- Introduction to Money Matters 0:00
- AI Investing: Boom or Bubble? 3:24
- The 6% “Safe Money” Return Myth 9:04
- Listener Call: Managing a Trust for an Elderly Parent 13:50
- How Much Risk Is Too Much in Retirement? 16:43
- Estate Planning Mistakes to Avoid 21:41
- Listener Call: Using Annuities for Preschool Costs 26:15
- Listener Call: Roth IRAs & Young Adult Money Habits 35:53
AI Boom or Bubble, Estate Planning Trouble, and the 6% Return Myth
On this week’s Money Matters, Scott and Pat ask the trillion-dollar question: Is AI investing the next dot-com bubble or a real economic shift? They revisit the 1999 tech mania to help make sense of today’s AI investing hype—and how to avoid repeating history.
They also tackle real-world questions around estate planning, including managing finances for a 97-year-old parent, family trust tensions, and how to avoid costly mistakes. Plus, the truth behind those “safe” 6% return promises—and what they really mean for your money.
Whether you're curious about AI investing, revisiting your estate plan, or just trying to separate fact from fiction in today’s market, Scott and Pat bring clarity, humor, and decades of experience. Don't miss their take on the future of AI investing—and what to watch for next.
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.
Automated Voice: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters", call now at 833-99-WORTH, that's 833-99-W-O-R-T-H.
Scott: Welcome to Allworth's "Money Matters", Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: Myself and my co-hosts, we're both financial advisors, helping people for the last few decades. And, yes, doing this podcast, radio show, now podcast for three decades.
Pat: How long?
Scott: Thirty years?
Pat: Over 30 years now.
Scott: Holy smokes. Hopefully, we have 30 years of wisdom, not one year 30 times over.
Pat: Yes, yes, yes. But you can be the judge of that.
Scott: You know, it's funny, is I reflect back over these last 30 years, cue the nostalgia music. Do you remember the run-up to the housing bubble? About 50% of our phone calls had to do with purchasing a new home, right?
Pat: Real estate.
Scott: And you could see where we are in market cycles just based on phone calls. And then a year and a half later, it was, how do I get out of this mortgage? Oh, yeah, it's funny that mid-2000s, the majority of our calls had something to do with real estate. And when prices go up on assets, for whatever reason, investors, not all investors, some investors want to jump in.
Pat: Yes, yes.
Scott: Wow, things are up.
Pat: Yes, so did my mom.
Scott: And then the dot-com, I remember the dot-com, which was, you know, you just throw a dart and you get rich, Pat.
Pat: And I don't think a lot of people remember this, or if they do, they're quite a bit older, but I bet a lot of our listeners don't recall this, 1999, the Nasdaq, which is the tech index, the Nasdaq, that index, for the year of 1999, returned 85%, 85%.
Scott: For that year.
Pat: For that year. If you just bought the basket of the CUE, Nasdaq index, 85% return. And I'll never forget, I had a client that had a little side account going, and he was bragging about how well his trading did. And he was kind of questioning why he was even with us sort of thing. Scott, my day trading, I was up 77% last year on my tech stocks. And I said to him, "You know, you could have just taken the year off, put it in the index, and it would have done better. You worked for nothing. You paid to work."
Scott: What did he say?
Pat: Yeah, I don't know. So, I have two of my children, two of my four children that will play in the market, and I always tell them that, exactly that. When they start talking about the returns or the losses, I say, "You know, you got to compare yourself to the index if you want a base."
Scott: Of course.
Pat: And they have curtailed their trading significantly after comparing themselves. So...
Scott: Don't let a bull market confuse you with wisdom.
Pat: Yes. So, in this market cycle, is AI like the dot-com?
Scott: That's the question.
Pat: Yeah. The investment is so great. You'd have to have like a Goldilocks scenario to get a ROI.
Scott: But I tell you, you look at companies' reportings this last quarter, something like 88% and some are...don't hold me to that number, it's almost 90% of companies have outperformed what they had projected they were going to do.
Pat: Yes. And is that AI? Is that...? What is it? I mean, there is some AI in there. And it isn't whether AI works or doesn't work. That's not a question. The question is...
Scott: Well, that's part of the question. Why is that not the question?
Pat: Well, because it's proven to work. The question is, how efficient is it? How good will it be in replacing labor? That's what it's about. That is exactly what it's about.
Scott: Of course, yes.
Pat: And is the investment... Remember the dot com, the telecommunications companies built so much infrastructure to support the internet.
Scott: The fiber optic line. What was the Corning? I mean, there's so many companies that stocks fell 90-some percent.
Pat: After.
Scott: Yes, yes. So, many companies the stocks just cratered. And they were the ones that were... Well, some just had no business model whatsoever. But then the ones that were involved in kind of laying the cable, the infrastructure, we had way more fiber optic cable laid than we ever needed.
Pat: Which all of America, all the world benefited from that because it actually opened up communications because it became a lot less expensive.
Scott: It's not that dissimilar to the railroads. When all kinds of investments flooded into railroads, most people lost money. There's oversupply to begin with. Same thing. And so, the question is now, right? That's what I think...
Pat: That's what I'm asking.
Scott: ... concerns me. All these huge energy production facilities, these massive, massive warehouses of...
Pat: Because the infrastructure to communicate is already bought and paid for. The existing infrastructure for that. So, now, we're just talking about plant facilities, plant facilities. And you look at...
Scott: We need energy and we need, I guess, their own computers to store all of them.
Pat: The billions and billions of dollars that have been pledged toward this, you're just like, well, these aren't all going to work out. That's just fact.
Scott: For sure.
Pat: There's going to be a good 60% to 70% that actually never make it, just don't get the ROI that they've expected. They would have been better off owning treasuries in that time period. But there will be 30 to 40% that will just become...
Scott: And some will crush it. And some of it's already been priced in that they're going to crush it.
Pat: That's right. Most of it is already been priced in.
Scott: I mean, that's what feels so strange right now.
Pat: It's different than the dot-com because the dot-com, many of those companies were just flat out. They could never ever make the kind of return associated with their stock price because it had been priced in and the business model also failed.
Scott: That's right. They had no business model.
Pat: Yeah, pets.com, when they went into bankruptcy, their number one asset was the talking sock puppet when it was sold in 2000.
Scott: And that asset's worthless today. Where's the talking sock?
Pat: I don't know.
Scott: I know you haven't seen the talking sock in25 years.
Pat: So, that's the big question. And when you look at the... But finally, we're starting to see broader diversification in stock prices in the S&P 500 in terms of the other companies besides the Magnificent Seven.
Scott: Magnificent Seven. Which by the way, five years from now, there will be a different group of stocks with a different name. Because we didn't talk about Magnificent Seven five years ago.
Pat: It will be the Fabulous Four.
Scott: It was the Fabulous Something, right?
Pat: Yeah, it's something, I don't remember.
Scott: You know, it's funny, when you do this long enough, after a while, you come up with these, like, you don't get too caught up in whatever the latest hype is. Yeah, because you know it's going to move on and it's going to be something else, I guess. I was talking to a younger advisor yesterday. He'd maybe been 10 years in the industry. And we just kind of...
Pat: All the advisors at the firm are younger than you. Most of them are. A lot of them.
Scott: I get it. No, no, no. But there's one thing about actually living through the market cycles versus reading about them.
Pat: Yes, living through the market cycles.
Scott: And so...
Pat: I think there's a difference with advisors who started in their career post-financial crisis versus pre-financial crisis. It's a very humbling industry because nobody knows when the market cycles are going to start and end, right? And so, a client could have hired an advisor at the very peak in 2007, like the absolute worst day. And no matter what strategy they had in place, no matter how conservative, dollar cost, the whole thing, they could have done all kinds of things, they would have lost money their first year and a half or so with that advisor, which is rough. So, what was the conversation you had with this younger advisor about?
Scott: I was just reflecting on these market cycles. And he wasn't an advisor part of our firm. He was not our firm. He was just some other advisor that I was chatting with.
Pat: It's hard. It's hard.
Scott: And I tell you, look, I was this morning driving... And we'll take some calls here in a minute. Driving into the studio this morning, I'm flipping on the radio station, which I don't very often because I kind of like the podcasts. I don't have to listen to commercials. You can fast forward them.
Pat: Like ours.
Scott: Like ours. Or not listen at all. And there was some advisor advertising. Essentially, the advertisement was, "Safe money, you should be earning 6%. Safe liquid money, 6% should be your bogey. Call me to discuss more."
Pat: Where? Where does he get this magical, the fabulous 6% on safe money?
Scott: Liquid. So, he said liquid. This is for your liquid investment.
Pat: It's actually, we know what it is. It's subprime loans, is what it is.
Scott: Well, those aren't very liquid.
Pat: That's right. They have, they have windows, but they could close the window.
Scott: And as I'm listening to something, I'm thinking, this advisor I was talking with this week, he currently has charges, it's his business, flat fees for his clients, and he's going to be moving to a assets under management fee to align his interest more with his clients. And he was talking about what his fees should be and that sort of thing. And I was having a conversation with him about... And this might sound harsh, but I said, "You have no reason to discount your fees. You should charge a market rate." And I said, "Because not only are you providing tremendous value to your clients, you are protecting them from others in the industry that do damage to people. So, if you're a great advisor, don't feel bad about charging a market rate. There's nothing wrong with that. Don't feel you need to discount."
Pat: There's nothing wrong with that.
Scott: I said, "These people don't need charity. They've got $10 million investment." And I'm just being very transparent here. And then I hear this ad this morning and I thought, that's exactly why you should charge a market rate. You are protecting people from these 6% safe money.
Pat: Come on.
Scott: It doesn't exist. When the treasuries are yielding 4%, how do you get 2% more with still being safe and liquid?
Pat: You don't.
Scott: You don't.
Pat: You don't. It doesn't exist.
Scott: I get frustrated when I hear stuff like that.
Pat: We all sense that in your tone and your voice, all of us.
Scott: Because, look, these people come and see us after the fact.
Pat: Oh, Scott. I mean, how many hundreds of people have you met with all of your career that have been sold crap from somebody that doesn't work out? They're trying to unwind the position. They can't, and they don't know what to do.
Scott: Yeah, they don't know what to do.
