Trustee Mistakes, Real Estate Math, Crypto Moves, and Tax-Savvy Giving
On this week's Money Matters, Scott and Pat dive into one of the most overlooked decisions in estate planning - choosing the right trustee. They break it down with real-life stories that show just how much the wrong choice can stir up family drama or even land you in legal trouble.
They also take live calls from listeners with real money questions - everything from keeping up with 401(k) contributions to making smart real estate moves. As always, Scott and Pat bring their no-nonsense advice to help people make confident, informed choices.
And if market ups and downs have you on edge, they’ve got you covered there too. Hear their thoughts on how to stay steady during volatility, use tax loss harvesting to your advantage, and even turn charitable giving into a smart tax strategy.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
Narrator: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401ks, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's Money Matters, call now at 833-99-WORTH. That's 833-99-W-O-R-T-H.
Scott: Welcome to Allworth's Money Matters. Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: Yeah. Glad you're with us as we talk about financial matters. Got a good program, got a couple good calls. Gonna talk with Mark Shone, one of our advisors about how he was taking advantage of some client. I'm joking.
Pat: Mark Shone, if you could meet this guy in person, he is more, like he just radiates energy.
Scott: I'm kidding. He's a good advisor. He's not taking advantage of anybody.
Pat: I always used to say that if you called me and said, "Well, the weirdest thing happened, we were in a meeting and Mark Shone spontaneously combusted," I'd say, "Oh, yeah."
Scott: Anyway, so we'll have Mark later on.
Pat: Makes sense.
Scott: So we're gonna have a good time. As we kick things off, I'm gonna talk about the importance of having the right person listed as trustee of your estate. I can't, I mean, we, we're not attorneys, so we don't, I don't personally draft documents. We work with attorneys. But being a financial advisor of over three decades, we have seen it all. I've got a neighbor who's an attorney, he's an attorney that specializes in estate litigation.
Pat: Suing trustees.
Scott: Family suing one another, family members suing, that's, he's made his, that's his career. It's a specialty of suing. And you think, why would anyone do that? Like, why would you sue your siblings?
Pat: Oh, I've seen it.
Scott: I know. We've both seen it. Actually, we've got one right now.
Pat: But fortunately, fortunately in this situation, the client had named a family member as a trustee and a professional trustee.
Scott: As a backup or as a co?
Pat: As a backup. And I am strongly encouraging the family member to step down and allow the professional trustee to take over because of the disharmony in the family.
Scott: Well, I was dealing with situation in the last couple of weeks. Mom and Dad pass. There's 20 million bucks or so. Three siblings, like three children to be split up equally amongst the kids.
Pat: That's a big amount of money.
Scott: Oh, yeah.
Pat: It's a big amount of money.
Scott: And the person I was talking to, they didn't have much in the way of assets. They were still paying down their mortgage. And they knew Mom and Dad had assets and had been ill for a number of years and they passed on. And this is about two years now that they both passed on. And one of the brothers is the trustee. And the brother...so it's been a couple of years. They had received nothing until recently.
Pat: After 23 months?
Scott: Something like that, 20 months. And he says, well, they've got to take care of some taxes. And they have to get some things in order. But I know there's some brokerage accounts. The estate has brokerage accounts and some commercial properties. And the one brother who's the trustee, he keeps saying, "Well, we need to get these things squared away before I can distribute anything." And then he distributes. They were at some family gathering and he had envelopes with them and passed them out like he was the...
Pat: Oh, that's hard to watch. Like it was his money.
Scott: Right. "Hey, good news. And come on down here. Let me hand you this envelope with," and he distributed about 100 grand or so.
Pat: Out of 20 million dollars.
Scott: Correct. Hundred grand. And a it turned out, the $100,000 is going to be taxable in the previous tax year, they're going to get a K1 on this portion of it. And my colleague says, "Well, it would have been nice to know. I could have done some other planning last year had I known I was going to have a hundred thousand dollar taxable distribution." And the brother's like, "Well, that's too bad."
Pat: And so they just picked the wrong trustee. Parents.
Scott: The trustee's an attorney. And I said, "You need to have a conversation with them that his fiduciary responsibility lies with the beneficiaries of the trust."
Pat: That's correct. That is exactly when I talk about the person that I'm trying to... I asked him to please give it up to the professional trustee. I talked about her fiduciary responsibility. And I said, "This is a big responsibility."
Scott: It's a legal responsibility. Big responsibility.
Pat: You cannot put your interest above that of the beneficiaries. Or even let even the perception that you've put your interest above that of the beneficiaries can create litigation.
Scott: Now, my colleague's not going to be suing his brother. They're close. They are close, but it's creating, yeah, especially not just with him, with my colleague's spouse it's like, what the heck is going on here? Like, this is just weird.
Pat: And choosing the right trustee.
Scott: And my colleague, he's got a couple of adult kids that and grandkids. He would like one of his thoughts, I'm going to let them give him some money so they can buy a house.
Pat: Which is nice.
Scott: That's what his plan is. He doesn't really have anything. But that's what he wants to do. Like, "I would like to be able to help my kids. And here it's been 24 months and..."
Pat: Nothing.
Scott: One brother's, well, 100 grand of it. And just got me thinking about like, you need to pick carefully or maybe have multiple children listed as co-trustees.
Pat: That's what we ended up doing. Had a discussion with my four kids and said, "What are your thoughts?" And they all said, "We'll do it together. All four of us." I said, "Okay, let's talk about what issues that that could create. Or what issues are created if we just choose one of you or we choose a third party."
Scott: Yeah, and if you haven't updated your will or trust in a number of years...
Pat: Please, please.
Scott: No one gets out of here alive. Right. We're all going to die at some point in time. We think it's going to be sometime in the future, but we never know. And having these things set up ahead of time makes things a lot cleaner and so on.
Pat: And Scott, let's take a couple of calls. And then I want to talk about this new scam I read about in The New York Times, which...
Scott: Oh, I've got something to talk about, too. Not a scam, but it's just...
Pat: It's a scammer, isn't it? Let's take a couple of calls and then we'll give it a discussion.
Scott: All right. Let's start here with Brian in Alabama. Brian, you're with Allworth's Money Matters.
Brian: How are you guys doing?
Scott: Awesome. How you doing, Brian?
Brian: Very well. Thank you. I just wonder if you guys had time to let me run over a asset scenario and...
Scott: Time?
Brian: I go for early retirement.
Scott: Brian, that's what we're doing here.
Pat: We have nothing but time.
Scott: We're in the studio talking to you.
Pat: We have set aside as much time as Brian needs.
Brian: I feel so special. Thank you.
Pat: What can we do to help?
Brian: All right. Well, I'm 53. And I'm a little definitely behind where I'd like to be. You know, just life happens. So I have a 401k balance currently of $350,000. The last four, five, about five years, I've been working on developing an income stream for post-retirement income in about four small rental homes.
Pat: Okay.
Brian: And I own those outright.
Pat: All right. Perfect. What are those worth?
Brian: They... Pardon?
Pat: What are they worth? And how much income do they generate?
Brian: I would say it'd be hard because there's still some crazy, unrealistic numbers going around. But, you know, they're modest small homes, I'd say around $300,000.
Pat: Each or?
Brian: I bought them in 2020 and 2021. So I was actually really lucky.
Pat: I'm not I'm not familiar with Alabama, although I have visited a beautiful state, at least the parts I was in. But is it $300,000 each or $300,000 between the four?
Brian: I would say a realistic value. It could be as high as $400,000, but I would say the $300,000 to $325,000 would be a realistic, what I would walk away with, you know.
Pat: If you sold all four?
Brian: Right. And I'm not interested in that.
Scott: Okay, we're just trying to understand. We're just trying to understand.
Pat: And how much income do they, after all expenses, how much income do they [inaudible 00:09:44]?
Brian: After all expenses gross before is like $4000 a month they generate when they're all full. And my expenses don't run over. I do everything myself. I'm the property manager, electrician, plumber, you name it. So really, I've just got commercial insurance. Let's see. Thirty seven hundred, let's say $3700 net.
Pat: Okay, we're going to call it three grand just to be conservative because we're baking in some vacancy there. All right. And what else do you have?
Brian: I owe on my primary home $89,000. It has a value of around $325,000 to $350,000.
Pat: All right. And I assume it's a low interest rate loan.
Brian: Yeah, it's an older mortgage. So it's five and a quarter. I'm not interested in really tapping into that. It looks like I'm going to be there for a while anyway. And I only have a small amount of debt. I owe $31,000 on my truck. I've got a vehicle payment for the first time in seven years. I had to get something.
Scott: Are you married?
Brian: Not married. No. I have one son.
Pat: And what is your income?
Scott: How old is your son?
Scott: How old is your son?
Brian: My income from $140,000 to $150,000 a year. My son is twelve. I already have all my homes in a irrevocable trust for him.
Pat: Okay. What's your question?
Brian: The rentals and my home.
Pat: What's your question for us?
Brian: Okay, so I am... It's a chicken or egg sort of thing. I am putting 20% into my 401k and I'm paying extra on my mortgage a good bit. What should I be focusing on most to get... I'm scared of leaving my job, doing the rental property full time, buying more and having the mortgage in case something happens.
Pat: That's right. As you should be.
