property, I want 500,000 to each of them.
Pat: No, yeah, you got it. We've got it, yeah. And you wanna set up that special needs trust and you wanna do it in that conjunction with the grandchild's parents.
Ron: Well, the other part of the equation, which I didn't indicate fully, is the other two adult grandchildren, I want at least 100,000 for each of them. And I have, I'm not there yet.
Pat: Yeah, that's right.
Scott: You're not there yet. Well then, yeah, plan on living many more years and you'll have it.
Pat: Yes.
Ron: Well, I wasn't, well, regarding the...
Pat: But in your trust, you want... Wait, wait, wait. One second, Ron. In your trust, do you have these percentages of the network? In your trust, how was it designed?
Ron: Yes, I do. I have the percentages established. It's with Vanguard and with the bank. And that for the Vanguard IRA...
Scott: Do you have a current living trust? Have you done a living trust since your wife passed?
Ron: Yes. I've already had that updated.
Pat: Okay, good.
Ron: I was already guided by the tax person to get new appraisals for all the properties, which I did as well.
Pat: For the step-up in basis. Yep. You're fine.
Ron: One other question regarding your comment about the short-term treasury. You indicated about the bank, money market funds and CDs. Are you saying that as well for the IRA money market funds?
Pat: Yeah, well, first of all, it doesn't matter. The state income tax won't make any difference. You're just gonna get a little bit higher yield. Go look at the BIL.
Ron: All right.
Scott: Ticker symbol BIL, Treasury Bill. Yeah.
Ron: Are you comfortable with the 30% stock?
Pat: I think it should be higher, but I'm not you.
Ron: Well, I just think, who knows?
Pat: Well, that's what I said.
Ron: In a short period of time, and I'm thinking of what you always seem to quote of short-term, you want it in a more flexible count. And I don't wanna have all of it there and I'm going next month.
Pat: That's right. But your beneficiaries aren't necessarily gonna spend that money.
Ron: Oh no, I'm not planning to spend the money.
Pat: No, your beneficiaries.
Ron: My whole mission is just to live basically and to leave what I can to them.
Pat: Understand, but your beneficiaries, like if I...look, if I were to die today and my money...and my wife were to pass on, I wouldn't expect my children to take all this money and spend it. They would invest it. And therefore the investment should be based on the timeline of who's going to be spending the money, not the people giving it. So when you say it's 30% equities and you're saying, well, I'm worried about risk, well, how long is the timeline? It's not your life.
Scott: But if his objective...if your objective is so strong on the dollar number at the date of your death...
Pat: Then do what you need to do. You're fine either way. But you asked me what I thought about it. My opinion is that's too low. I would say move it to 50%. You're not gonna spend all this money. You would be a better steward of your money to your children if you put more equities in the portfolio.
Ron: Even considering all the chaos.
Pat: Oh, the chaos. This is the...Yeah, look at the chaos the last 30 years. We just, you know, we as people have a tendency to focus on the short term and the chaos. You think this is the first time that this government has been in this kind of chaos? Remember when Nixon resigned? Do you remember that? And they pardoned Gerald Ford. I mean, I was a kid and I was like, that's crazy. This will never, this is the...remember the oil crisis and waiting in lines and then the city's being burned down and you wanna go through?
Scott: The drill's getting underneath the desk at school because of the nuclear bomb. I don't know how the desk was gonna save us.
Pat: I always questioned that. I'm like, okay. This isn't the highest quality desk. But the point being, your question was the investment should be on timelines. And you're thinking about your life. I'm thinking about the beneficiary's lifetime. So, but keep it at 30% if it makes you happy.
Scott: I'd like to finish with one comment. Obviously, your grandchild with special needs is gonna need some help financially. My guess is your kids are looking at you and saying, dad, I know it's horrible that mom passed, but go live your life. Right? And so you're very focused on making sure that these dollars go to your kids. I'm just, maybe I'm out of line for saying this, but my guess is your kids will be like, dad, we want you to live your life. And if that means you're going on cruises and spending some of this money, we don't get quite as much, we don't care. We want you to live your life. So I'm just gonna leave it at that. And maybe I'm just out of bounds.
Pat: But I...yes, he called, asked us our opinions. So yeah. There you go. Appreciate the call.
Scott: Yeah.
Pat: And maybe you don't wanna do that. Maybe you just wanna stay on.