Pat: Yes, it's difficult.
Scott: And sometimes you can't help them anymore. I'd love to be able to help you out. "I know you're $800,000 in that position is now worth $550 and it's now illiquid. I don't know what to tell you."
Pat: Yeah. There's not a lot you can do.
Scott: Not a lot you can do. Anyway, all right, we're going to take some calls.
Pat: Yeah. Later on in the show, so we've got to hit this, Scott, I want to talk about this Cambodian conglomerate.
Scott: I didn't even know what you're talking about.
Pat: Well, that's why I'm talking about it.
Scott: Okay, Cambodian conglomerate.
Pat: Called the Prince Group where they've been sanctioned by the U.S. government for pig butchering.
Scott: Well, that'll keep everyone tuned in. That's a forward tease, they would call, in the industry.
Pat: Oh, yeah. I've been brushing up on my...
Scott: So, good.
Pat: I've been brushing up on my radio skills.
Scott: Honey, I'll be in the house in a moment. I got to wait for the rest of this program.
Pat: Or just put it on pause.
Scott: All right. If you want to join our program... I talked to a buddy of mine, said, "You can't take live calls." I said, "No." I said, "We go record the show during the week, and we schedule our calls." One, we get better calls, this way, so you're not wasting your time on bad calls. But two, it enables us to have a cushy lifestyle."
Pat: A cushy lifestyle.
Scott: Well, 20-some years, we did it live on the weekends.
Pat: That's right, every weekend.
Scott: And I can tell you this, we would not be doing the program today if we still had to do it live on the weekends.
Pat: Oh, that's right. And I cannot tell you how many soccer and little league games I missed. And for that, I'm thankful.
Scott: That's not nice. Anyway, if you want to be part of our program, you had a question for us, we'd love to take it, questions@moneymatters.com is the best way to reach us with your question. We'll schedule time, questions@moneymatters.com. We're starting off here with Gerald. Gerald, you're with Allworth's "Money Matters".
Gerald: Hi. Thank you for taking my call.
Scott: Yeah. Glad you joined us.
Gerald: I've been off and on listeners since the early 2000s. So, I'm glad, guys, you're still here...
Pat: Oh, I appreciate that.
Scott: Me too.
Gerald: ...offering advice.
Scott: Appreciate that. How can we help?
Gerald: I follow your program.
Scott: Thank you. How can we help?
Gerald: I am a trustee for my parents' trust account, and both parents are retired and my mom passed away recently. So, my dad is a surviving spouse.
Scott: By the way, sorry about that. How recent did she pass away?
Gerald: September last month.
Scott: Okay.
Gerald: And now, my dad's monthly income is $1,900, and he has an expense of $7,500 a month. All their assets is cash and checking and savings accounts. They have an IRA, very small, $2,900 for my dad and $3,500 for my mom respectively. And what I'd like to do is to invest some of their cash in the stock market so my dad can get more income and better return on investment, rather than the puny interest rates in the bank of 0.01%.
Pat: How old is your father?
Gerald: 97.
Pat: And how much money is in brokerage accounts or bank accounts?
Gerald: $850k.
Pat: Wait, but you...
Gerald: $850k.
Pat: Okay, thank you. That's all in cash.
Gerald: Yeah.
Scott: I assumed it was $850,000, not $850.
Pat: And how much of this would you invest in the market?
Gerald: I don't know. That's why I'm calling, and thinking right off the get-go, $100k.
Pat: How many beneficiaries are there to the estate?
Gerald: Two, myself and my sister.
Pat: And he's 97. And so, here's one of the ways to think about it. First of all, the money shouldn't be in the bank. There's so many other investments that are liquid that you can choose from.
Scott: The treasuries are paying almost 4%. Thirty-day treasuries are almost 4%.
Pat: Yeah. So, that's pretty simple there. But let's talk about the investable part of it. If you set aside, five years in cash at this amount, so you said the expenses are $7,500 a month.
Scott: Let's call it $100 grand a year.
Pat: Okay, it's $90,000, but we'll call it $100k. So, you set aside $500,000 and you put it into, let's say, treasury something that's liquid and safe.
Scott: CEDs even, whatever, yeah.
Pat: And then you took a look at the rest of the $350,000, I would feel comfortable investing it based on how the other beneficiaries of the estate would react to this. And the reason behind that is, you have a fiduciary obligation to not only your father, but to the beneficiaries of the trust. And when you look at it this way, what you're doing is, if you took that $350,000 and put all equities, you would be investing for yourself and your sister, essentially, which means the timelines are longer. And if your sister, you know, she understands it and understands the reasoning behind it...
Scott: Here's the risk. Let's say you took $500,000, left it in secure investments, took $350,000, invested it, let's say, you put it all in stock, which I wouldn't really recommend necessarily. But if you did that, the market takes a downturn. The $350,000 goes to $250,000. Your father passes away. Your sister says, "What the heck? How'd you lose that money? You lost 100 grand. That's half mine. You lost me $50,000."
Pat: That's right. That's the risk. And so, it all comes back to how your sister would... So, if your sister was on the same page as you and understood the risk and...
Scott: I would have her involved in these discussions.
Pat: That's right.
Scott: And if she's not comfortable, I wouldn't do it.
Pat: That's right.
Gerald: Okay. But to gain additional income from my dad, you're suggesting to put the $500k in treasury, treasury bills or kitty.
Scott: Shorter-term fixed income.
Pat: Yes, combination of things.
Scott: Yeah. Which has some sort of a government guarantee.
Gerald: How about dividend EFT?
Pat: It's not appropriate for his... Unless, look, it all gets down to the... If you were the only one that was the beneficiary of this estate, it'd be easy.
Scott: Yeah. Particularly if you had other assets in case things went sideways and your dad needed some money, if you could take care of them, then it would be even easier.
Pat: Yeah. And in fact, I would make the argument that if you have other assets and your sister has other assets and you're all on board, then I would probably set aside even less money than the five years, and go to a fully diversified portfolio. But at the end of the day, it's not what's the best portfolio, it's who are the people involved in the transaction?
Gerald: Okay.
Pat: So, your sister, I mean, is she fluent in finance?
Gerald: Well, no, but I could talk to her.
Pat: All right. I'd give it a shot. Yeah, and I would use and advisor. I would absolutely use an advisor.
Scott: Because you're a fiduciary. You have a legal responsibility for the beneficiaries to manage these monies for your father and for the subsequent beneficiaries. That's your duty. If you hire an advisor, it reduces your risk dramatically.
Pat: And a lot of it has to do with her view. If she is...
Scott: Prudent investor rule. I think that's what they call it.
Pat: That's what they call it.
Scott: You'd be prudent man.
Pat: But if your sister has plenty of other assets and you have plenty of other assets and you both understand the risk involved, you can put more risk in the portfolio, which will give you a greater long-term rate of return. The question is, how are you going to react? You know, once they weren't a 35% down market on the day your father dies and this money goes to your sister and she was going to use it to pay off the mortgage and send a kid to college, then you've got problems. But if she said, "Ah, look, I can, I can weather this stuff for another five years, three years. It doesn't really matter." Then it would drive the investment that making decision more aggressively. Does that make sense?
Gerald: Yes, it does.
Pat: Yeah. So, it's a...
Gerald: But, okay, again...
Pat: And I would make sure...
Gerald: ...so, if I'm paying his income.
Scott: ...the more risk you take, you need to make sure that your father's...
Pat: You've got the money to provide...
Scott: That $7,500.
Pat: Yeah, I'm sure he's in a home or something.
Gerald: For his expenses.
Pat: If he lives another 10 years.
Gerald: Yeah. All right. Thank you for your...
Scott: So, you had a question about the fixed income, just by either... I'll use an advisor and put together, you wouldn't just throw it all in a treasury. You would put together a good...
Pat: Yeah, fair enough.
Scott: Hire an advisor to help you put together a proper fixed income portfolio on the liquid side of things. All right.
Gerald: Okay. Thank you very much.
Scott: All right. Thank you. Appreciate the call. Thanks for being a long time listener.
Pat: Yeah, it can get really sticky. I was talking to a friend this last weekend, who's a beneficiary, his parents passed away. First parent died four years ago. The other one died two years ago, something like that. Largest state, still no distributions. The only distribution he got was a check to cover the taxable portion that flowed through to him. He got a K-1 that he learned about after he filed his taxes. His brother is the trustee, didn't tell his siblings that, "Oh, by the way, you're going to have phantom income here." Essentially, is what happened. And then he gets a check just enough to cover his tax liability, and it's been over two years. And his brother says, "Well, I'm still trying to close out the estate."
Scott: Well, you obviously know, it doesn't stop you from doing partial distributions for the estate.
Pat: Of course. Of course, that's what I've told my friends.
Scott: Oftentimes it's just control issues.
Pat: That's what's a 100%. It's so obvious. And my friend says to me, he's in a sticky situation. And it's quite a bit of assets. And he'd like to help his kids get a down payment on a house. He's got... And he says, "But I care more about my relationship with my brother than I do about any money." It's a very similar situation where guy lives on the West coast. Family owns a house in Kennebunkport, 80-year-old house. Nothing fancy, but it's worth $4 million.
Scott: It's in Kennebunkport, right on the water or something, I'm guessing.
Pat: Yeah. Yes, yes. And within three hours' drive for both his brothers to use it as a vacation home, so it stays in the estate.
Scott: Do they hit him up for cash to help on the repairs and property taxes and everything?
Pat: No.
Scott: Okay. That's the least...
Pat: But his point, as I pointed out to him because he lives close to Lake Tahoe, I said, "You know, if they paid you out your portion of it, you could buy a house in Lake Tahoe and get some of the benefits." But he says, "Well, I go back there about once a year on my vacation for a week." So, it's how you set up these estates, especially if it's sizable is really, really important because you could write that in, you could write that in. You could say, the house needs to be liquidated or fair market value. It could be sold to any or all of the...
Scott: I've had a cabinet Tahoe for 20 years, almost 20 years. And my daughter who hardly ever uses it, she'll be there maybe a week in the summer or something. Like dad, "You got to promise me you never sell that." And I'm thinking, "No, I'm not going to promise you that, number one. Number two, I think that I would like that liquidated if your mother and I both died. There's no sense." I've got four kids. Like, to your point, I don't want them to deal with...