Brian: But I understand that if I buy a appreciating asset, that it could very well generate easily another $900 a month to pay the mortgage. So should I scale back my 401k to the bare five percent because my company matches five percent, free money, and focus on paying off the mortgage over the next couple of years? And then the truck?
Pat: No.
Brian: There's different schools of thought, like [inaudible crosstalk 00:12:12].
Pat: Yeah, yeah, yeah. You called us. You called us and asked us what we thought, though. So I can't speak to someone...
Brian: What would you do?
Scott: Yeah, I would keep the 20% in your 401k.
Pat: I would keep the 20% in the 401k and I would actually continue to buy rentals like you have. You've been able to do. Yeah, you've been able to do this over the last four years, you said, didn't you?
Brian: Yes.
Pat: Okay, do the same. You're doing great. If you just started this financial plan like this in the rentals over the last four to five years, you're doing great. But keep the 20% in the 401k. Your kid is how old?
Scott: Twelve.
Brian: Twelve.
Pat: Well, so look at your kid. By the time you're 59 and a half, your kid will be going into college. You could fund part of that college education from your IRA if you have to. But this is what my guess is going to be. If your son decides to go to college is that you will scale back on the 401k at that point in time and fund his education directly out of your income. You work till you're age 62. You continue to put 20% in and accumulate, let's say, double the houses between now and the next nine years, you are golden. You are rich. You buy a plaid shirt. You will be a mayor of any town you want in Alabama.
Brian: I'd like to retire at 56, though, if I didn't get to that part.
Scott: Oh.
Pat: All right. Well, then don't do any of that.
Brian: Yeah, sorry about that. Yeah. I'd like to quit working.
Pat: No, no, no. Just keep doing what you're doing. Like I just said, just keep on that path. And when you get to 56, then decide whether you have enough to retire at 56.
Brian: But should I continue to pay off the mortgage?
Pat: No.
Brian: You know, or should I just focus on the mortgage or focus on retirement? Because I'm out of time for it to appreciate.
Scott: I wouldn't. The mortgage is essentially what you could be. Hopefully you can do both. If you think you're going to retire. I mean, you're making 140 to 150 grand a year. So you're going to have to be, your lifestyle is going to have to be much less than that in the next few years in order to have any chance of retirement.
Pat: I wouldn't worry about the mortgage though. You're essentially earning five and a quarter. Right?
Brian: Right.
Pat: That's what you'd be earning in a savings account. Around there, a little bit less than five and a quarter in a Treasury bill. So it's kind of a push there. So just keep on that path that I showed you. When you get to age 56... You're doing everything you can do. When you get to age 56, then reassess whether you have enough to retire or not, or you need to make life changes. But the path you're on is perfect. It's perfect. You got a late start. You said you got a late start. You didn't get a late start on that 401k, but you've acquired those properties. You've done well. You don't have enough money to retire. If you asked me, can you retire at 56 at your current path? The answer is no, you can't.
Brian: No. So I'll just keep trying to reinvest the rental income into another house.
Pat: That's right.
Brian: Slowly but surely. It takes about two years.
Pat: That's right.
Scott: That would be a good move.
Brian: Buy a fifth, then a sixth. Okay.
Pat: That's right.
Brian: Wonderful.
Pat: What else can you do? Unless I want you... I said, "Okay, look, you can retire at 56. You need to live on $54,000 a year between now and the age of 56," what are you going to tell me?
Brian: Can't do it.
Pat: All right. There you go. There's our answer.
Brian: All right. Let me ask you one more question if I may. Let's say the 401k doesn't appreciate that much over two years. Probably not, you know, a little bit. How much, if you were me, out of the $350, 000, would you leave as an emergency, whatever? I guess what I'm saying, I'd like to buy two more homes and I think I could with $200,000. I'll be 55 then, so I won't have the penalty. I'll just have the taxes.
Pat: That's not true.
Brian: I'll only pull it out one home at a time.
Pat: Wait, wait, wait. Stop. Stop. That's not true. If you separate from service, there's no penalty. But if you're employed, there's a penalty on the, for 55. Fifty-five in a 401k.
Scott: If you're planning on spending these dollars to use for a house, then don't put them in your 401k.
Pat: Yeah, but don't do that.
Scott: I wouldn't do that.
Pat: You want both. You want both. You don't... Keep the 20% in the 401k. And here's how you look at it. Brian, forgive me for a second. Here's how you look at it. If I looked at your portfolio and how I thought about the investment thesis behind it, right, I would say, "Well, let's look at Brian's portfolio. So Brian can actually fix these houses. He acts as a property manager. There's value add there. Let's just call these houses, because they generate income, the bond portion of his portfolio, the fixed income portion of his portfolio, that they are designed to provide income from now until your dying day." And we're going to look at your 401k as 100 percent stock, so we're going to call it the equity side of your portfolio. So right now, if I were to look at your portfolio, I would say that you're at 55% bonds, approximately, and 45% stocks. You have 100% of your 401k is in stocks. So, go ahead and invest 100% of your 401k in stocks, continue that 20% and build that real estate on the outside and pretend that's the bond portion of your portfolio.
Brian: But at best, and I'll go it up and down. You can do six or seven percent of rental property, I can return 20% annually.
Pat: No, that's not true. That's just flat out not true. You have returned 20% annually, maybe because there's some appreciation on that property. But that isn't true. I mean...
Brian: They all paid for themselves in less than five years. It's a unique market.
Pat: Yeah, I get that. But over the long term, we're talking long term, right? You might be in an unusual position in in that particular localized market. But at some point in time, every market catches up with itself, which means that if there's excess returns in any market, it actually draws capital into that marketplace. Right? And because it draws capital into that marketplace, it suppresses the yields back to normal. Everything reverts to its average. Everything reverts to its means. I was talking to a guy the other day was telling me he was buying properties in Alabama because the yields were so high. And he was buying them in Michigan as well, because the yields are so high. And he was saying the same thing. It's 20%, it's 20%. Doesn't mean it's 20% forever. Right?
The mere fact that you came on a radio show podcast and said, I get a 20% yield in in Alabama on my rental property, people will actually start exploring whether they should be buying rental properties in Alabama, which will then suppress your yields.
Brian: Right.
Pat: That's just the way. That's just the way markets work. Right? Capital flows to the highest yielding, lowest risk place it can. So in your particular situation, you don't want to, just because you've, in the short period of time, you've invested in these you've got 20% doesn't mean they're going to be 20%. Heck, if I thought I could get 20% forever, I wouldn't have anything else anywhere but in that marketplace. Me personally. I would move to Alabama today.
Scott: Totally agree. If I could get 20%, I'd liquidate everything I've got.
Pat: Everything I own. But three years doesn't make a lifetime. Four years. So, what you're doing for diversif...
Brian: I mean, rent is not decreasing anytime soon.
Pat: Okay. Talk yourself into whatever you want. I'm just telling you how economics work.
Brian: Right. Oh, I understand what you're saying. It's just okay. I was just thinking that as old as I am, I can't expect...
Pat: You're 53.
Brian: ...another bull, you know.
Pat: You're 53.
Scott: You can't expect another bull?
Pat: Bear market.
Brian: Not without having to access the money.
Pat: You're okay. Just do what I... Like I said, you called for our advice. I'm not going to change it because you want to create some sort of positive cognitive bias in your investments. That's what it is. It's a positive cognitive. We all do it. We all talk ourselves into whatever.
Brian: It's been very rewarding.
Pat: Oh, of course it has. Look, I have had investments that have been so fabulous I can't even talk about them. And then...
Brian: It is until it isn't, right?
Pat: Yeah, look, it's fun until it's not. But look, in a diversified portfolio, the thing that, the reason you have diversification is because you don't know what's going to happen. We have no idea. As I tell my kids, I have four children and they're like, "Dad, what's the best investment you've ever made?" You know what I say to them? "You're asking the wrong question. The question you should be asking is, what's the worst investment you've ever made and why?"
Scott: It's having you punks.
Pat: Yeah. And I say to them, "And the reason is, is because you as my children will learn more from my mistakes than you will from my successes. I as an investor will learn more from my own mistakes than I will from my successes, because the loss of money is much more difficult." That's why you've got to just own it. We don't know. We're going to keep it diversified. Existing, in fact, the mere fact that you tell me that you're, these rentals have done 20% actually scares me. It means that they're going to revert to their means faster because they're so far out of average.
Scott: Or just not have an appreciation for a period.
Pat: That's right.
Scott: Things don't go straight up forever.
Pat: Yeah. So anyway, that's our opinion. Appreciate the call.
Scott: Thanks, Brian.
Pat: Let's continue on talking with Dave. Dave, you're with Allworth's Money Matters.
Dave: Hello. I have a question about cryptocurrency. I just wondering what you think about adding a small portion to a balanced portfolio, you know, maybe like Bitcoin and some XRP or something. What do you think about that?
Pat: When you say small, like what percentage?
Dave: I'm thinking like $500 dollars at the most.
Pat: Out of how much?
Dave: Oh, you know, I've got like retirement, a 401k.
Pat: Like a million dollars?
Dave: Yeah, probably about a million. Yeah.
Pat: Oh. I'd go more than 500.
Dave: Yeah. Okay.
Pat: If I were going to go...
Scott: What do you mean you'd go more than 500?
Pat: It's not exciting enough. Five hundred out of a million. I mean, if you're going to play it.
Scott: I mean, to your point, Pat.