Scott: Maybe not. I don't know, but just throw it out there. Anyway, let's, we're gonna be joined now by our CPA expert, Suzanne Conrad. Suzanne, thanks for joining us on our program.
Suzanne: Hello, thanks for having me back.
Scott: And Suzanne, what is your role with Allworth?
Suzanne: I am the director of tax solutions. So one below the vice president, I kind of manage the Folsom team, work with all of our CPAs, enrolled agents, make sure our training's on track, make sure we put out a qualified quality product. And prepare and review returns.
Pat: How many?
Suzanne: Provide a lot of planning.
Pat: And I'm...Scott and I are no longer the acting CEOs of the company. So I ask this in all seriousness. How many enrolled agents, how many people work in that division of the company?
Suzanne: Well, I could have told you, there's nine of us here in Folsom, but we've gained some people. So I don't know the total number. I think it's around 30.
Pat: Okay. So, and the job is to support our financial advisors...
Scott: With tax guidance, tax planning, and sometimes tax preparation.
Pat: For our clients. That's the role, correct?
Suzanne: Absolutely. To provide integrated financial advice, right? So we work with the advisors, we work with the clients to make sure we're optimizing their financial future, including the tax piece.
Pat: Because if you talk...if you listen, this is for the listener, Suzanne, you know this. If you listen to our show, we talk about how important tax and estate planning is in the financial planning process.
Scott: Massive.
Pat: That's why it's integrated into the firm itself.
Scott: I don't know, frankly, and mostly big Wall Street firms, they state we cannot provide tax advice. How can you give good financial advice and ignore tax advice?
Pat: And actually, so in one of the benefits of actually becoming a larger firm and integrating these other firms is that you can get to scale and have divisions like tax solutions, insurance solutions, and estate planning. So, enough of our commercial.
Scott: Suzanne, what are some of the most overlooked tax saving strategies that individuals and families, maybe the employer they overlook, maybe focus on those with a million or more in savings.
Suzanne: Boy, that's a loaded question. My intermediate accounting teacher's favorite answer was, it depends. And that definitely, applies to this question. What are their circumstances? Are they at or near retirement? Are they a young family starting out with college costs to consider? Is the money in IRAs mostly qualified accounts? Or is it after tax investment accounts? Are they high earners? Are they retired in a low bracket before Social Security and RMDs kick in? It really is specific to the client situation. But having said that, the most obvious and frequent tax savings I see overlooked is clients not optimizing their retirement plan contributions, like not maxing out the 401(k) or whatever their employers offer if they have an employer. If they're earning income, people aren't maxing that out. And that's just such low hanging fruit. I mean, you gotta, at least, do that minimum if you're optimizing your tax situation. For me, it pains me.
Pat: Especially if there's a match.
Suzanne: Especially if there's a match. Well, of course. You can do it pre-tax or you can do Roth. A lot of employers have Roth contribution options. So you can split it depending on your situation, but you might as well at least do that if you have the cash flow for it.
Scott: And are there any specific deductions or credits that individuals or families with more than a million bucks in net worth tend to miss?
Suzanne: Yeah, a lot of the ones I see miss most often is the QCDs, right? It just...
Scott: The what?
Suzanne: The QCDs, qualified charitable distributions, coming out of IRAs. So you can do that when you hit 70 and a half. A lot of clients will make donations thinking they're gonna get a charitable deduction, but they don't itemize because the standard deduction is so high. For anybody 70 and a half, if they're charitably inclined, they really ought to do that.
Scott: And how often have you seen this missed?
Suzanne: Often.
Pat: You know what? You think of it. And because it can work for $500 or $1,000 or $1,500, even small amounts.
Scott: And this is anyone who's 70 and above...70 and a half and above, they can gift up to their qualified, their required minimum distribution, although technically, there's not there for 70 anymore, but up to the required minimum distribution to a nonprofit. And it doesn't fund, doesn't go through the tax turn at all, right? Just goes automatically there. They don't have to report it as income. And no...
Suzanne: It's actually 108,000 a year per person. So they can do quite a bit and not have that IRA withdrawal.
Scott: And is that the maximum or is that...?
Pat: It's the max.
Scott: But if someone has 200 grand in their 401(k), can they give 108 grand? Or is it the maximum, whatever is greater, the 108,000, I'm sorry, the lesser?