Pat: Yeah. What happens if one ends up living in Boston, and the other one ends up living in Sacramento, so one gets 80% of the benefit, one gets 20%.
Scott: It can get complicated. You want to make it as clean as possible for your heirs, yes.
Pat: And don't require them to own anything, my advice, after you die. Which means don't set up a perpetual trust that...
Scott: No. That's the same problem with this same estate. There's a commercial properties that this guy, the dad had with another gentleman and they said, "No, you need to keep these properties for 10 years, post my death."
Pat: Oh, why?
Scott: So, that the other partners had enough to sell and pay the capital gains taxes. I mean, you think about the challenge that is, you're telling somebody, "You got to keep a property for 10 years." Maybe it's a warehouse somewhere that's got a leaky roofs that's falling apart. The tenant quit paying. And I mean, I'm just like... This is a close friend of mine. I'm hearing this, what a mess it is right now. And it's one's benefited, yet, except the brother that gets to control. Whether he thinks he's doing out of love for his siblings or not, it's a control thing. It's obvious to me.
Pat: It is control.
Scott: Obvious. Anyway.
Pat: Younger brother or older brother?
Scott: Younger brother.
Pat: Payback. Remember that time you used to punch me.
Scott: Remember that time you locked me in the closet. All right, let's continue on. We're talking to Sharon. Sharon, you're with Allworth's "Money Matters".
Sharon: Hi, good morning.
Scott: Hi Sharon.
Sharon: I have a complicated, but interesting question about a deduction possibility for grandchildren. My husband and I are retirees. We recently purchased a fixed annuity for $1.4 million. And at that point, my adult children who have two small children in preschool asked us to pay for preschool, which we're happy to do if we can afford it. And the preschool is in the state of Washington. We're in California. And I was wondering if the $4,000 per month that we're paying in tuition is deductible in any way to us.
Pat: No, it's not. It's not deductible.
Scott: If the school was a nonprofit, religious, or some sort of nonprofit, and you gave $100,000 check to their campaign of some sort, and the school was then able to offer tuition at a reduced amount, theoretically, you can get the tax deduction on the gift.
Pat: You could get, yeah.
Scott: There's no quid pro quo. So, you couldn't say, "Hey, wink, wink. I'm going to write you guys a check. Can you have my grandkids come and do low tuition or free tuition?" That's not going to work.
Pat: That's right. You can't take a tax deduction for a charitable contribution if there's economic value to you in that, in that gift. So, the answer to your question is no, there's no deductibility part of it. But let's step back for a second, why did you mention the annuity?
Sharon: Well, because we're using money from the annuity with which is taxable. We're using money from the annuity to pay for the preschool.
Pat: Okay. And is that an immediate annuity where the start a distributions of income immediately based on your life expectancy?
Sharon: Yeah. I don't know if it's based. It's based on, we paid this amount that's a fixed annuity and we get something like not enough. We get $9,000 a month out of it.
Pat: Okay, okay.
Scott: So, it's an immediate annuity.
Pat: It's an immediate annuity.
Scott: So, when you both pass away, it's gone. Is that correct?
Sharon: It's gone. It's till age 80. And then we have another annuity that kicks in from 80 onward.
Pat: Oh, got it. How old are you now?
Sharon: 65.
Pat: All right. So, it's a 15-year annuity.
Sharon: Right.
Pat: And how much is it paying a month?
Sharon: It's paying out, like, $9,000 a month.
Scott: It shouldn't be all taxable. If it's an immediate annuity, your check is two things. One, it's a return of principal, the money that you invested in this annuity.
Pat: Which is not taxable.
Scott: And the second is the interest on that, which is taxable. So, over 15-year immediate annuity, maybe half of it is tax free.
Pat: Now, if you're taking withdrawals from it and not annuitize it...
Scott: But $9,000 a month on a $1.4 million is more than the interest. So, it sounds to me like it's an immediate annuity for 15 years.
Pat: Fifteen-year fixed.
Scott: And then they sold them another annuity that's going to be paying at age 80.
Pat: Okay. so the answer to your question is no, that's not tax deductible. But if you think you have ample assets, it may make sense for you to fund a 529 plan for your grandchildren in the future, right? Where you make the deposits, it grows tax deferred, and it comes out tax free as long as it's used for education.
Scott: And the Big Beautiful Bill just increased what qualifies as...
Pat: Yes, primary education.
Scott: It's now high school tuition. I don't know about other private school for elementary. I don't recall off the top of my head, but I believe so.
Pat: But it is for high school. So, in the planning process, if you have ample opportunities, you can actually set this up where you're the owner and the child is actually the beneficiary. You make the deposits very similar to your annuity. It grows tax free and that comes out tax free as long as it's used for that education, so you don't pay any tax on that growth.
Scott: You have much on assets outside of the annuities?
Sharon: A house and more stock accounts and, yeah. Yeah, so...
Scott: That'd be the best way to go about it.
Pat: Yeah. But make sure it's much like that annuity. Once you put it in there, you can't get it back out, much like your immediate annuity.
Sharon: Right. That's a really good answer. Thank you. I appreciate it.
Pat: Okay. All right.
Scott: Yeah. Appreciate the call. That's why, you know, Pat, it's like the financial planning, people ask about what's a good investment. And like, "Well, I don't know, what do you mean? What's a good investment right now?" Well, you look at a situation like this, so they're trying to help their grandkids, which is great. What a blessing to do. I hope when I have grandkids, I can be able to help something like this. Feel good about it.
Pat: Your helping your grandkids. Why does it always have to be about you feeling good about it?
Scott: Well, you got a good point. I'd feel better if my kids had enough money to support their own family. I think about it, I'd feel really good if they didn't need my money. My point is here, if they're paying for preschool, there's a good chance they'll help pay for education...
Pat: In the future,
Scott: ...in the future. High school, elementary school, college, even a 529 plan is a phenomenal vehicle for, particularly, a grandparent who wants to help a grandchild.
Pat: Exactly.
Scott: Especially, if they're the owner. They can still control it.
Pat: It's gain for its owner.
Scott: When they put money in, it's out of their estate. They can give how many years of...? I think it's five years. They can give a big chunk, $150,000.
Pat: It's $190,000. I looked it up.
Scott: $190,000. All right, it's almost 200 grand. They can stick in per grand per individual.
Pat: Yeah. I think it's a $190,000.
Scott: Whether or not, that's the right thing to do. I'm not saying that you should miss it.
Pat: You got to make sure you have enough in your estate.
Scott: Yeah. You don't want to give away money that you might need in the future.
Pat: Yeah. I was talking to a guy that recently sold his company for $100 million.
Scott: He should have enough.
Pat: I'm hoping. And he was talking about it. I said, "Well, you've got grandkids. Why don't you do this thing first? And why don't you do it all at once? Not every year, just get it out so that it gets more tax deferred growth on that in them." But you have to make sure that you have enough money to retire comfortably. Yeah, to support your needs.
Scott: I think at $100 million, he's probably fine.
Pat: I think so, yeah. He's got a really nice boat though.
Scott: He's a good friend to have.
Pat: He's got a 35-foot formula bow rider. Very nice.
Scott: It does sound nice.
Pat: It is a nice boat.
Scott: I remember seeing the awesome Tahoe a couple of years ago and this brand new wooden Riva. The boat was over a million dollars. Not a huge yacht. We're talking about a runabout.
Pat: Yeah, I got you.
Scott: But it's wood.
Pat: It's Riva.
Scott: And I'm like, "Who, some guy just sold it. Some guy just sold this something like..." That'd be the last thing I'd want, is some boat that... Anyway, back to this, the whole concept with planning is, from a tax standpoint, having interest that accumulates in the 529 plan is much better than having interest accumulating in the annuity that then becomes taxable.
Pat: Significantly, significantly.
Scott: Which is why in order to make any sort of an investment recommendation, one needs to take in consideration what all of the objectives are. What someone's trying to accomplish.
Pat: And risk tolerance. And my guess is their risk tolerance, Sharon's risk tolerance and her husband's is relatively low.
Scott: If you're going to be putting that much money in annuities and then layering them too.
Pat: Yeah, your risk tolerance is relatively low.
Scott: That would be, that would be.
Pat: Not good or bad. It's just what it is.
Scott: I personally, not stay emphatically, I wouldn't have recommended the immediate annuity strategy.
Pat: Ah, they take that back. Yeah, you would have.
Scott: Same thing could happen.
Pat: Maybe.
Scott: Yeah, there's times... And there's non-commissioned annuities now, too.
Pat: That's right.
Scott: So, a fee-based advisor can recommend a non-commissioned annuity. But the thing with an immediate annuity, once you write that check, it's that assets no longer yours.
Pat: You're buying a pension. You're buying a pension.
Scott: And that's why I say, I shouldn't say emphatically, because there are times that I have recommended, and there'll be times in the future I'll recommend it again. Let's continue on here. Talk with Lori. Lori, you're with Allworth's "Money Matters".
Lori: Yeah. Hi, thanks for having me on.
Scott: Yeah. Glad you joined us.
Lori: Well, I've got a couple of young adults who, as you would say, are not yet self-feeders.
Pat: Thank you. That was my dad's term, by the way.
Scott: Self-feeding.
Lori: Although, you know, they're both in school, so hopefully, they're going to be working their way toward that. And I just kind of wanted to run by, am I doing the right thing with them in terms of money wise right now? So, they're both in school. They both got part-time jobs. And one of them is, has no impulse control whatsoever. One, I think, you know, has sort of a handle on that kind of thing. So, the one who it will blow through money if she has the opportunity is 19 years old. So, she has a job right now. So, I've basically told her, like, she needs to put that money into Roth. And because she's at home, I'm paying for all of her bills. Although because of her ability to blow through money, I did tell her she has to pay me for her car insurance and she has to pay her own gas.
Pat: Very nice.
Lori: Just to give her a bill. Not because it's something she can afford, but just to give her something.
Scott: Yeah, I get it. Yeah, of course, you're trying to teach her to be an adult and to be a self-feeder and discipline.