Pat: I mean, if you're going to play in it, play in it.
Scott: To Pat's point, it's a speculative thing you're doing, right? Probably a bit at this point, you feel like you're missing out. Everyone's been talking about this. You don't have any. You want to have a little stake in it or something, right?
Dave: Yeah, exactly.
Scott: But like I quit. Not that I ever gambled much, but I was younger every once in awhile I'd go to Tahoe or somewhere and I'd play blackjack. Maybe once a year. I don't. And I used to bet 20 bucks or what? If I lost 100 bucks when I was in college, it meant something.
Pat: You felt it.
Scott: Yes. And now I've discovered that I don't want to actually gamble enough to where it would impact my life at all. So, there's no excitement in it. And I just basically said, I'm not going to bother playing anymore.
Pat: I feel like it's a waste of time.
Scott: Yeah, waste of time. And it's not...
Pat: Yes. So look, I wouldn't do it just because I don't, like I don't understand it. I just got to flat out just, I think it's hype and mania. I had a conversation with a gentleman that is a longtime listener of this show and a client of the firm, has been for years. He thought, you know, we were completely missing the boat. And I might be and... But if you want to play in the sandbox, you know, kick some sand around, have at it, you know.
Scott: I mean, it wouldn't surprise me, Pat, if Bitcoin two years from now is worth $250,000 dollars or $2000.
Pat: Either one. Yeah. And what's really perplexing...
Scott: And really either one are within the realm of possibility.
Pat: And there are some risks to crypto. The word crypto means it's... Right? You can't break the chain. That someone... It's written in stone. Right? What happens if someone is able to hack that? People say, "Well, it can't be done." Well, okay. Right?
Dave: Okay. Yeah.
Scott: I mean, any sort of investment, if you're talking about, like, people invest for a variety of reasons, obviously the number one reason is for some financial security, investing for their future. But people also like to dabble in other things, and it's not uncommon. I mean, look, we've got clients that we manage 95% of their portfolio, and then they have a little side account sometimes with us, sometimes not. And they go and pick different stocks and do different strategies. And they just enjoy doing that. They find some sort of satisfaction. They also realize that they don't want to have their vast majority of their money there because they can't afford to lose the vast majority of their money.
Pat: Yeah, but if you, if Dave, if you said, "I've got ten thousand dollars, I'm going to buy," what did you say? XPR or whatever?
Dave: XRP.
Pat: I don't know what XRP is. What is XRP?
Dave: It's a real hot one right now that they're all promoting.
Scott: Well, if I was to buy one, I might buy one that's not real hot. Buy the one they're about to promote.
Pat: That's it.
Dave: Okay. All right.
Pat: Buy the Doge.
Dave: The Doge.
Pat: The Doge. Is that still around?
Scott: I don't know.
Pat: There's like, there's over 10,000 cryptocurrencies right now.
Dave: Mm-hmm. Yeah.
Pat: Ten thousand.
Dave: Okay.
Scott: Yeah, it's, and I appreciate the call, Dave. And for some aspect, it's just a transfer of wealth from...
Pat: ...promoters, from non-promoters to promoters.
Scott: Yes. Don't you think?
Pat: Yeah, I think Bitcoin lives in a different realm.
Scott: It does. But some little coin that's hot now that...
Pat: Yes, yes, yes, yes. The Melania coin. The Trump coin, the meme coin.
Scott: I've seen the headlines. I've not read any of the articles about the [inaudible crosstalk 00:26:25].
Pat: I have read a couple. I'm like, hey, nothing surprises me. Didn't you have a neighbor that came out with a cryptocurrency at one point?
Scott: Yeah, I haven't looked at it in a couple of years.
Pat: You going to come out with a Scott coin, a little picture of you on the coin?
Scott: No, he reached out and wanted to know if I wanted to help launch this thing a few years ago.
Pat: Oh, by promoting it?
Scott: Yeah, I'm like I'm not going to promote it.
Pat: All right. So. You tell me your story first.
Scott: Well, so this is actually an article in the Wall Street Journal that I read. And I don't know how I was surprised by it, but I was surprised by it. And to give you some little context here, I remember years ago, Berkshire Hathaway, Berkshire Hathaway was the company founded by Warren Buffett, of course, and he chose to never split his shares. So as the value of the company increased, he just the sheer price got more and more expensive and to the point where it was out of reach for the average Americans. And there was a mutual fund. This is a long time ago, Pat, that created a mutual fund where you can buy in the mutual fund. The mutual fund owned one security, what was Berkshire Hathaway stock. And then they would charge a management fee for that.
Pat: On top of it, just so that people could buy smaller denominations.
Scott: And so when Warren Buffett finally got wind of what was happening, that someone's making money on his stock...
Pat: They issued the baby [inaudible 00:27:58]. The class B shares, which is essentially I think it was just to take the sheer price divided by 100. And that's what the baby Bs are. And so the average America could then afford it, and it killed the management fee of these mutual fund.
Scott: So, yes, this is a scam or not a scam. I think it depends on your perception here. But this has to do with privately held companies.
Pat: So what is a privately held company?
Scott: One that's not public. And in particular, this particular article pointed out SpaceX. SpaceX founded and controlled by Elon Musk, who controls Tesla, The Boring Company.
Pat: NASA.
Scott: NASA? He Controls NASA.
Pat: DOGE.
Scott: The entire government. Anyway, so but it's privately held and these days, companies don't like going public because when they go public, they have to go through all kinds of disclosures, public disclosures. But if they keep their shareholders limited to under 2000 holders of records, they could remain a private company. So what has transpired is there's these investment pools, so to speak, that are being formed where investors invest in these. And then they go out and buy SpaceX stock in the secondary market, right.
Pat: And who do they buy it from? SpaceX employees or previous employees of SpaceX that have over concentrated positions in this relative to their net worth and want some diversification.
Scott: Right. So if you're an executive at SpaceX, you've been there forever. And suddenly your stock's worth $200 million, $20 million, $2, whatever. And your net worth is relatively the same or nothing, right? Like, well, I would certainly like to diversify and maybe spend some of these dollars if you've been there. So that creates a market for it. But they're limited to 2000 holders of record. So enter these special purpose vehicles, SPVs,
Pat: Not to be confused with the SPACs.
Scott: That's correct.
Pat: Special purpose acquisition company.
Scott: SPVs. The management fee on these, the ones that were highlighted here, one... It's similar to a hedge fund. So they're charging a one percent management fee, then 20% of the profits above I think it's eight percent. One and 20 structure.
Pat: Wow. For doing nothing.
Scott: Pulling these things together to buy one company.
Pat: Yeah. Crazy. Crazy. Do they have to get the blessings of Elon?
Scott: Well, the article talked about it was Elon's friends doing it. "A Side Hustle for Friends of Musk" was what the headline of the article was.
Pat: Wow. That's rich.
Scott: And this is all allegedly based on the Wall Street Journal's reporting.
Pat: We are relying on the Wall Street Journal for this.
Scott: But it's it just got me thinking like the value is a bit up already. It's incredible market cap already.
Pat: Yeah, already, already. And then on top of it, someone is actually taking a big cut. And I'm sure there's a huge market for it.
Scott: I'm sure there is.
Pat: Massive market.
Scott: But it's also one of these ways, you're escaping, like there's the intent of the law and there's the letter of the law. And all you have to follow is the letter of the law.
Pat: Not the intent.
Scott: So the intent is, look, if you're going to have more than two thousand holders of record, we want you to be public and you start to have these...
Pat: But since we create a company as a holder of record...
Scott: Special...
Pat: ...we really don't know who holds this.
Scott: That's right. So there could be tens of thousands of shares.
Pat: I don't know if mine's nearly as good. And I'll just give it a quick shout out here for this. What I found fascinating is that a number of weeks ago, there was a 60 Minutes piece on different types of scotch and bourbons being made and the barrels and how they're aged. And on that, they actually interviewed a company that invest in what are new or fresh barrels filled with liquor. Right? Essentially moonshine. And it gets its flavor from that. And this was a 60 Minutes piece. And the guy was talking about what a great investment it was. I thought, wow.
Scott: The barrels?
Pat: Well, they're filled. So then you and I would go out and buy, let's say, 10 barrels that are filled, and then we would pay to warehouse them for eight years, 10 years, 12 years. And then we would take them and sell them into the secondary market.
Scott: They do the same thing in the wine market.
Pat: Exactly the same thing. Except now this thing is just...
Scott: I've never had any interest investing in that stuff. But anyway, tell me what's this...
Pat: It's filled with scams, which is you would expect, which is people are buying these barrels and thinking they're stored somewhere, and in fact, they did buy them. So did eight other people buy the same barrel. Right? And so any time that you see these things that are hot and new investments, you just look at it and you think...
Scott: They might be advertising. They're probably advertising in social media, maybe even on the radio, maybe even on television.
Pat: Yes, especially after this 60 Minutes piece that came out a few weeks ago. And I just thought to myself when I watched it on 60 Minutes and this came out a couple of weeks later...
Scott: That's funny. You're watching 60 Minutes, like, eh, that looks like one of those areas there's going to be scammers coming in.
Pat: It's going to, like it just seems a little bit like...
Scott: I mean, how do you do? How do you do your due diligence on something like that?
Pat: I don't know. Remember, there was a scam in the Sacramento area, Scott, when we first got into the business 30 years ago, the guy was selling cattle.