Suzanne: The 108,000, it's gotta be from an IRA. I don't believe...
Scott: I understand. But it can be above the required minimum distribution amount.
Suzanne: Correct, yes.
Pat: I didn't know that.
Scott: But it cannot go to a donor advice fund.
Pat: I know that. But I knew the maximum was 108, but I didn't know it could exceed the RMD. Mostly because there's clients typically, don't exceed their RMD with these qualified charitable distributions. So this is something that is kind of like a no-brainer. Why do they not allow it to go to a donor advice fund? It would be used so much more.
Scott: Because a lot of people don't spend the money. They put the money in the donor advice fund and they never give it away. It's probably should be more. That would be an area of legislation I would think would be helpful to...
Pat: I actually know someone like that.
Scott: You do?
Suzanne: Yeah.
Pat: Yes. We put it in there and don't give it away as fast as we should. Okay. Next question, Scott.
Scott: What other deductions or credits do people tend to miss?
Suzanne: You know, a biggie right now is the electric vehicles. People buy them and think they get the credit. And for one reason or another, they don't. So you have to be really careful. They have a lot of requirements now. There's an income limitation. So if you're over 300,000 married filing jointly and you try to take that credit, it's going to get disallowed. We actually have a client whose prior accountant took it and it didn't meet the manufacturing requirements. They owed 7,500. It's a 25% penalty on the understatement of tax. So they're going to owe like 10 grand thinking they qualified for this electric vehicle that they don't. So, you know, you have to be careful. If you're buying an EV to get the credit, just make sure you qualify for it and you do your research.
Scott: Talk to the accountant before.
Pat: So Suzanne, can we...this is a little bit off topic, but I just find it fascinating about the new tools that we're using at Allworth. I saw a story this week that someone had missed a charitable deduction and it was going to expire. But how we are able to take past year's tax returns and run it through an AI system, right? Pretty easily, that flags problems that previous accountants have made. Can you talk a little bit about how this thing works?
Suzanne: Yeah, it's, you know, it's a pretty sweet program. It takes a prior year return and it just offers some guidelines, you know, some planning guidelines like for IRMAA brackets, for Medicare, you know, you have this much room in your next tax bracket. So look at a Roth IRA conversion. It's really nice for pretty straightforward planning. You know, if you have a lot of rentals and Schedule C income, it's a little less efficient for that and you need to use some real tax planning software, but it's a really handy tool. I really like what it...you know, it pulls in the prior year return information and prints out a report that's really easy to read and understand. And so it's really a great thing that the advisors get to use now.
Pat: And how far back will you go looking at people's returns?
Suzanne: Well, the statute is three years.
Pat: Will you go back three years and ask for the last three tax returns to look to see if the previous prepared or the client themselves doing their own taxes had done it correctly?
Suzanne: Usually only if we see something. So we'll look at prior year and if there's something suspect, then we'll go back farther. Or if, you know, the client comes to us and says, I didn't really trust my prior preparer, then we'll go look. But it's usually just, you know, the prior year, unless we see something where we need to look further.
Pat: And what percentage of times do you actually find problems with prior year returns?
Scott: That's a good question.
Suzanne: Self prepared, self-prepared returns, probably 50% or more.
Scott: Okay. Are you kidding me?
Pat: Self prepared.
Scott: I heard that. So I'm just thinking the sample of client you work with, right, so you're not, and I'm not gonna mention a name, but you're not dealing with like...these are Allworth clients. So they have savings.
Pat: Yes, the money.
Scott: Right. So these are people that have saved well, they're Allworth clients, wealth management clients, and been doing the taxes themselves. And you saying that more than half the time they're making mistakes.
Suzanne: It's often. Yeah. Especially if they have like a rental or something, because usually they come to us when something changed, you know, they can't do it themselves, or they don't want to, or, you know, their partner who was doing taxes no longer can, or something like that. So yeah, it's pretty high with a self prepared, unfortunately, you know, things like QBI getting this, stuff like that.
Pat: And how about from someone that has had it professionally prepared, what percentage of the time just ballpark, do you think that you find mistakes?
Suzanne: You know, we actually just quizzed all our preparers, and I'd say it's probably 20% to 30% of the time.
Pat: From someone else brings in a tax return for another preparer. How do we guard against that?
Scott: I'm gonna say what percentage of Allworth tax returns are inaccurate?