Lori: Right. So, you know, I know she's 19. So, technically, you know, she's an adult, she can do what she wants with her money, but I'm trying to put her...
Scott: Yeah, she can also leave the house and go figure it out on her own, so...
Lori: And that's not happening anytime soon, apparently. So, you know, in terms of that, so I basically said she has to put 75% of her paycheck into a Roth IRA because I'm just trying to, "lock up" her money now while she has her bills paid.
Pat: Perfect.
Lori: And I think, because my daughter...
Scott: She can still go out and pull the money out of that Roth.
Lori: Yeah, I haven't told her that though.
Scott: I mean, let's hope. So, you're trying to teach her some lessons here, and also, help her by having some money set aside. And one would hope that if she has that urge to pull the money out, she can realize, "Huh, I don't think I want to cut my ties with my parents on the financial end of things," which is probably what would happen. That's what I would do to my kid if they did something like that. I'd like, "Go figure it out on your own then." So, one would, it's not going to be enough there to actually do any real damage to herself.
Pat: So, I think it's a great idea.
Scott: I do, too.
Lori: Well, and the other thing I'm wondering about is, you know, I feel like the advantage, I keep telling my kids, you know, "You're young, you're 19 or 24. This is, you put money in this stuff and look what happens over time for this, for your retirement. So, if we just focus on that..." You know, because, hopefully, they get out of school, they have a job, then, you know, they're on their own in terms of now they're self-eaters. But right now, the one thing I can do from, I'm hoping is, given the advantage of time and, you know, compound changes, and that kind of stuff. So, my other thought is, if I can afford it, should I do this sort of... I think it's $16,000 a year that you can give to somebody without tax consequences.
Scott: Yeah, $18,000.
Lori: Oh, $18,000. Oh, okay.
Scott: Yeah. For both you and your spouse.
Pat: Per individual.
Lori: Okay. So, you know, is there anything else I'm missing in terms of, I kind of feel like if I can get them to do this now in the Roth IRA.
Pat: But you can't put 18 grand in a Roth IRA.
Lori: Oh, sure, you're right.
Pat: That exceeds the limit. Yeah. It's based on her income. How, how large is your estate?
Lori: I mean, at this point, I'm set. Like, I'm happy I'm not gonna slip.
Pat: Is it, like, $5 million, or...?
Lori: No, no. It's, like, $3 million.
Scott: Okay, still fair.
Pat: I would not start gifting.
Lori: Okay. And, and why? Because...
Scott: I would disagree. Why? With my kids, their first jobs, I would put money in the Roth IRA for them. They earned 3 grand for that summer. I put 3 grand in Roth IRA.
Pat: She's already got the child putting in 75% of her... If she wants to top it up to go to a 100% of pay...
Lori: Well, and I will, I'm going to. Whatever they make this year, they're going to go in the Roth and I'm treating my kids differently. My daughter, I'm telling her, she has to fund her own Roth as much as possible. My son, no, because he's reasonable with money and he has other expenses and whatever. But, you know, my plan is whatever they make this year, they're going to put in Roth.
Scott: Okay. Perfect.
Lori: Whether it's me and them or just them or however that goes.
Scott: And I agree with Pat. I would not transfer money and give them money in addition to the Roth.
Pat: That's correct. That's what I said.
Lori: And see, no, and why? Because again, my feeling is if I put that into something that they could put in equities or whatever like that, they've got, you know, decades for that to yield.
Pat: Oh, I understand. But that's...
Scott: You can own it and transfer to them later.
Pat: Yeah. And you get a full step up in basis at either your death or your spouse's death. So, I would make the argument, because you don't have an estate tax problem... What's the limit for the estate tax?
Scott: 30 million bucks next year, husband and wife.
Pat: For husband and wife. So, because you don't have an estate tax problem, I would make the argument that it better off in a tax efficient portfolio in your name with the idea that it's going to go to them because you'll receive a full step up in basing basis at death. And the compounding actually, you're right, and you're still taking advantage of the compounding, but you've got this tax efficiency that's built into it at death. And we're not trying to shrink your estate.
Scott: And the worst case is the step up basis goes away and you transfer the shares to your kids. And it's the same thing as them having it now.
Pat: From the very beginning. So, I wouldn't go above and beyond the Roth. I wouldn't be using up any part of either my exemption amount or even...
Scott: Here's one thing to keep. So, we each have four kids. Like, they all very different with their finances. My 18-year-old, freshman in college, she blew through 1,000 bucks her first month, like the money she had set for the whole semester, essentially.
Lori: Gone.
Scott: I gave her a tiny allowance because she's got a meal plan. And I just looked at that a couple of days ago and I think, "She's got like 20 bucks left." And I'm like, "Well, I guess you're not going to have a lot of fun the next couple of months because I'm not helping you anymore." Because I'm trying to teach her that, like, there's consequences when you spend your money. You can only spend a dollar once. But the reality is, we try to teach our kids these values, particularly the values that are important to us. And we hope that our kids are going to have those same values as they go through life. And the reality is, they have their own values, whether it's financial or in every other area of life. They typically don't mirror our own values.
Lori: Sure, they're going to be themselves.
Pat: As we all know, as we've raised kids.
Scott: But this Roth is very, very valuable. It's a great teaching. And here's the reality. my very first job out of college, I started putting money into 401(k). I took that money out of the 401(k) to fund opening Hanson McClain 30...
Pat: You borrowed 10 grand, and I would have done the same, but I didn't have 10 grand in an IRA.
Scott: I had $10,000 in an IRA and I borrowed it out for 60 days to start the business. And that was 32 years ago or something like...
Pat: Thirty-three years ago.
Scott: Thirty-three years ago. So, and the Roth is actually, because you could pull your principal out without any tax consequences.
Pat: They're fantastic.
Scott: So, they might want to use it for the purchase of a first time home. I would just talk about all the benefits of it, and then talk about compounding growth.
Lori: I'm keeping it really simple in terms of, like, I'm locking up her money. It's sort of, if you will, just keep it. You know, like the same thing, I put her on my credit card. I was gone for two weeks. I cannot tell you how much DoorDash happened in that time, you know. You know, she is going to be who she is, but I keep telling myself, we've got six more years, so she has a pre-punctual cortex, you know, maybe things can change.
Pat: They're all different. That's funny. That's funny, yeah.
Scott: I think you're on the right path, but I would not gift above that at any point in time, unless they changed the estate tax.
Lori: Okay, so just wait, they have to wait.
Pat: Yep. And, you know, when they purchased the first time home, you might want to lend it to them and, you know...
Scott: Or gift it or whatever.
Pat: Or gift it or whatever, but not just out of...
Lori: Well, and okay. My understanding is there's some... I'm going to get the numbers wrong, but you can gift a million dollars over... Like, I've helped somebody else with a down payment for their house. Yes, you know, there are initials like that. So, my understanding is there was some separate category about that where there's, again, if they get a house, I can do a down payment for them. And it's within, I don't have the right phrase for it, a lifetime giving thing, or something like that.
Scott: Yeah. So, there is a gift and a state tax. It's one in the same. It's a lifetime gift and a state tax.
Lori: That's it, okay.
Scott: And next year, it's 15 million bucks per individual. So, a couple can do $30 million. And this means that either their estate, when they die, or while they're living, they can transfer that much, gift that much to whoever they like, whether it's their kids or their favorite talk show host or whatever.
Lori: Keep it going.
Scott: So, like my oldest daughter's 29. She was not great with money when she was younger. Now, she has her own business, works her butt off, does very well. Her mother and I gifted her some money for a down payment for her house. And it was more than the $36,000 that we were limited to, they get $18,000 per year. And so, we used up part of our, what's called lifetime exemption. And then we had to file a tax return, a gift tax return.
Pat: But there's another way you could do it, which is, you lend them the money, and you put an interest rate, a fair market interest rate on it. And then every year...
Scott: You forgive.
Pat: ...you forgive a portion of that loan that is equivalent to that $36,000 until the loan goes away. And that way, you haven't used up your exemption.
Scott: They have to pay the interest.
Pat: You have to pay the interest, but it's just a transfer money internally, quite frankly, because you're forgiving the... The interest is actually coming back to you. So, depending upon the size of your estate, sometimes you do it like Scott did. I did it with combination of the two of them with my kids. So, two of my children bought homes, and I did combination of the two of them. And, you know, one's in law school. I got to tell you for a daughter that didn't want to go to college, she sure likes school now.
Scott: Are you paying for her law school?
Lori: Well...
Pat: She was...
Scott: It sounds like a yes to me.
Pat: No, no, no. She got a full scholarship.
Scott: Oh, God bless her, and you.
Pat: Yeah, pretty good grades. So, there's lots of ways you can go about doing it, but I love the fact that you are using this as a time to actually educate.
Lori: Well, yeah, I mean, I feel like... You know, my hope is that they'll make some good decisions, but right now, you know, they've got different stuff. And I'm a widow, so I can't do the whole, like, you know, husband and wife giving kids. I don't have that option, it's me. So, I just want to make sure that I kind of got them set up, but not in a way that, like... You know, they've got 529, it's pretty much their school is going to be covered. Like, you know, they're lucky kids to be able to have that.
Pat: Luxury.
Lori: Exactly. So, you know, they're going to get out of school eventually, hopefully without debts. So, it's kind of like, I just want to help set them up for like, okay, what's their retirement stuff, you know, set up?
Scott: I mean, look, I think some of us are born savers and some of us are born spenders. It just seems that way to me, right? So, she's a spender. Just like other areas of our lives where we have certain temptations, a part of maturity is designed in our life in such a manner to put some protections in place so we don't succumb to those temptations. And for her, spending money is going to be one of those temptations, and she's going to have to learn how to budget her money, how not to go spend money on an impulse. But she's eventually going to have to learn that on her own. You can help guide her and teach her, but that's...
Lori: I hope so, and I did. Absolutely, yeah. She's going to be her own person. All ready, well, thank you.
Pat: All right. I appreciate the call.
Lori: I'm good.
Pat: It's funny.
Scott: It's funny because I think... You know, it's fun talking to, like, young parents that have, like, kids that are 2 and 4. They got it all planned out how everything's going to work out so perfectly and all that.
Pat: Scott, that was you.
Scott: I know it was me. It's every young couple.