Scott: And they didn't exist.
Pat: They didn't exist.
Scott: Yeah. Right.
Scott: Yeah. Careful. You got to be careful. All right. Like we talked about at the beginning of the program, Mark Shone is going to join us. Mark, thanks for taking some time.
Mark: Yeah, absolutely. It's good to be here. How are you, Scott?
Scott: Good. And Mark is one of our certified financial planners in San Francisco Bay Area, the Bay Area, some in Sacramento...
Pat: But he's in...
Scott: ...Nevada.
Pat: Like most of your stuff, you said you do remotely now, dorrect?
Mark: I do. Yeah. Yeah. Most of it is remote, but there's still some in-person things. But yeah, it's probably 90% remote.
Pat: Wow.
Scott: Well, it's interesting how I mean, I think the pandemic changed a lot of our behaviors, mine included. And there's like you think about long term clients that would come in periodically for whatever the reviews are. And then now it's like, "I think I'm good. Why don't we just do this..." I mean, if I can go to the dentist remotely, I'd certainly choose that rather than driving all the way across town to see my dentist. And that's the same thing. Number one. Number two, just with we've got experts, a variety of different expertise that are in different parts of the country, all over the place.
Pat: Yeah. And they come in, they drop into meetings all the time.
Scott: Yes. And so whether if maybe a client's in the office with an advisor and we have a big monitor behind the person pops in or it's all remote.
Pat: Yes.
Scott: And that's sometimes...
Mark: Yeah, I mean, it's a better client experience. Think about it. They hop in their car, drive 30 minutes to come to see you, spend an hour there, drive an hour. You know, it's a two hour event that can be handled efficiently in an hour.
Scott: Yeah, not only that, if you the portfolio, you want a portfolio specialist, they can pop in the meeting briefly or an attorney or a CPA or insurance expert.
Pat: Anyway, Mark, you have a story for us. Is this correct?
Mark: Yeah, I have a story of just some tactics or around some things that you can do within, when you get market volatility is likely.
Pat: Okay. And before you tell this, I got to tell you that you were on the show a while ago and you talked about Silicon Valley Bank and how you had put these collar around executives so that they were protected from a downside. And I've thought about that about three or four times. And how, you know, how hard it is for a client to do that with a stock that's doing so well. Right?
Scott: And there's, think of like insurance. There's a cost. You pay a premium for those guarantees.
Pat: Right. How hard it is for that particular client. But then after they live through it and the person in the next office didn't do those techniques and change their life irrevocably forever, right?
Mark: Yeah.
Pat: It's chilling.
Mark: Not only premiums. Yeah. Not only premiums, but sometimes it's, you know, it's actual tax that you have to pay. I mean, there are some pain points and it's against a stock that you are generally pretty excited about. As you know, created your lifestyle, all the things. There's all kinds of emotions around it as well.
Pat: Yeah. And you only do it with stocks that are doing really well.
Mark: That's right.
Pat: That's one of the only ones that you have a constant position.
Mark: You don't have that problem.
Pat: Right. So anyway, I want to thank you for that last conversation because I have thought about it. In fact, I thought about it this morning, driving into the show. I have thought about it no less than three times about just how actually like at the end of it...
Scott: That's why it's important for people to step back and say, what are they really trying to accomplish in their life? And most people get to a point where they're more concerned about not going broke than they are about becoming wealthier. And we get confused because we get excited.
Mark: You spend money, not returns is something that I often say to clients. Right? So, if you're not worried about headed to the cocktail party and my portfolio did X and, you know, yours only did Y. You spend money. It's capital. It supports your lifestyle. So you just have to think about it a little, in a more broad sense. And you have to have the passion to get your clients to do the right thing. I mean, if you didn't have conviction and they didn't have the courage, we're having extremely different, you know, conversations today than we had. So, you know, it's important stuff. So that helps to kind of live through some of those things [inaudible crosstalk 00:39:01] more passion.
Scott: I mean, it's interesting. Like we've had communications training with our advisors. I mean, sometimes the best people with numbers are not always the ones that are also the most outgoing and connecting well with people. Right? And so part of the interesting about this profession, it's the people that can can do both, that are both good with numbers and highly interactive with people. And to your point, Mark, it's you've got to have the conviction. And then you need to be powerful. You need to be skilled enough to help guide that client down the journey to where they end up with that conviction.
Pat: Yeah. And they're thankful for it. So your techniques today, you're going to share a couple with us.
Mark: Wanted to talk about just a client that I have that when we saw market correction, what kind of things do we do? And there's essentially three main things that that can happen, one broad case thing. But first of all, the work that we've done in advance of this correction allows us and gives us the opportunity to do the things that are important. So we talked a little bit about direct indexing. You've talked about it on the show here. And that's the ability to tax loss harvest. Even when markets are going up, you have the ability to do that. Well, that puts you in a position to do some things that are as simple as rebalancing a portfolio when markets start to get very volatile and to rebalance a portfolio without causing any taxation. So the decisions that you make and the planning work that you do years in advance help you be more proactive in an environment like this. So the first thing is just to allow to do rebalancing without taxation. That was the biggest thing.
Pat: And Mark, that's just because you've got loss carry forward that you've actually just kept dry?
Mark: That's correct.
Pat: Right?
Mark: That's correct.
Pat: Or rebalance in retirement accounts.
Mark: Or rebalance in a retirement account. Yeah, correct.
Scott: And maybe trying to look at the overall portfolio, let's say you've got half your assets in taxable, half in retirement accounts. You might actually end up tweaking it a bit where you do a further rebalance in the retirement account and a little in the taxable to avoid triggering a tax bill.
Pat: To get to the target state of the portfolio.
Mark: That's correct. That's correct. And I do have some clients, you know, we harvest these losses and you can do this while the market is trending up. So most people, you know, thinking, wow, why are we creating a bunch of losses? It's something that you can do while the market is appreciated.
Pat: You're doing it because you're smart.
Mark: Yeah, it's helpful. And then they're like, "Should we use some of those losses?" You know, I'm always getting asked, "Should we use some of these losses this year?" I said, "We're going to utilize the losses when there's a purpose." And that's purpose is going to be to rebalance, to take cash out, to do something. So you just want to be thoughtful about that.
Scott: And there's no time limit. We can we can carry forward realized losses indefinitely, except to our grave. You can't...
Pat: But you don't really need them to your grave because the step up in basis.
Scott: Whatever.
Mark: That's good. That's correct. Yeah. Well, you also don't want to carry losses into your grave as well, because you get a step down in basis. So [inaudible crosstalk 00:42:23]. Yeah.
Pat: I'm just so bad.
Scott: That was really bad.
Pat: It was bad.
Scott: Nice, nice try.
Mark: But the other thing that you could do is in these environments is sometimes is a good time that if you have things that have held up pretty well in this environment, you'll do charitable giving with appreciated stock. So those are some of the things either to reduce and get your portfolio back in balance. So growth stocks have done really well over, well, a really, really long period of time. They've started to correct a little bit harder. But if we're going to be doing charitable things instead of selling to rebalance, we'll use charitable giving to gift away those highly appreciated positions.
Pat: Did it last week. Did it last week. Did it last week after the conversation. Exact conversation was, "You know, now is a good time to do this. And by the way, not only are you doing it because, you know, we're going to do a lump sum, you know, that rather than every year, let's do it every three or four years so that we actually get as much benefit out of it as possible. And the other is just for the record keeping, bookkeeping, the ease of actually gifting to charities, a donor advice fund.
Scott: Through a donor advice fund. Yeah.
Scott: Makes it so easy.
Mark: Yeah, yeah. And you would in this type of environment, because there's a rebalancing benefit, you would be more likely to do or, you know, in this case, it was more beneficial to donate the appreciated stock directly instead of using charitable remainder distributions or those kind of things. Right. And kind of wait till the end of the year and do that.
Pat: Wait. So explain that.
Mark: The appreciated [inaudible 00:44:16] is a bigger thing.
Pat: Explain that to... You would just choose the charity and...
Mark: Yeah, instead of using, you know, if you have a set amount that you're going to give a lot of times year over year, it makes sense to use a charitable distribution, qualified charitable distribution out of your IRA.
Scott: Correct. If you're over 70.
Mark: [inaudible 00:44:37] and away you go. Yes. Over 70 and a half, you can do it, right. But in a year like this, I'm saying, let's avoid future capital gain on a position. And it benefits your portfolio long term by taking some of that out of the portfolio.
Scott: Well, Mark, as always, appreciate you taking some time to be with us. Mark Shone, a CFP extraordinaire.
Pat: And Mark, how's the band going?
Mark: It's going well. We played after the last time I was on with you. All is well. Our hits on YouTube went way up. I will tell you that.
Scott: Don't get too famous out there. You're going to quit Allworth. You're a rock star.
Pat: Stop.
Scott: How old are you? Fifty-nine?
Mark: Fifty-nine. Yeah.
Scott: Mark, [inaudible 00:45:26] rock star. Stop for a minute.
Mark: There's a real big, heavy, heavy demand for 59 year old drummers.
Pat: When you're, when you said the hits on YouTube went way up, like they doubled so now you got 10.
Mark: Oh, no, 17.
Pat: That's funny. Thanks, Mark.