Suzanne: None, no. You know, we do have a pretty good quality control process that's higher level. And I was gonna just say that, you know, tax season is crazy and the pace is insane. And so things do get missed, but we do have a pretty strict review process and quality control that we go through. So, you know, I personally loathe amended returns. I never want to have to prepare another one. So my goal is to not miss anything.
Pat: Are people reluctant to file extensions?
Suzanne: Very much so, yeah.
Pat: And can you talk about why someone should file an extension? I never understand why people are reluctant to file an extension. Can you explain what a tax extension actually means? When do you write the check and when the tax return actually gets done? Can you just walk us through that?
Suzanne: Yes, well, my husband has an S corp and I finally broke him and told him that no preparer files on time. So he was one of those people that hated to extend, but...
Scott: Oh, that's hilarious.
Suzanne: Yeah, as long as your planning is good, you know, you don't have...you know, what your estimated tax is gonna be. The extension just buys you an extension. It's an extension of the time to file, not an extension of the time to pay. So, you know, if you file an extension in April, you get until October to finish up your tax return, but you have to pay and, you know, what you think your tax liability is gonna be in April, or you get subject to penalties and interest. And I think that's a lot of it. You know, people don't understand tax. If they did, they probably wouldn't be having us do it. So it's involving their money. It's involving security. It's, you know, the IRS and that's scary, right? They don't wanna get a notice. And so there's a lot of emotional stuff that comes into it, but really if you're doing good planning, it's just really not a big deal, you know.
Scott: So sometimes it's just impossible to be, I mean, if you have a very simple tax return, it's easier to get it done by April 15th. You talk about your husband's got an S corp. Well, that means you gotta do the business's taxes first. And then if you've got other investments with a partner, a partnership, sometimes you don't get a K-1 until October.
Pat: So, but here's the point to the listeners, right? Is you estimate, you do a quick and dirty, this is how much I think I'm gonna pay on my taxes. And then you pay that amount and sometimes a little bit more.
Scott: Yeah, a tax on April 15th.
Pat: You pay by April 15th. And then when your accountant isn't working 18 hours a day, you go back to them in June and you say, let's do our taxes now or July or August when they're not buried and you do your taxes. And then you file the real return as late as October 15th.
Suzanne: Right. And then...
Pat: What's that?
Suzanne: And then we can give them time, right? You know, we can sit with them and walk them through every question. And yeah, it's a better result.
Pat: That and you actually get better tax planning, not just preparation in that. Which is what the advisors do. So our advisors work hand in hand with the accountants for more complicated financial situations to make sure that not only is the preparation, the preparation by the time it's done, it comes as no surprise what's happening, right? It's the tax planning where the money is made.
Scott: That planning is not happening in March and April.
Pat: That's right.
Scott: Because our entire tax team is buried doing tax reviews.
Pat: That's right, that's right. So anyway, how is it going this tax season? You buried yet?
Suzanne: You know what? It just, it feels like tax season today, but it's pretty good. It's not bad. We've got some good staff and we're getting our systems down. You know, we've had our clients for a long time. So it's all good. There were no major tax law changes. So that's always a bonus, right?
Scott: That's right.
Suzanne: The whole country wasn't impacted by disasters as Southern California was, but you know, it's been kind of a normal year. So it's going pretty well.
Scott: Good, perfect.
Pat: Thanks Suzanne, appreciate it. Thanks for being part of the team.
Scott: Yeah, glad you're here.
Suzanne: You're welcome, you guys. Thanks for having me on.
Scott: Good luck during tax time.
Suzanne: Okay.
Scott: Yeah, that's a...certain times of the year it's a tough thing.
Pat: And we see it, because we house with these accountants? And you're like, how?
Scott: Do you feel bad for them?
Pat: I mean, did you not spend any time with a career counselor? Did I say that out loud?
Scott: We are out of time. Yeah, there's not enough people going into the profession either.
Pat: There's not enough people going in there.
Scott: Anyway, we're out of time. If you appreciate this podcast, we're gonna ask you a couple of favors. One, send it off to a friend that you think could benefit. Two, give us a review. Three, be sure to follow us on wherever you get your podcasts so that you automatically get this program. You don't have to miss one. Anyway, we'll see you again next week. This has been Scott Hanson and Pat McClain. Our Allworth's "Money Matters."
Man: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.