Pat: It wasn't me.
Scott: No?
Pat: No. No, I just like, we'll see how it goes. Do you remember what you said to me years ago?
Scott: Oh, I apparently I said something that stuck with you.
Pat: You said to me...
Scott: Well, I apologize in advance.
Pat: ...you were talking about your kids. You said, "If I knew I didn't have any control, I wouldn't have tried so hard." When you're talking about raising your kids.
Scott: Oh, yeah. Yeah, yeah, yeah.
Pat: You said, "If I knew I couldn't influence the outcome that much, I wouldn't have tried so hard." But then you reflected on it and said, "But I had to." And you did, you made a difference. You didn't run them run willy nilly. Well, so you, you imprinted some values on them.
Scott: Oh, for sure. And I still have those conversations with even my older kids. I have one this morning. My wife and I, for those that don't know, we raised two kids, and then we adopted two girls from the foster system when we were empty nesters. They were 9 and 6 at the time. This was nine years ago. And I had a friend visiting with us for a while. It was for the afternoon or whatever. And he says to me, "Scott, you parent more like a grandparent than you do a parent." And I took it as a compliment. I don't know if he meant it as a compliment. But to your point, like you kind of realize that some of these things, maybe you don't sweat the small stuff.
Pat: I just kind of let it go.
Scott: Whatever, you know,
Pat: Let it go.
Scott: Whatever.
Pat: Let it go. All right. Before we go, I was talking about pig butchering.
Scott: Which is super exciting.
Pat: Well, this group in Cambodia... But this is the numbers that astounded me. The justice department sees $15 billion worth of Bitcoin from this guy.
Scott: Ah, here it comes.
Pat: Right? $15 billion.
Scott: I did see a headline on it. $15 billion?
Pat: $15 billion in Bitcoin. Americans lost at least $10 billion to scams originating from this region in Cambodia where this guy operates. They have hundreds of thousands of employees that operate in this pig butchering, and these are romantic scams.
Scott: So, it's not a pig.
Pat: No, they, they call pig butchering because you fatten these people up through romantic scams, and then slaughter them at the very end. So, they're multi months, if not year relationships where people think they're in a relationship.
Scott: I had a family member almost... I mean, this relationship went on months, several weeks, all scam.
Pat: So, the point being here is that if you have a relative that you think is susceptible to this, be it young or old, they say $10 billion. Americans lost at least $10 billion to scams originating just from this region in Cambodia. This is a region outside of Phnom Penh that has lost it. The enterprise employs hundreds of thousands of people, the enterprise, which is, they're multiple of these pig butchering. But the point being, if you have someone who's close to you that you believe is even slightly susceptible, get on their account somehow to monitor them. You can be cc'd or get on the application so that you see transactions. In any of the big brokerage firms, if you got an app on your phone, you can actually, you know, ask to have permission so that you can monitor this. And it's real. It happens every day. I've read an article from a local newspaper this morning, this person wired $125,000 in a bank fraud, it was a bank fraud, and the local authorities were able to get $97,000 of it back, which I thought was pretty incredible. But they're called pig butchering. So, if you have someone that's susceptible, you believe to be susceptible, start monitoring their accounts.
Scott: And have a conversation with them, too.
Pat: Oh, please, please, please.
Scott: Hey, it's been it's been fun doing the show with you, Pat. And I appreciate the callers. Again, if you would like to join us, have a question for us, just send us an email, questions@moneymatters.com. And if you like our program, a couple of things, one is let others know, some friends, forward this on, and then also, follow us, and give us a review. We appreciate that. So, this has been Scott Hanson and Pat McClain of Allworth's "Money Matters".
Automated Voice: 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 a state-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: Myself and my co-hosts, we're both financial advisors, helping people for the last few decades. And, yes, doing this podcast, radio show, now podcast for three decades.
Pat: How long?
Scott: Thirty years?
Pat: Over 30 years now.
Scott: Holy smokes. Hopefully, we have 30 years of wisdom, not one year 30 times over.
Pat: Yes, yes, yes. But you can be the judge of that.
Scott: You know, it's funny, is I reflect back over these last 30 years, cue the nostalgia music. Do you remember the run-up to the housing bubble? About 50% of our phone calls had to do with purchasing a new home, right?
Pat: Real estate.
Scott: And you could see where we are in market cycles just based on phone calls. And then a year and a half later, it was, how do I get out of this mortgage? Oh, yeah, it's funny that mid-2000s, the majority of our calls had something to do with real estate. And when prices go up on assets, for whatever reason, investors, not all investors, some investors want to jump in.
Pat: Yes, yes.
Scott: Wow, things are up.
Pat: Yes, so did my mom.
Scott: And then the dot-com, I remember the dot-com, which was, you know, you just throw a dart and you get rich, Pat.
Pat: And I don't think a lot of people remember this, or if they do, they're quite a bit older, but I bet a lot of our listeners don't recall this, 1999, the Nasdaq, which is the tech index, the Nasdaq, that index, for the year of 1999, returned 85%, 85%.
Scott: For that year.
Pat: For that year. If you just bought the basket of the CUE, Nasdaq index, 85% return. And I'll never forget, I had a client that had a little side account going, and he was bragging about how well his trading did. And he was kind of questioning why he was even with us sort of thing. Scott, my day trading, I was up 77% last year on my tech stocks. And I said to him, "You know, you could have just taken the year off, put it in the index, and it would have done better. You worked for nothing. You paid to work."
Scott: What did he say?
Pat: Yeah, I don't know. So, I have two of my children, two of my four children that will play in the market, and I always tell them that, exactly that. When they start talking about the returns or the losses, I say, "You know, you got to compare yourself to the index if you want a base."
Scott: Of course.
Pat: And they have curtailed their trading significantly after comparing themselves. So...
Scott: Don't let a bull market confuse you with wisdom.
Pat: Yes. So, in this market cycle, is AI like the dot-com?
Scott: That's the question.
Pat: Yeah. The investment is so great. You'd have to have like a Goldilocks scenario to get a ROI.
Scott: But I tell you, you look at companies' reportings this last quarter, something like 88% and some are...don't hold me to that number, it's almost 90% of companies have outperformed what they had projected they were going to do.
Pat: Yes. And is that AI? Is that...? What is it? I mean, there is some AI in there. And it isn't whether AI works or doesn't work. That's not a question. The question is...
Scott: Well, that's part of the question. Why is that not the question?
Pat: Well, because it's proven to work. The question is, how efficient is it? How good will it be in replacing labor? That's what it's about. That is exactly what it's about.
Scott: Of course, yes.
Pat: And is the investment... Remember the dot com, the telecommunications companies built so much infrastructure to support the internet.
Scott: The fiber optic line. What was the Corning? I mean, there's so many companies that stocks fell 90-some percent.
Pat: After.
Scott: Yes, yes. So, many companies the stocks just cratered. And they were the ones that were... Well, some just had no business model whatsoever. But then the ones that were involved in kind of laying the cable, the infrastructure, we had way more fiber optic cable laid than we ever needed.
Pat: Which all of America, all the world benefited from that because it actually opened up communications because it became a lot less expensive.
Scott: It's not that dissimilar to the railroads. When all kinds of investments flooded into railroads, most people lost money. There's oversupply to begin with. Same thing. And so, the question is now, right? That's what I think...
Pat: That's what I'm asking.
Scott: ... concerns me. All these huge energy production facilities, these massive, massive warehouses of...
Pat: Because the infrastructure to communicate is already bought and paid for. The existing infrastructure for that. So, now, we're just talking about plant facilities, plant facilities. And you look at...
Scott: We need energy and we need, I guess, their own computers to store all of them.
Pat: The billions and billions of dollars that have been pledged toward this, you're just like, well, these aren't all going to work out. That's just fact.
Scott: For sure.
Pat: There's going to be a good 60% to 70% that actually never make it, just don't get the ROI that they've expected. They would have been better off owning treasuries in that time period. But there will be 30 to 40% that will just become...
Scott: And some will crush it. And some of it's already been priced in that they're going to crush it.
Pat: That's right. Most of it is already been priced in.
Scott: I mean, that's what feels so strange right now.
Pat: It's different than the dot-com because the dot-com, many of those companies were just flat out. They could never ever make the kind of return associated with their stock price because it had been priced in and the business model also failed.
Scott: That's right. They had no business model.
Pat: Yeah, pets.com, when they went into bankruptcy, their number one asset was the talking sock puppet when it was sold in 2000.
Scott: And that asset's worthless today. Where's the talking sock?
Pat: I don't know.
Scott: I know you haven't seen the talking sock in25 years.
Pat: So, that's the big question. And when you look at the... But finally, we're starting to see broader diversification in stock prices in the S&P 500 in terms of the other companies besides the Magnificent Seven.
Scott: Magnificent Seven. Which by the way, five years from now, there will be a different group of stocks with a different name. Because we didn't talk about Magnificent Seven five years ago.
Pat: It will be the Fabulous Four.
Scott: It was the Fabulous Something, right?
Pat: Yeah, it's something, I don't remember.
Scott: You know, it's funny, when you do this long enough, after a while, you come up with these, like, you don't get too caught up in whatever the latest hype is. Yeah, because you know it's going to move on and it's going to be something else, I guess. I was talking to a younger advisor yesterday. He'd maybe been 10 years in the industry. And we just kind of...
Pat: All the advisors at the firm are younger than you. Most of them are. A lot of them.
Scott: I get it. No, no, no. But there's one thing about actually living through the market cycles versus reading about them.
Pat: Yes, living through the market cycles.
Scott: And so...
Pat: I think there's a difference with advisors who started in their career post-financial crisis versus pre-financial crisis. It's a very humbling industry because nobody knows when the market cycles are going to start and end, right? And so, a client could have hired an advisor at the very peak in 2007, like the absolute worst day. And no matter what strategy they had in place, no matter how conservative, dollar cost, the whole thing, they could have done all kinds of things, they would have lost money their first year and a half or so with that advisor, which is rough. So, what was the conversation you had with this younger advisor about?
Scott: I was just reflecting on these market cycles. And he wasn't an advisor part of our firm. He was not our firm. He was just some other advisor that I was chatting with.
Pat: It's hard. It's hard.