Scott: Thanks, Mark. Appreciate it. We're about out of time here. Hey, I want to let them know that this Tuesday, Pat and I are going to be in studio taking calls, Tuesday, May 20th. This Tuesday from 10:30 to 12:30 Pacific Time, 10:30 to 12:30 this Tuesday, Pacific Time. If you want to be part of the program, send us an email. Questions at moneymatters.com questions at moneymatters.com. Or you can call 833-99-WORTH. We'll see you again next week. This has been Scott Hanson and Pat McClain of Allworth's Money Matters.
Narrator: 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: Yeah. Glad you're with us as we talk about financial matters. Got a good program, got a couple good calls. Gonna talk with Mark Shone, one of our advisors about how he was taking advantage of some client. I'm joking.
Pat: Mark Shone, if you could meet this guy in person, he is more, like he just radiates energy.
Scott: I'm kidding. He's a good advisor. He's not taking advantage of anybody.
Pat: I always used to say that if you called me and said, "Well, the weirdest thing happened, we were in a meeting and Mark Shone spontaneously combusted," I'd say, "Oh, yeah."
Scott: Anyway, so we'll have Mark later on.
Pat: Makes sense.
Scott: So we're gonna have a good time. As we kick things off, I'm gonna talk about the importance of having the right person listed as trustee of your estate. I can't, I mean, we, we're not attorneys, so we don't, I don't personally draft documents. We work with attorneys. But being a financial advisor of over three decades, we have seen it all. I've got a neighbor who's an attorney, he's an attorney that specializes in estate litigation.
Pat: Suing trustees.
Scott: Family suing one another, family members suing, that's, he's made his, that's his career. It's a specialty of suing. And you think, why would anyone do that? Like, why would you sue your siblings?
Pat: Oh, I've seen it.
Scott: I know. We've both seen it. Actually, we've got one right now.
Pat: But fortunately, fortunately in this situation, the client had named a family member as a trustee and a professional trustee.
Scott: As a backup or as a co?
Pat: As a backup. And I am strongly encouraging the family member to step down and allow the professional trustee to take over because of the disharmony in the family.
Scott: Well, I was dealing with situation in the last couple of weeks. Mom and Dad pass. There's 20 million bucks or so. Three siblings, like three children to be split up equally amongst the kids.
Pat: That's a big amount of money.
Scott: Oh, yeah.
Pat: It's a big amount of money.
Scott: And the person I was talking to, they didn't have much in the way of assets. They were still paying down their mortgage. And they knew Mom and Dad had assets and had been ill for a number of years and they passed on. And this is about two years now that they both passed on. And one of the brothers is the trustee. And the brother...so it's been a couple of years. They had received nothing until recently.
Pat: After 23 months?
Scott: Something like that, 20 months. And he says, well, they've got to take care of some taxes. And they have to get some things in order. But I know there's some brokerage accounts. The estate has brokerage accounts and some commercial properties. And the one brother who's the trustee, he keeps saying, "Well, we need to get these things squared away before I can distribute anything." And then he distributes. They were at some family gathering and he had envelopes with them and passed them out like he was the...
Pat: Oh, that's hard to watch. Like it was his money.
Scott: Right. "Hey, good news. And come on down here. Let me hand you this envelope with," and he distributed about 100 grand or so.
Pat: Out of 20 million dollars.
Scott: Correct. Hundred grand. And a it turned out, the $100,000 is going to be taxable in the previous tax year, they're going to get a K1 on this portion of it. And my colleague says, "Well, it would have been nice to know. I could have done some other planning last year had I known I was going to have a hundred thousand dollar taxable distribution." And the brother's like, "Well, that's too bad."
Pat: And so they just picked the wrong trustee. Parents.
Scott: The trustee's an attorney. And I said, "You need to have a conversation with them that his fiduciary responsibility lies with the beneficiaries of the trust."
Pat: That's correct. That is exactly when I talk about the person that I'm trying to... I asked him to please give it up to the professional trustee. I talked about her fiduciary responsibility. And I said, "This is a big responsibility."
Scott: It's a legal responsibility. Big responsibility.
Pat: You cannot put your interest above that of the beneficiaries. Or even let even the perception that you've put your interest above that of the beneficiaries can create litigation.
Scott: Now, my colleague's not going to be suing his brother. They're close. They are close, but it's creating, yeah, especially not just with him, with my colleague's spouse it's like, what the heck is going on here? Like, this is just weird.
Pat: And choosing the right trustee.
Scott: And my colleague, he's got a couple of adult kids that and grandkids. He would like one of his thoughts, I'm going to let them give him some money so they can buy a house.
Pat: Which is nice.
Scott: That's what his plan is. He doesn't really have anything. But that's what he wants to do. Like, "I would like to be able to help my kids. And here it's been 24 months and..."
Pat: Nothing.
Scott: One brother's, well, 100 grand of it. And just got me thinking about like, you need to pick carefully or maybe have multiple children listed as co-trustees.
Pat: That's what we ended up doing. Had a discussion with my four kids and said, "What are your thoughts?" And they all said, "We'll do it together. All four of us." I said, "Okay, let's talk about what issues that that could create. Or what issues are created if we just choose one of you or we choose a third party."
Scott: Yeah, and if you haven't updated your will or trust in a number of years...
Pat: Please, please.
Scott: No one gets out of here alive. Right. We're all going to die at some point in time. We think it's going to be sometime in the future, but we never know. And having these things set up ahead of time makes things a lot cleaner and so on.
Pat: And Scott, let's take a couple of calls. And then I want to talk about this new scam I read about in The New York Times, which...
Scott: Oh, I've got something to talk about, too. Not a scam, but it's just...
Pat: It's a scammer, isn't it? Let's take a couple of calls and then we'll give it a discussion.
Scott: All right. Let's start here with Brian in Alabama. Brian, you're with Allworth's Money Matters.
Brian: How are you guys doing?
Scott: Awesome. How you doing, Brian?
Brian: Very well. Thank you. I just wonder if you guys had time to let me run over a asset scenario and...
Scott: Time?
Brian: I go for early retirement.
Scott: Brian, that's what we're doing here.
Pat: We have nothing but time.
Scott: We're in the studio talking to you.
Pat: We have set aside as much time as Brian needs.
Brian: I feel so special. Thank you.
Pat: What can we do to help?
Brian: All right. Well, I'm 53. And I'm a little definitely behind where I'd like to be. You know, just life happens. So I have a 401k balance currently of $350,000. The last four, five, about five years, I've been working on developing an income stream for post-retirement income in about four small rental homes.
Pat: Okay.
Brian: And I own those outright.
Pat: All right. Perfect. What are those worth?
Brian: They... Pardon?
Pat: What are they worth? And how much income do they generate?
Brian: I would say it'd be hard because there's still some crazy, unrealistic numbers going around. But, you know, they're modest small homes, I'd say around $300,000.
Pat: Each or?
Brian: I bought them in 2020 and 2021. So I was actually really lucky.
Pat: I'm not I'm not familiar with Alabama, although I have visited a beautiful state, at least the parts I was in. But is it $300,000 each or $300,000 between the four?
Brian: I would say a realistic value. It could be as high as $400,000, but I would say the $300,000 to $325,000 would be a realistic, what I would walk away with, you know.
Pat: If you sold all four?
Brian: Right. And I'm not interested in that.
Scott: Okay, we're just trying to understand. We're just trying to understand.
Pat: And how much income do they, after all expenses, how much income do they [inaudible 00:09:44]?
Brian: After all expenses gross before is like $4000 a month they generate when they're all full. And my expenses don't run over. I do everything myself. I'm the property manager, electrician, plumber, you name it. So really, I've just got commercial insurance. Let's see. Thirty seven hundred, let's say $3700 net.
Pat: Okay, we're going to call it three grand just to be conservative because we're baking in some vacancy there. All right. And what else do you have?
Brian: I owe on my primary home $89,000. It has a value of around $325,000 to $350,000.
Pat: All right. And I assume it's a low interest rate loan.
Brian: Yeah, it's an older mortgage. So it's five and a quarter. I'm not interested in really tapping into that. It looks like I'm going to be there for a while anyway. And I only have a small amount of debt. I owe $31,000 on my truck. I've got a vehicle payment for the first time in seven years. I had to get something.
Scott: Are you married?
Brian: Not married. No. I have one son.
Pat: And what is your income?
Scott: How old is your son?
Scott: How old is your son?
Brian: My income from $140,000 to $150,000 a year. My son is twelve. I already have all my homes in a irrevocable trust for him.
Pat: Okay. What's your question?
Brian: The rentals and my home.
Pat: What's your question for us?
Brian: Okay, so I am... It's a chicken or egg sort of thing. I am putting 20% into my 401k and I'm paying extra on my mortgage a good bit. What should I be focusing on most to get... I'm scared of leaving my job, doing the rental property full time, buying more and having the mortgage in case something happens.
Pat: That's right. As you should be.
Brian: But I understand that if I buy a appreciating asset, that it could very well generate easily another $900 a month to pay the mortgage. So should I scale back my 401k to the bare five percent because my company matches five percent, free money, and focus on paying off the mortgage over the next couple of years? And then the truck?
Pat: No.
Brian: There's different schools of thought, like [inaudible crosstalk 00:12:12].
Pat: Yeah, yeah, yeah. You called us. You called us and asked us what we thought, though. So I can't speak to someone...
Brian: What would you do?
Scott: Yeah, I would keep the 20% in your 401k.