Scott: And I tell you, look, I was this morning driving... And we'll take some calls here in a minute. Driving into the studio this morning, I'm flipping on the radio station, which I don't very often because I kind of like the podcasts. I don't have to listen to commercials. You can fast forward them.
Pat: Like ours.
Scott: Like ours. Or not listen at all. And there was some advisor advertising. Essentially, the advertisement was, "Safe money, you should be earning 6%. Safe liquid money, 6% should be your bogey. Call me to discuss more."
Pat: Where? Where does he get this magical, the fabulous 6% on safe money?
Scott: Liquid. So, he said liquid. This is for your liquid investment.
Pat: It's actually, we know what it is. It's subprime loans, is what it is.
Scott: Well, those aren't very liquid.
Pat: That's right. They have, they have windows, but they could close the window.
Scott: And as I'm listening to something, I'm thinking, this advisor I was talking with this week, he currently has charges, it's his business, flat fees for his clients, and he's going to be moving to a assets under management fee to align his interest more with his clients. And he was talking about what his fees should be and that sort of thing. And I was having a conversation with him about... And this might sound harsh, but I said, "You have no reason to discount your fees. You should charge a market rate." And I said, "Because not only are you providing tremendous value to your clients, you are protecting them from others in the industry that do damage to people. So, if you're a great advisor, don't feel bad about charging a market rate. There's nothing wrong with that. Don't feel you need to discount."
Pat: There's nothing wrong with that.
Scott: I said, "These people don't need charity. They've got $10 million investment." And I'm just being very transparent here. And then I hear this ad this morning and I thought, that's exactly why you should charge a market rate. You are protecting people from these 6% safe money.
Pat: Come on.
Scott: It doesn't exist. When the treasuries are yielding 4%, how do you get 2% more with still being safe and liquid?
Pat: You don't.
Scott: You don't.
Pat: You don't. It doesn't exist.
Scott: I get frustrated when I hear stuff like that.
Pat: We all sense that in your tone and your voice, all of us.
Scott: Because, look, these people come and see us after the fact.
Pat: Oh, Scott. I mean, how many hundreds of people have you met with all of your career that have been sold crap from somebody that doesn't work out? They're trying to unwind the position. They can't, and they don't know what to do.
Scott: Yeah, they don't know what to do.
Pat: Yes, it's difficult.
Scott: And sometimes you can't help them anymore. I'd love to be able to help you out. "I know you're $800,000 in that position is now worth $550 and it's now illiquid. I don't know what to tell you."
Pat: Yeah. There's not a lot you can do.
Scott: Not a lot you can do. Anyway, all right, we're going to take some calls.
Pat: Yeah. Later on in the show, so we've got to hit this, Scott, I want to talk about this Cambodian conglomerate.
Scott: I didn't even know what you're talking about.
Pat: Well, that's why I'm talking about it.
Scott: Okay, Cambodian conglomerate.
Pat: Called the Prince Group where they've been sanctioned by the U.S. government for pig butchering.
Scott: Well, that'll keep everyone tuned in. That's a forward tease, they would call, in the industry.
Pat: Oh, yeah. I've been brushing up on my...
Scott: So, good.
Pat: I've been brushing up on my radio skills.
Scott: Honey, I'll be in the house in a moment. I got to wait for the rest of this program.
Pat: Or just put it on pause.
Scott: All right. If you want to join our program... I talked to a buddy of mine, said, "You can't take live calls." I said, "No." I said, "We go record the show during the week, and we schedule our calls." One, we get better calls, this way, so you're not wasting your time on bad calls. But two, it enables us to have a cushy lifestyle."
Pat: A cushy lifestyle.
Scott: Well, 20-some years, we did it live on the weekends.
Pat: That's right, every weekend.
Scott: And I can tell you this, we would not be doing the program today if we still had to do it live on the weekends.
Pat: Oh, that's right. And I cannot tell you how many soccer and little league games I missed. And for that, I'm thankful.
Scott: That's not nice. Anyway, if you want to be part of our program, you had a question for us, we'd love to take it, questions@moneymatters.com is the best way to reach us with your question. We'll schedule time, questions@moneymatters.com. We're starting off here with Gerald. Gerald, you're with Allworth's "Money Matters".
Gerald: Hi. Thank you for taking my call.
Scott: Yeah. Glad you joined us.
Gerald: I've been off and on listeners since the early 2000s. So, I'm glad, guys, you're still here...
Pat: Oh, I appreciate that.
Scott: Me too.
Gerald: ...offering advice.
Scott: Appreciate that. How can we help?
Gerald: I follow your program.
Scott: Thank you. How can we help?
Gerald: I am a trustee for my parents' trust account, and both parents are retired and my mom passed away recently. So, my dad is a surviving spouse.
Scott: By the way, sorry about that. How recent did she pass away?
Gerald: September last month.
Scott: Okay.
Gerald: And now, my dad's monthly income is $1,900, and he has an expense of $7,500 a month. All their assets is cash and checking and savings accounts. They have an IRA, very small, $2,900 for my dad and $3,500 for my mom respectively. And what I'd like to do is to invest some of their cash in the stock market so my dad can get more income and better return on investment, rather than the puny interest rates in the bank of 0.01%.
Pat: How old is your father?
Gerald: 97.
Pat: And how much money is in brokerage accounts or bank accounts?
Gerald: $850k.
Pat: Wait, but you...
Gerald: $850k.
Pat: Okay, thank you. That's all in cash.
Gerald: Yeah.
Scott: I assumed it was $850,000, not $850.
Pat: And how much of this would you invest in the market?
Gerald: I don't know. That's why I'm calling, and thinking right off the get-go, $100k.
Pat: How many beneficiaries are there to the estate?
Gerald: Two, myself and my sister.
Pat: And he's 97. And so, here's one of the ways to think about it. First of all, the money shouldn't be in the bank. There's so many other investments that are liquid that you can choose from.
Scott: The treasuries are paying almost 4%. Thirty-day treasuries are almost 4%.
Pat: Yeah. So, that's pretty simple there. But let's talk about the investable part of it. If you set aside, five years in cash at this amount, so you said the expenses are $7,500 a month.
Scott: Let's call it $100 grand a year.
Pat: Okay, it's $90,000, but we'll call it $100k. So, you set aside $500,000 and you put it into, let's say, treasury something that's liquid and safe.
Scott: CEDs even, whatever, yeah.
Pat: And then you took a look at the rest of the $350,000, I would feel comfortable investing it based on how the other beneficiaries of the estate would react to this. And the reason behind that is, you have a fiduciary obligation to not only your father, but to the beneficiaries of the trust. And when you look at it this way, what you're doing is, if you took that $350,000 and put all equities, you would be investing for yourself and your sister, essentially, which means the timelines are longer. And if your sister, you know, she understands it and understands the reasoning behind it...
Scott: Here's the risk. Let's say you took $500,000, left it in secure investments, took $350,000, invested it, let's say, you put it all in stock, which I wouldn't really recommend necessarily. But if you did that, the market takes a downturn. The $350,000 goes to $250,000. Your father passes away. Your sister says, "What the heck? How'd you lose that money? You lost 100 grand. That's half mine. You lost me $50,000."
Pat: That's right. That's the risk. And so, it all comes back to how your sister would... So, if your sister was on the same page as you and understood the risk and...
Scott: I would have her involved in these discussions.
Pat: That's right.
Scott: And if she's not comfortable, I wouldn't do it.
Pat: That's right.
Gerald: Okay. But to gain additional income from my dad, you're suggesting to put the $500k in treasury, treasury bills or kitty.
Scott: Shorter-term fixed income.
Pat: Yes, combination of things.
Scott: Yeah. Which has some sort of a government guarantee.
Gerald: How about dividend EFT?
Pat: It's not appropriate for his... Unless, look, it all gets down to the... If you were the only one that was the beneficiary of this estate, it'd be easy.
Scott: Yeah. Particularly if you had other assets in case things went sideways and your dad needed some money, if you could take care of them, then it would be even easier.
Pat: Yeah. And in fact, I would make the argument that if you have other assets and your sister has other assets and you're all on board, then I would probably set aside even less money than the five years, and go to a fully diversified portfolio. But at the end of the day, it's not what's the best portfolio, it's who are the people involved in the transaction?
Gerald: Okay.
Pat: So, your sister, I mean, is she fluent in finance?
Gerald: Well, no, but I could talk to her.
Pat: All right. I'd give it a shot. Yeah, and I would use and advisor. I would absolutely use an advisor.
Scott: Because you're a fiduciary. You have a legal responsibility for the beneficiaries to manage these monies for your father and for the subsequent beneficiaries. That's your duty. If you hire an advisor, it reduces your risk dramatically.
Pat: And a lot of it has to do with her view. If she is...
Scott: Prudent investor rule. I think that's what they call it.
Pat: That's what they call it.
Scott: You'd be prudent man.
Pat: But if your sister has plenty of other assets and you have plenty of other assets and you both understand the risk involved, you can put more risk in the portfolio, which will give you a greater long-term rate of return. The question is, how are you going to react? You know, once they weren't a 35% down market on the day your father dies and this money goes to your sister and she was going to use it to pay off the mortgage and send a kid to college, then you've got problems. But if she said, "Ah, look, I can, I can weather this stuff for another five years, three years. It doesn't really matter." Then it would drive the investment that making decision more aggressively. Does that make sense?
Gerald: Yes, it does.
Pat: Yeah. So, it's a...
Gerald: But, okay, again...
Pat: And I would make sure...
Gerald: ...so, if I'm paying his income.
Scott: ...the more risk you take, you need to make sure that your father's...
Pat: You've got the money to provide...
Scott: That $7,500.
Pat: Yeah, I'm sure he's in a home or something.
Gerald: For his expenses.
Pat: If he lives another 10 years.
Gerald: Yeah. All right. Thank you for your...
Scott: So, you had a question about the fixed income, just by either... I'll use an advisor and put together, you wouldn't just throw it all in a treasury. You would put together a good...
Pat: Yeah, fair enough.
Scott: Hire an advisor to help you put together a proper fixed income portfolio on the liquid side of things. All right.
Gerald: Okay. Thank you very much.
Scott: All right. Thank you. Appreciate the call. Thanks for being a long time listener.
Pat: Yeah, it can get really sticky. I was talking to a friend this last weekend, who's a beneficiary, his parents passed away. First parent died four years ago. The other one died two years ago, something like that. Largest state, still no distributions. The only distribution he got was a check to cover the taxable portion that flowed through to him. He got a K-1 that he learned about after he filed his taxes. His brother is the trustee, didn't tell his siblings that, "Oh, by the way, you're going to have phantom income here." Essentially, is what happened. And then he gets a check just enough to cover his tax liability, and it's been over two years. And his brother says, "Well, I'm still trying to close out the estate."
Scott: Well, you obviously know, it doesn't stop you from doing partial distributions for the estate.
Pat: Of course. Of course, that's what I've told my friends.
Scott: Oftentimes it's just control issues.
Pat: That's what's a 100%. It's so obvious. And my friend says to me, he's in a sticky situation. And it's quite a bit of assets. And he'd like to help his kids get a down payment on a house. He's got... And he says, "But I care more about my relationship with my brother than I do about any money." It's a very similar situation where guy lives on the West coast. Family owns a house in Kennebunkport, 80-year-old house. Nothing fancy, but it's worth $4 million.
Scott: It's in Kennebunkport, right on the water or something, I'm guessing.
Pat: Yeah. Yes, yes. And within three hours' drive for both his brothers to use it as a vacation home, so it stays in the estate.
Scott: Do they hit him up for cash to help on the repairs and property taxes and everything?
Pat: No.
Scott: Okay. That's the least...
Pat: But his point, as I pointed out to him because he lives close to Lake Tahoe, I said, "You know, if they paid you out your portion of it, you could buy a house in Lake Tahoe and get some of the benefits." But he says, "Well, I go back there about once a year on my vacation for a week." So, it's how you set up these estates, especially if it's sizable is really, really important because you could write that in, you could write that in. You could say, the house needs to be liquidated or fair market value. It could be sold to any or all of the...
Scott: I've had a cabinet Tahoe for 20 years, almost 20 years. And my daughter who hardly ever uses it, she'll be there maybe a week in the summer or something. Like dad, "You got to promise me you never sell that." And I'm thinking, "No, I'm not going to promise you that, number one. Number two, I think that I would like that liquidated if your mother and I both died. There's no sense." I've got four kids. Like, to your point, I don't want them to deal with...
Pat: Yeah. What happens if one ends up living in Boston, and the other one ends up living in Sacramento, so one gets 80% of the benefit, one gets 20%.
Scott: It can get complicated. You want to make it as clean as possible for your heirs, yes.
Pat: And don't require them to own anything, my advice, after you die. Which means don't set up a perpetual trust that...
Scott: No. That's the same problem with this same estate. There's a commercial properties that this guy, the dad had with another gentleman and they said, "No, you need to keep these properties for 10 years, post my death."
Pat: Oh, why?
Scott: So, that the other partners had enough to sell and pay the capital gains taxes. I mean, you think about the challenge that is, you're telling somebody, "You got to keep a property for 10 years." Maybe it's a warehouse somewhere that's got a leaky roofs that's falling apart. The tenant quit paying. And I mean, I'm just like... This is a close friend of mine. I'm hearing this, what a mess it is right now. And it's one's benefited, yet, except the brother that gets to control. Whether he thinks he's doing out of love for his siblings or not, it's a control thing. It's obvious to me.
Pat: It is control.
Scott: Obvious. Anyway.
Pat: Younger brother or older brother?
Scott: Younger brother.
Pat: Payback. Remember that time you used to punch me.
Scott: Remember that time you locked me in the closet. All right, let's continue on. We're talking to Sharon. Sharon, you're with Allworth's "Money Matters".
Sharon: Hi, good morning.
Scott: Hi Sharon.
Sharon: I have a complicated, but interesting question about a deduction possibility for grandchildren. My husband and I are retirees. We recently purchased a fixed annuity for $1.4 million. And at that point, my adult children who have two small children in preschool asked us to pay for preschool, which we're happy to do if we can afford it. And the preschool is in the state of Washington. We're in California. And I was wondering if the $4,000 per month that we're paying in tuition is deductible in any way to us.
Pat: No, it's not. It's not deductible.
Scott: If the school was a nonprofit, religious, or some sort of nonprofit, and you gave $100,000 check to their campaign of some sort, and the school was then able to offer tuition at a reduced amount, theoretically, you can get the tax deduction on the gift.
Pat: You could get, yeah.
Scott: There's no quid pro quo. So, you couldn't say, "Hey, wink, wink. I'm going to write you guys a check. Can you have my grandkids come and do low tuition or free tuition?" That's not going to work.
Pat: That's right. You can't take a tax deduction for a charitable contribution if there's economic value to you in that, in that gift. So, the answer to your question is no, there's no deductibility part of it. But let's step back for a second, why did you mention the annuity?
Sharon: Well, because we're using money from the annuity with which is taxable. We're using money from the annuity to pay for the preschool.
Pat: Okay. And is that an immediate annuity where the start a distributions of income immediately based on your life expectancy?
Sharon: Yeah. I don't know if it's based. It's based on, we paid this amount that's a fixed annuity and we get something like not enough. We get $9,000 a month out of it.
Pat: Okay, okay.
Scott: So, it's an immediate annuity.
Pat: It's an immediate annuity.
Scott: So, when you both pass away, it's gone. Is that correct?
Sharon: It's gone. It's till age 80. And then we have another annuity that kicks in from 80 onward.
Pat: Oh, got it. How old are you now?
Sharon: 65.
Pat: All right. So, it's a 15-year annuity.
Sharon: Right.
Pat: And how much is it paying a month?
Sharon: It's paying out, like, $9,000 a month.
Scott: It shouldn't be all taxable. If it's an immediate annuity, your check is two things. One, it's a return of principal, the money that you invested in this annuity.
Pat: Which is not taxable.
Scott: And the second is the interest on that, which is taxable. So, over 15-year immediate annuity, maybe half of it is tax free.
Pat: Now, if you're taking withdrawals from it and not annuitize it...
Scott: But $9,000 a month on a $1.4 million is more than the interest. So, it sounds to me like it's an immediate annuity for 15 years.
Pat: Fifteen-year fixed.
Scott: And then they sold them another annuity that's going to be paying at age 80.
Pat: Okay. so the answer to your question is no, that's not tax deductible. But if you think you have ample assets, it may make sense for you to fund a 529 plan for your grandchildren in the future, right? Where you make the deposits, it grows tax deferred, and it comes out tax free as long as it's used for education.
Scott: And the Big Beautiful Bill just increased what qualifies as...
Pat: Yes, primary education.
Scott: It's now high school tuition. I don't know about other private school for elementary. I don't recall off the top of my head, but I believe so.
Pat: But it is for high school. So, in the planning process, if you have ample opportunities, you can actually set this up where you're the owner and the child is actually the beneficiary. You make the deposits very similar to your annuity. It grows tax free and that comes out tax free as long as it's used for that education, so you don't pay any tax on that growth.
Scott: You have much on assets outside of the annuities?
Sharon: A house and more stock accounts and, yeah. Yeah, so...
Scott: That'd be the best way to go about it.
Pat: Yeah. But make sure it's much like that annuity. Once you put it in there, you can't get it back out, much like your immediate annuity.
Sharon: Right. That's a really good answer. Thank you. I appreciate it.
Pat: Okay. All right.
Scott: Yeah. Appreciate the call. That's why, you know, Pat, it's like the financial planning, people ask about what's a good investment. And like, "Well, I don't know, what do you mean? What's a good investment right now?" Well, you look at a situation like this, so they're trying to help their grandkids, which is great. What a blessing to do. I hope when I have grandkids, I can be able to help something like this. Feel good about it.
Pat: Your helping your grandkids. Why does it always have to be about you feeling good about it?
Scott: Well, you got a good point. I'd feel better if my kids had enough money to support their own family. I think about it, I'd feel really good if they didn't need my money. My point is here, if they're paying for preschool, there's a good chance they'll help pay for education...
Pat: In the future,
Scott: ...in the future. High school, elementary school, college, even a 529 plan is a phenomenal vehicle for, particularly, a grandparent who wants to help a grandchild.
Pat: Exactly.
Scott: Especially, if they're the owner. They can still control it.
Pat: It's gain for its owner.
Scott: When they put money in, it's out of their estate. They can give how many years of...? I think it's five years. They can give a big chunk, $150,000.
Pat: It's $190,000. I looked it up.
Scott: $190,000. All right, it's almost 200 grand. They can stick in per grand per individual.
Pat: Yeah. I think it's a $190,000.
Scott: Whether or not, that's the right thing to do. I'm not saying that you should miss it.
Pat: You got to make sure you have enough in your estate.
Scott: Yeah. You don't want to give away money that you might need in the future.
Pat: Yeah. I was talking to a guy that recently sold his company for $100 million.
Scott: He should have enough.
Pat: I'm hoping. And he was talking about it. I said, "Well, you've got grandkids. Why don't you do this thing first? And why don't you do it all at once? Not every year, just get it out so that it gets more tax deferred growth on that in them." But you have to make sure that you have enough money to retire comfortably. Yeah, to support your needs.
Scott: I think at $100 million, he's probably fine.
Pat: I think so, yeah. He's got a really nice boat though.
Scott: He's a good friend to have.
Pat: He's got a 35-foot formula bow rider. Very nice.
Scott: It does sound nice.
Pat: It is a nice boat.
Scott: I remember seeing the awesome Tahoe a couple of years ago and this brand new wooden Riva. The boat was over a million dollars. Not a huge yacht. We're talking about a runabout.
Pat: Yeah, I got you.
Scott: But it's wood.
Pat: It's Riva.
Scott: And I'm like, "Who, some guy just sold it. Some guy just sold this something like..." That'd be the last thing I'd want, is some boat that... Anyway, back to this, the whole concept with planning is, from a tax standpoint, having interest that accumulates in the 529 plan is much better than having interest accumulating in the annuity that then becomes taxable.
Pat: Significantly, significantly.
Scott: Which is why in order to make any sort of an investment recommendation, one needs to take in consideration what all of the objectives are. What someone's trying to accomplish.