Pat: I would keep the 20% in the 401k and I would actually continue to buy rentals like you have. You've been able to do. Yeah, you've been able to do this over the last four years, you said, didn't you?
Brian: Yes.
Pat: Okay, do the same. You're doing great. If you just started this financial plan like this in the rentals over the last four to five years, you're doing great. But keep the 20% in the 401k. Your kid is how old?
Scott: Twelve.
Brian: Twelve.
Pat: Well, so look at your kid. By the time you're 59 and a half, your kid will be going into college. You could fund part of that college education from your IRA if you have to. But this is what my guess is going to be. If your son decides to go to college is that you will scale back on the 401k at that point in time and fund his education directly out of your income. You work till you're age 62. You continue to put 20% in and accumulate, let's say, double the houses between now and the next nine years, you are golden. You are rich. You buy a plaid shirt. You will be a mayor of any town you want in Alabama.
Brian: I'd like to retire at 56, though, if I didn't get to that part.
Scott: Oh.
Pat: All right. Well, then don't do any of that.
Brian: Yeah, sorry about that. Yeah. I'd like to quit working.
Pat: No, no, no. Just keep doing what you're doing. Like I just said, just keep on that path. And when you get to 56, then decide whether you have enough to retire at 56.
Brian: But should I continue to pay off the mortgage?
Pat: No.
Brian: You know, or should I just focus on the mortgage or focus on retirement? Because I'm out of time for it to appreciate.
Scott: I wouldn't. The mortgage is essentially what you could be. Hopefully you can do both. If you think you're going to retire. I mean, you're making 140 to 150 grand a year. So you're going to have to be, your lifestyle is going to have to be much less than that in the next few years in order to have any chance of retirement.
Pat: I wouldn't worry about the mortgage though. You're essentially earning five and a quarter. Right?
Brian: Right.
Pat: That's what you'd be earning in a savings account. Around there, a little bit less than five and a quarter in a Treasury bill. So it's kind of a push there. So just keep on that path that I showed you. When you get to age 56... You're doing everything you can do. When you get to age 56, then reassess whether you have enough to retire or not, or you need to make life changes. But the path you're on is perfect. It's perfect. You got a late start. You said you got a late start. You didn't get a late start on that 401k, but you've acquired those properties. You've done well. You don't have enough money to retire. If you asked me, can you retire at 56 at your current path? The answer is no, you can't.
Brian: No. So I'll just keep trying to reinvest the rental income into another house.
Pat: That's right.
Brian: Slowly but surely. It takes about two years.
Pat: That's right.
Scott: That would be a good move.
Brian: Buy a fifth, then a sixth. Okay.
Pat: That's right.
Brian: Wonderful.
Pat: What else can you do? Unless I want you... I said, "Okay, look, you can retire at 56. You need to live on $54,000 a year between now and the age of 56," what are you going to tell me?
Brian: Can't do it.
Pat: All right. There you go. There's our answer.
Brian: All right. Let me ask you one more question if I may. Let's say the 401k doesn't appreciate that much over two years. Probably not, you know, a little bit. How much, if you were me, out of the $350, 000, would you leave as an emergency, whatever? I guess what I'm saying, I'd like to buy two more homes and I think I could with $200,000. I'll be 55 then, so I won't have the penalty. I'll just have the taxes.
Pat: That's not true.
Brian: I'll only pull it out one home at a time.
Pat: Wait, wait, wait. Stop. Stop. That's not true. If you separate from service, there's no penalty. But if you're employed, there's a penalty on the, for 55. Fifty-five in a 401k.
Scott: If you're planning on spending these dollars to use for a house, then don't put them in your 401k.
Pat: Yeah, but don't do that.
Scott: I wouldn't do that.
Pat: You want both. You want both. You don't... Keep the 20% in the 401k. And here's how you look at it. Brian, forgive me for a second. Here's how you look at it. If I looked at your portfolio and how I thought about the investment thesis behind it, right, I would say, "Well, let's look at Brian's portfolio. So Brian can actually fix these houses. He acts as a property manager. There's value add there. Let's just call these houses, because they generate income, the bond portion of his portfolio, the fixed income portion of his portfolio, that they are designed to provide income from now until your dying day." And we're going to look at your 401k as 100 percent stock, so we're going to call it the equity side of your portfolio. So right now, if I were to look at your portfolio, I would say that you're at 55% bonds, approximately, and 45% stocks. You have 100% of your 401k is in stocks. So, go ahead and invest 100% of your 401k in stocks, continue that 20% and build that real estate on the outside and pretend that's the bond portion of your portfolio.
Brian: But at best, and I'll go it up and down. You can do six or seven percent of rental property, I can return 20% annually.
Pat: No, that's not true. That's just flat out not true. You have returned 20% annually, maybe because there's some appreciation on that property. But that isn't true. I mean...
Brian: They all paid for themselves in less than five years. It's a unique market.
Pat: Yeah, I get that. But over the long term, we're talking long term, right? You might be in an unusual position in in that particular localized market. But at some point in time, every market catches up with itself, which means that if there's excess returns in any market, it actually draws capital into that marketplace. Right? And because it draws capital into that marketplace, it suppresses the yields back to normal. Everything reverts to its average. Everything reverts to its means. I was talking to a guy the other day was telling me he was buying properties in Alabama because the yields were so high. And he was buying them in Michigan as well, because the yields are so high. And he was saying the same thing. It's 20%, it's 20%. Doesn't mean it's 20% forever. Right?
The mere fact that you came on a radio show podcast and said, I get a 20% yield in in Alabama on my rental property, people will actually start exploring whether they should be buying rental properties in Alabama, which will then suppress your yields.
Brian: Right.
Pat: That's just the way. That's just the way markets work. Right? Capital flows to the highest yielding, lowest risk place it can. So in your particular situation, you don't want to, just because you've, in the short period of time, you've invested in these you've got 20% doesn't mean they're going to be 20%. Heck, if I thought I could get 20% forever, I wouldn't have anything else anywhere but in that marketplace. Me personally. I would move to Alabama today.
Scott: Totally agree. If I could get 20%, I'd liquidate everything I've got.
Pat: Everything I own. But three years doesn't make a lifetime. Four years. So, what you're doing for diversif...
Brian: I mean, rent is not decreasing anytime soon.
Pat: Okay. Talk yourself into whatever you want. I'm just telling you how economics work.
Brian: Right. Oh, I understand what you're saying. It's just okay. I was just thinking that as old as I am, I can't expect...
Pat: You're 53.
Brian: ...another bull, you know.
Pat: You're 53.
Scott: You can't expect another bull?
Pat: Bear market.
Brian: Not without having to access the money.
Pat: You're okay. Just do what I... Like I said, you called for our advice. I'm not going to change it because you want to create some sort of positive cognitive bias in your investments. That's what it is. It's a positive cognitive. We all do it. We all talk ourselves into whatever.
Brian: It's been very rewarding.
Pat: Oh, of course it has. Look, I have had investments that have been so fabulous I can't even talk about them. And then...
Brian: It is until it isn't, right?
Pat: Yeah, look, it's fun until it's not. But look, in a diversified portfolio, the thing that, the reason you have diversification is because you don't know what's going to happen. We have no idea. As I tell my kids, I have four children and they're like, "Dad, what's the best investment you've ever made?" You know what I say to them? "You're asking the wrong question. The question you should be asking is, what's the worst investment you've ever made and why?"
Scott: It's having you punks.
Pat: Yeah. And I say to them, "And the reason is, is because you as my children will learn more from my mistakes than you will from my successes. I as an investor will learn more from my own mistakes than I will from my successes, because the loss of money is much more difficult." That's why you've got to just own it. We don't know. We're going to keep it diversified. Existing, in fact, the mere fact that you tell me that you're, these rentals have done 20% actually scares me. It means that they're going to revert to their means faster because they're so far out of average.
Scott: Or just not have an appreciation for a period.
Pat: That's right.
Scott: Things don't go straight up forever.
Pat: Yeah. So anyway, that's our opinion. Appreciate the call.
Scott: Thanks, Brian.
Pat: Let's continue on talking with Dave. Dave, you're with Allworth's Money Matters.
Dave: Hello. I have a question about cryptocurrency. I just wondering what you think about adding a small portion to a balanced portfolio, you know, maybe like Bitcoin and some XRP or something. What do you think about that?
Pat: When you say small, like what percentage?
Dave: I'm thinking like $500 dollars at the most.
Pat: Out of how much?
Dave: Oh, you know, I've got like retirement, a 401k.
Pat: Like a million dollars?
Dave: Yeah, probably about a million. Yeah.
Pat: Oh. I'd go more than 500.
Dave: Yeah. Okay.
Pat: If I were going to go...
Scott: What do you mean you'd go more than 500?
Pat: It's not exciting enough. Five hundred out of a million. I mean, if you're going to play it.
Scott: I mean, to your point, Pat.
Pat: I mean, if you're going to play in it, play in it.
Scott: To Pat's point, it's a speculative thing you're doing, right? Probably a bit at this point, you feel like you're missing out. Everyone's been talking about this. You don't have any. You want to have a little stake in it or something, right?
Dave: Yeah, exactly.
Scott: But like I quit. Not that I ever gambled much, but I was younger every once in awhile I'd go to Tahoe or somewhere and I'd play blackjack. Maybe once a year. I don't. And I used to bet 20 bucks or what? If I lost 100 bucks when I was in college, it meant something.
Pat: You felt it.
Scott: Yes. And now I've discovered that I don't want to actually gamble enough to where it would impact my life at all. So, there's no excitement in it. And I just basically said, I'm not going to bother playing anymore.
Pat: I feel like it's a waste of time.
Scott: Yeah, waste of time. And it's not...
Pat: Yes. So look, I wouldn't do it just because I don't, like I don't understand it. I just got to flat out just, I think it's hype and mania. I had a conversation with a gentleman that is a longtime listener of this show and a client of the firm, has been for years. He thought, you know, we were completely missing the boat. And I might be and... But if you want to play in the sandbox, you know, kick some sand around, have at it, you know.
Scott: I mean, it wouldn't surprise me, Pat, if Bitcoin two years from now is worth $250,000 dollars or $2000.
Pat: Either one. Yeah. And what's really perplexing...
Scott: And really either one are within the realm of possibility.
Pat: And there are some risks to crypto. The word crypto means it's... Right? You can't break the chain. That someone... It's written in stone. Right? What happens if someone is able to hack that? People say, "Well, it can't be done." Well, okay. Right?
Dave: Okay. Yeah.
Scott: I mean, any sort of investment, if you're talking about, like, people invest for a variety of reasons, obviously the number one reason is for some financial security, investing for their future. But people also like to dabble in other things, and it's not uncommon. I mean, look, we've got clients that we manage 95% of their portfolio, and then they have a little side account sometimes with us, sometimes not. And they go and pick different stocks and do different strategies. And they just enjoy doing that. They find some sort of satisfaction. They also realize that they don't want to have their vast majority of their money there because they can't afford to lose the vast majority of their money.
Pat: Yeah, but if you, if Dave, if you said, "I've got ten thousand dollars, I'm going to buy," what did you say? XPR or whatever?
Dave: XRP.
Pat: I don't know what XRP is. What is XRP?
Dave: It's a real hot one right now that they're all promoting.
Scott: Well, if I was to buy one, I might buy one that's not real hot. Buy the one they're about to promote.
Pat: That's it.
Dave: Okay. All right.
Pat: Buy the Doge.
Dave: The Doge.
Pat: The Doge. Is that still around?
Scott: I don't know.
Pat: There's like, there's over 10,000 cryptocurrencies right now.
Dave: Mm-hmm. Yeah.
Pat: Ten thousand.
Dave: Okay.
Scott: Yeah, it's, and I appreciate the call, Dave. And for some aspect, it's just a transfer of wealth from...
Pat: ...promoters, from non-promoters to promoters.
Scott: Yes. Don't you think?
Pat: Yeah, I think Bitcoin lives in a different realm.
Scott: It does. But some little coin that's hot now that...
Pat: Yes, yes, yes, yes. The Melania coin. The Trump coin, the meme coin.
Scott: I've seen the headlines. I've not read any of the articles about the [inaudible crosstalk 00:26:25].
Pat: I have read a couple. I'm like, hey, nothing surprises me. Didn't you have a neighbor that came out with a cryptocurrency at one point?
Scott: Yeah, I haven't looked at it in a couple of years.
Pat: You going to come out with a Scott coin, a little picture of you on the coin?
Scott: No, he reached out and wanted to know if I wanted to help launch this thing a few years ago.
Pat: Oh, by promoting it?
Scott: Yeah, I'm like I'm not going to promote it.
Pat: All right. So. You tell me your story first.
Scott: Well, so this is actually an article in the Wall Street Journal that I read. And I don't know how I was surprised by it, but I was surprised by it. And to give you some little context here, I remember years ago, Berkshire Hathaway, Berkshire Hathaway was the company founded by Warren Buffett, of course, and he chose to never split his shares. So as the value of the company increased, he just the sheer price got more and more expensive and to the point where it was out of reach for the average Americans. And there was a mutual fund. This is a long time ago, Pat, that created a mutual fund where you can buy in the mutual fund. The mutual fund owned one security, what was Berkshire Hathaway stock. And then they would charge a management fee for that.
Pat: On top of it, just so that people could buy smaller denominations.
Scott: And so when Warren Buffett finally got wind of what was happening, that someone's making money on his stock...
Pat: They issued the baby [inaudible 00:27:58]. The class B shares, which is essentially I think it was just to take the sheer price divided by 100. And that's what the baby Bs are. And so the average America could then afford it, and it killed the management fee of these mutual fund.
Scott: So, yes, this is a scam or not a scam. I think it depends on your perception here. But this has to do with privately held companies.
Pat: So what is a privately held company?
Scott: One that's not public. And in particular, this particular article pointed out SpaceX. SpaceX founded and controlled by Elon Musk, who controls Tesla, The Boring Company.
Pat: NASA.
Scott: NASA? He Controls NASA.
Pat: DOGE.
Scott: The entire government. Anyway, so but it's privately held and these days, companies don't like going public because when they go public, they have to go through all kinds of disclosures, public disclosures. But if they keep their shareholders limited to under 2000 holders of records, they could remain a private company. So what has transpired is there's these investment pools, so to speak, that are being formed where investors invest in these. And then they go out and buy SpaceX stock in the secondary market, right.
Pat: And who do they buy it from? SpaceX employees or previous employees of SpaceX that have over concentrated positions in this relative to their net worth and want some diversification.
Scott: Right. So if you're an executive at SpaceX, you've been there forever. And suddenly your stock's worth $200 million, $20 million, $2, whatever. And your net worth is relatively the same or nothing, right? Like, well, I would certainly like to diversify and maybe spend some of these dollars if you've been there. So that creates a market for it. But they're limited to 2000 holders of record. So enter these special purpose vehicles, SPVs,
Pat: Not to be confused with the SPACs.
Scott: That's correct.
Pat: Special purpose acquisition company.
Scott: SPVs. The management fee on these, the ones that were highlighted here, one... It's similar to a hedge fund. So they're charging a one percent management fee, then 20% of the profits above I think it's eight percent. One and 20 structure.
Pat: Wow. For doing nothing.
Scott: Pulling these things together to buy one company.
Pat: Yeah. Crazy. Crazy. Do they have to get the blessings of Elon?
Scott: Well, the article talked about it was Elon's friends doing it. "A Side Hustle for Friends of Musk" was what the headline of the article was.
Pat: Wow. That's rich.
Scott: And this is all allegedly based on the Wall Street Journal's reporting.
Pat: We are relying on the Wall Street Journal for this.
Scott: But it's it just got me thinking like the value is a bit up already. It's incredible market cap already.
Pat: Yeah, already, already. And then on top of it, someone is actually taking a big cut. And I'm sure there's a huge market for it.
Scott: I'm sure there is.
Pat: Massive market.
Scott: But it's also one of these ways, you're escaping, like there's the intent of the law and there's the letter of the law. And all you have to follow is the letter of the law.
Pat: Not the intent.
Scott: So the intent is, look, if you're going to have more than two thousand holders of record, we want you to be public and you start to have these...
Pat: But since we create a company as a holder of record...
Scott: Special...
Pat: ...we really don't know who holds this.
Scott: That's right. So there could be tens of thousands of shares.
Pat: I don't know if mine's nearly as good. And I'll just give it a quick shout out here for this. What I found fascinating is that a number of weeks ago, there was a 60 Minutes piece on different types of scotch and bourbons being made and the barrels and how they're aged. And on that, they actually interviewed a company that invest in what are new or fresh barrels filled with liquor. Right? Essentially moonshine. And it gets its flavor from that. And this was a 60 Minutes piece. And the guy was talking about what a great investment it was. I thought, wow.
Scott: The barrels?
Pat: Well, they're filled. So then you and I would go out and buy, let's say, 10 barrels that are filled, and then we would pay to warehouse them for eight years, 10 years, 12 years. And then we would take them and sell them into the secondary market.
Scott: They do the same thing in the wine market.
Pat: Exactly the same thing. Except now this thing is just...
Scott: I've never had any interest investing in that stuff. But anyway, tell me what's this...
Pat: It's filled with scams, which is you would expect, which is people are buying these barrels and thinking they're stored somewhere, and in fact, they did buy them. So did eight other people buy the same barrel. Right? And so any time that you see these things that are hot and new investments, you just look at it and you think...
Scott: They might be advertising. They're probably advertising in social media, maybe even on the radio, maybe even on television.
Pat: Yes, especially after this 60 Minutes piece that came out a few weeks ago. And I just thought to myself when I watched it on 60 Minutes and this came out a couple of weeks later...
Scott: That's funny. You're watching 60 Minutes, like, eh, that looks like one of those areas there's going to be scammers coming in.
Pat: It's going to, like it just seems a little bit like...
Scott: I mean, how do you do? How do you do your due diligence on something like that?
Pat: I don't know. Remember, there was a scam in the Sacramento area, Scott, when we first got into the business 30 years ago, the guy was selling cattle.
Scott: And they didn't exist.
Pat: They didn't exist.
Scott: Yeah. Right.
Scott: Yeah. Careful. You got to be careful. All right. Like we talked about at the beginning of the program, Mark Shone is going to join us. Mark, thanks for taking some time.
Mark: Yeah, absolutely. It's good to be here. How are you, Scott?
Scott: Good. And Mark is one of our certified financial planners in San Francisco Bay Area, the Bay Area, some in Sacramento...
Pat: But he's in...
Scott: ...Nevada.
Pat: Like most of your stuff, you said you do remotely now, dorrect?
Mark: I do. Yeah. Yeah. Most of it is remote, but there's still some in-person things. But yeah, it's probably 90% remote.
Pat: Wow.
Scott: Well, it's interesting how I mean, I think the pandemic changed a lot of our behaviors, mine included. And there's like you think about long term clients that would come in periodically for whatever the reviews are. And then now it's like, "I think I'm good. Why don't we just do this..." I mean, if I can go to the dentist remotely, I'd certainly choose that rather than driving all the way across town to see my dentist. And that's the same thing. Number one. Number two, just with we've got experts, a variety of different expertise that are in different parts of the country, all over the place.
Pat: Yeah. And they come in, they drop into meetings all the time.
Scott: Yes. And so whether if maybe a client's in the office with an advisor and we have a big monitor behind the person pops in or it's all remote.
Pat: Yes.
Scott: And that's sometimes...
Mark: Yeah, I mean, it's a better client experience. Think about it. They hop in their car, drive 30 minutes to come to see you, spend an hour there, drive an hour. You know, it's a two hour event that can be handled efficiently in an hour.
Scott: Yeah, not only that, if you the portfolio, you want a portfolio specialist, they can pop in the meeting briefly or an attorney or a CPA or insurance expert.
Pat: Anyway, Mark, you have a story for us. Is this correct?
Mark: Yeah, I have a story of just some tactics or around some things that you can do within, when you get market volatility is likely.
Pat: Okay. And before you tell this, I got to tell you that you were on the show a while ago and you talked about Silicon Valley Bank and how you had put these collar around executives so that they were protected from a downside. And I've thought about that about three or four times. And how, you know, how hard it is for a client to do that with a stock that's doing so well. Right?
Scott: And there's, think of like insurance. There's a cost. You pay a premium for those guarantees.
Pat: Right. How hard it is for that particular client. But then after they live through it and the person in the next office didn't do those techniques and change their life irrevocably forever, right?
Mark: Yeah.
Pat: It's chilling.
Mark: Not only premiums. Yeah. Not only premiums, but sometimes it's, you know, it's actual tax that you have to pay. I mean, there are some pain points and it's against a stock that you are generally pretty excited about. As you know, created your lifestyle, all the things. There's all kinds of emotions around it as well.
Pat: Yeah. And you only do it with stocks that are doing really well.
Mark: That's right.
Pat: That's one of the only ones that you have a constant position.
Mark: You don't have that problem.
Pat: Right. So anyway, I want to thank you for that last conversation because I have thought about it. In fact, I thought about it this morning, driving into the show. I have thought about it no less than three times about just how actually like at the end of it...
Scott: That's why it's important for people to step back and say, what are they really trying to accomplish in their life? And most people get to a point where they're more concerned about not going broke than they are about becoming wealthier. And we get confused because we get excited.
Mark: You spend money, not returns is something that I often say to clients. Right? So, if you're not worried about headed to the cocktail party and my portfolio did X and, you know, yours only did Y. You spend money. It's capital. It supports your lifestyle. So you just have to think about it a little, in a more broad sense. And you have to have the passion to get your clients to do the right thing. I mean, if you didn't have conviction and they didn't have the courage, we're having extremely different, you know, conversations today than we had. So, you know, it's important stuff. So that helps to kind of live through some of those things [inaudible crosstalk 00:39:01] more passion.
Scott: I mean, it's interesting. Like we've had communications training with our advisors. I mean, sometimes the best people with numbers are not always the ones that are also the most outgoing and connecting well with people. Right? And so part of the interesting about this profession, it's the people that can can do both, that are both good with numbers and highly interactive with people. And to your point, Mark, it's you've got to have the conviction. And then you need to be powerful. You need to be skilled enough to help guide that client down the journey to where they end up with that conviction.
Pat: Yeah. And they're thankful for it. So your techniques today, you're going to share a couple with us.
Mark: Wanted to talk about just a client that I have that when we saw market correction, what kind of things do we do? And there's essentially three main things that that can happen, one broad case thing. But first of all, the work that we've done in advance of this correction allows us and gives us the opportunity to do the things that are important. So we talked a little bit about direct indexing. You've talked about it on the show here. And that's the ability to tax loss harvest. Even when markets are going up, you have the ability to do that. Well, that puts you in a position to do some things that are as simple as rebalancing a portfolio when markets start to get very volatile and to rebalance a portfolio without causing any taxation. So the decisions that you make and the planning work that you do years in advance help you be more proactive in an environment like this. So the first thing is just to allow to do rebalancing without taxation. That was the biggest thing.
Pat: And Mark, that's just because you've got loss carry forward that you've actually just kept dry?
Mark: That's correct.
Pat: Right?
Mark: That's correct.
Pat: Or rebalance in retirement accounts.
Mark: Or rebalance in a retirement account. Yeah, correct.
Scott: And maybe trying to look at the overall portfolio, let's say you've got half your assets in taxable, half in retirement accounts. You might actually end up tweaking it a bit where you do a further rebalance in the retirement account and a little in the taxable to avoid triggering a tax bill.
Pat: To get to the target state of the portfolio.
Mark: That's correct. That's correct. And I do have some clients, you know, we harvest these losses and you can do this while the market is trending up. So most people, you know, thinking, wow, why are we creating a bunch of losses? It's something that you can do while the market is appreciated.
Pat: You're doing it because you're smart.
Mark: Yeah, it's helpful. And then they're like, "Should we use some of those losses?" You know, I'm always getting asked, "Should we use some of these losses this year?" I said, "We're going to utilize the losses when there's a purpose." And that's purpose is going to be to rebalance, to take cash out, to do something. So you just want to be thoughtful about that.
Scott: And there's no time limit. We can we can carry forward realized losses indefinitely, except to our grave. You can't...
Pat: But you don't really need them to your grave because the step up in basis.
Scott: Whatever.
Mark: That's good. That's correct. Yeah. Well, you also don't want to carry losses into your grave as well, because you get a step down in basis. So [inaudible crosstalk 00:42:23]. Yeah.
Pat: I'm just so bad.
Scott: That was really bad.
Pat: It was bad.
Scott: Nice, nice try.
Mark: But the other thing that you could do is in these environments is sometimes is a good time that if you have things that have held up pretty well in this environment, you'll do charitable giving with appreciated stock. So those are some of the things either to reduce and get your portfolio back in balance. So growth stocks have done really well over, well, a really, really long period of time. They've started to correct a little bit harder. But if we're going to be doing charitable things instead of selling to rebalance, we'll use charitable giving to gift away those highly appreciated positions.
Pat: Did it last week. Did it last week. Did it last week after the conversation. Exact conversation was, "You know, now is a good time to do this. And by the way, not only are you doing it because, you know, we're going to do a lump sum, you know, that rather than every year, let's do it every three or four years so that we actually get as much benefit out of it as possible. And the other is just for the record keeping, bookkeeping, the ease of actually gifting to charities, a donor advice fund.
Scott: Through a donor advice fund. Yeah.
Scott: Makes it so easy.
Mark: Yeah, yeah. And you would in this type of environment, because there's a rebalancing benefit, you would be more likely to do or, you know, in this case, it was more beneficial to donate the appreciated stock directly instead of using charitable remainder distributions or those kind of things. Right. And kind of wait till the end of the year and do that.
Pat: Wait. So explain that.
Mark: The appreciated [inaudible 00:44:16] is a bigger thing.
Pat: Explain that to... You would just choose the charity and...
Mark: Yeah, instead of using, you know, if you have a set amount that you're going to give a lot of times year over year, it makes sense to use a charitable distribution, qualified charitable distribution out of your IRA.
Scott: Correct. If you're over 70.
Mark: [inaudible 00:44:37] and away you go. Yes. Over 70 and a half, you can do it, right. But in a year like this, I'm saying, let's avoid future capital gain on a position. And it benefits your portfolio long term by taking some of that out of the portfolio.
Scott: Well, Mark, as always, appreciate you taking some time to be with us. Mark Shone, a CFP extraordinaire.
Pat: And Mark, how's the band going?
Mark: It's going well. We played after the last time I was on with you. All is well. Our hits on YouTube went way up. I will tell you that.
Scott: Don't get too famous out there. You're going to quit Allworth. You're a rock star.
Pat: Stop.
Scott: How old are you? Fifty-nine?
Mark: Fifty-nine. Yeah.
Scott: Mark, [inaudible 00:45:26] rock star. Stop for a minute.
Mark: There's a real big, heavy, heavy demand for 59 year old drummers.
Pat: When you're, when you said the hits on YouTube went way up, like they doubled so now you got 10.
Mark: Oh, no, 17.
Pat: That's funny. Thanks, Mark.
Scott: Thanks, Mark. Appreciate it. We're about out of time here. Hey, I want to let them know that this Tuesday, Pat and I are going to be in studio taking calls, Tuesday, May 20th. This Tuesday from 10:30 to 12:30 Pacific Time, 10:30 to 12:30 this Tuesday, Pacific Time. If you want to be part of the program, send us an email. Questions at moneymatters.com questions at moneymatters.com. Or you can call 833-99-WORTH. We'll see you again next week. This has been Scott Hanson and Pat McClain of Allworth's Money Matters.
Narrator: 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.