Pat: And risk tolerance. And my guess is their risk tolerance, Sharon's risk tolerance and her husband's is relatively low.
Scott: If you're going to be putting that much money in annuities and then layering them too.
Pat: Yeah, your risk tolerance is relatively low.
Scott: That would be, that would be.
Pat: Not good or bad. It's just what it is.
Scott: I personally, not stay emphatically, I wouldn't have recommended the immediate annuity strategy.
Pat: Ah, they take that back. Yeah, you would have.
Scott: Same thing could happen.
Pat: Maybe.
Scott: Yeah, there's times... And there's non-commissioned annuities now, too.
Pat: That's right.
Scott: So, a fee-based advisor can recommend a non-commissioned annuity. But the thing with an immediate annuity, once you write that check, it's that assets no longer yours.
Pat: You're buying a pension. You're buying a pension.
Scott: And that's why I say, I shouldn't say emphatically, because there are times that I have recommended, and there'll be times in the future I'll recommend it again. Let's continue on here. Talk with Lori. Lori, you're with Allworth's "Money Matters".
Lori: Yeah. Hi, thanks for having me on.
Scott: Yeah. Glad you joined us.
Lori: Well, I've got a couple of young adults who, as you would say, are not yet self-feeders.
Pat: Thank you. That was my dad's term, by the way.
Scott: Self-feeding.
Lori: Although, you know, they're both in school, so hopefully, they're going to be working their way toward that. And I just kind of wanted to run by, am I doing the right thing with them in terms of money wise right now? So, they're both in school. They both got part-time jobs. And one of them is, has no impulse control whatsoever. One, I think, you know, has sort of a handle on that kind of thing. So, the one who it will blow through money if she has the opportunity is 19 years old. So, she has a job right now. So, I've basically told her, like, she needs to put that money into Roth. And because she's at home, I'm paying for all of her bills. Although because of her ability to blow through money, I did tell her she has to pay me for her car insurance and she has to pay her own gas.
Pat: Very nice.
Lori: Just to give her a bill. Not because it's something she can afford, but just to give her something.
Scott: Yeah, I get it. Yeah, of course, you're trying to teach her to be an adult and to be a self-feeder and discipline.
Lori: Right. So, you know, I know she's 19. So, technically, you know, she's an adult, she can do what she wants with her money, but I'm trying to put her...
Scott: Yeah, she can also leave the house and go figure it out on her own, so...
Lori: And that's not happening anytime soon, apparently. So, you know, in terms of that, so I basically said she has to put 75% of her paycheck into a Roth IRA because I'm just trying to, "lock up" her money now while she has her bills paid.
Pat: Perfect.
Lori: And I think, because my daughter...
Scott: She can still go out and pull the money out of that Roth.
Lori: Yeah, I haven't told her that though.
Scott: I mean, let's hope. So, you're trying to teach her some lessons here, and also, help her by having some money set aside. And one would hope that if she has that urge to pull the money out, she can realize, "Huh, I don't think I want to cut my ties with my parents on the financial end of things," which is probably what would happen. That's what I would do to my kid if they did something like that. I'd like, "Go figure it out on your own then." So, one would, it's not going to be enough there to actually do any real damage to herself.
Pat: So, I think it's a great idea.
Scott: I do, too.
Lori: Well, and the other thing I'm wondering about is, you know, I feel like the advantage, I keep telling my kids, you know, "You're young, you're 19 or 24. This is, you put money in this stuff and look what happens over time for this, for your retirement. So, if we just focus on that..." You know, because, hopefully, they get out of school, they have a job, then, you know, they're on their own in terms of now they're self-eaters. But right now, the one thing I can do from, I'm hoping is, given the advantage of time and, you know, compound changes, and that kind of stuff. So, my other thought is, if I can afford it, should I do this sort of... I think it's $16,000 a year that you can give to somebody without tax consequences.
Scott: Yeah, $18,000.
Lori: Oh, $18,000. Oh, okay.
Scott: Yeah. For both you and your spouse.
Pat: Per individual.
Lori: Okay. So, you know, is there anything else I'm missing in terms of, I kind of feel like if I can get them to do this now in the Roth IRA.
Pat: But you can't put 18 grand in a Roth IRA.
Lori: Oh, sure, you're right.
Pat: That exceeds the limit. Yeah. It's based on her income. How, how large is your estate?
Lori: I mean, at this point, I'm set. Like, I'm happy I'm not gonna slip.
Pat: Is it, like, $5 million, or...?
Lori: No, no. It's, like, $3 million.
Scott: Okay, still fair.
Pat: I would not start gifting.
Lori: Okay. And, and why? Because...
Scott: I would disagree. Why? With my kids, their first jobs, I would put money in the Roth IRA for them. They earned 3 grand for that summer. I put 3 grand in Roth IRA.
Pat: She's already got the child putting in 75% of her... If she wants to top it up to go to a 100% of pay...
Lori: Well, and I will, I'm going to. Whatever they make this year, they're going to go in the Roth and I'm treating my kids differently. My daughter, I'm telling her, she has to fund her own Roth as much as possible. My son, no, because he's reasonable with money and he has other expenses and whatever. But, you know, my plan is whatever they make this year, they're going to put in Roth.
Scott: Okay. Perfect.
Lori: Whether it's me and them or just them or however that goes.
Scott: And I agree with Pat. I would not transfer money and give them money in addition to the Roth.
Pat: That's correct. That's what I said.
Lori: And see, no, and why? Because again, my feeling is if I put that into something that they could put in equities or whatever like that, they've got, you know, decades for that to yield.
Pat: Oh, I understand. But that's...
Scott: You can own it and transfer to them later.
Pat: Yeah. And you get a full step up in basis at either your death or your spouse's death. So, I would make the argument, because you don't have an estate tax problem... What's the limit for the estate tax?
Scott: 30 million bucks next year, husband and wife.
Pat: For husband and wife. So, because you don't have an estate tax problem, I would make the argument that it better off in a tax efficient portfolio in your name with the idea that it's going to go to them because you'll receive a full step up in basing basis at death. And the compounding actually, you're right, and you're still taking advantage of the compounding, but you've got this tax efficiency that's built into it at death. And we're not trying to shrink your estate.
Scott: And the worst case is the step up basis goes away and you transfer the shares to your kids. And it's the same thing as them having it now.
Pat: From the very beginning. So, I wouldn't go above and beyond the Roth. I wouldn't be using up any part of either my exemption amount or even...
Scott: Here's one thing to keep. So, we each have four kids. Like, they all very different with their finances. My 18-year-old, freshman in college, she blew through 1,000 bucks her first month, like the money she had set for the whole semester, essentially.
Lori: Gone.
Scott: I gave her a tiny allowance because she's got a meal plan. And I just looked at that a couple of days ago and I think, "She's got like 20 bucks left." And I'm like, "Well, I guess you're not going to have a lot of fun the next couple of months because I'm not helping you anymore." Because I'm trying to teach her that, like, there's consequences when you spend your money. You can only spend a dollar once. But the reality is, we try to teach our kids these values, particularly the values that are important to us. And we hope that our kids are going to have those same values as they go through life. And the reality is, they have their own values, whether it's financial or in every other area of life. They typically don't mirror our own values.
Lori: Sure, they're going to be themselves.
Pat: As we all know, as we've raised kids.
Scott: But this Roth is very, very valuable. It's a great teaching. And here's the reality. my very first job out of college, I started putting money into 401(k). I took that money out of the 401(k) to fund opening Hanson McClain 30...
Pat: You borrowed 10 grand, and I would have done the same, but I didn't have 10 grand in an IRA.
Scott: I had $10,000 in an IRA and I borrowed it out for 60 days to start the business. And that was 32 years ago or something like...
Pat: Thirty-three years ago.
Scott: Thirty-three years ago. So, and the Roth is actually, because you could pull your principal out without any tax consequences.
Pat: They're fantastic.
Scott: So, they might want to use it for the purchase of a first time home. I would just talk about all the benefits of it, and then talk about compounding growth.
Lori: I'm keeping it really simple in terms of, like, I'm locking up her money. It's sort of, if you will, just keep it. You know, like the same thing, I put her on my credit card. I was gone for two weeks. I cannot tell you how much DoorDash happened in that time, you know. You know, she is going to be who she is, but I keep telling myself, we've got six more years, so she has a pre-punctual cortex, you know, maybe things can change.
Pat: They're all different. That's funny. That's funny, yeah.
Scott: I think you're on the right path, but I would not gift above that at any point in time, unless they changed the estate tax.
Lori: Okay, so just wait, they have to wait.
Pat: Yep. And, you know, when they purchased the first time home, you might want to lend it to them and, you know...
Scott: Or gift it or whatever.
Pat: Or gift it or whatever, but not just out of...
Lori: Well, and okay. My understanding is there's some... I'm going to get the numbers wrong, but you can gift a million dollars over... Like, I've helped somebody else with a down payment for their house. Yes, you know, there are initials like that. So, my understanding is there was some separate category about that where there's, again, if they get a house, I can do a down payment for them. And it's within, I don't have the right phrase for it, a lifetime giving thing, or something like that.
Scott: Yeah. So, there is a gift and a state tax. It's one in the same. It's a lifetime gift and a state tax.
Lori: That's it, okay.
Scott: And next year, it's 15 million bucks per individual. So, a couple can do $30 million. And this means that either their estate, when they die, or while they're living, they can transfer that much, gift that much to whoever they like, whether it's their kids or their favorite talk show host or whatever.
Lori: Keep it going.
Scott: So, like my oldest daughter's 29. She was not great with money when she was younger. Now, she has her own business, works her butt off, does very well. Her mother and I gifted her some money for a down payment for her house. And it was more than the $36,000 that we were limited to, they get $18,000 per year. And so, we used up part of our, what's called lifetime exemption. And then we had to file a tax return, a gift tax return.
Pat: But there's another way you could do it, which is, you lend them the money, and you put an interest rate, a fair market interest rate on it. And then every year...
Scott: You forgive.
Pat: ...you forgive a portion of that loan that is equivalent to that $36,000 until the loan goes away. And that way, you haven't used up your exemption.
Scott: They have to pay the interest.
Pat: You have to pay the interest, but it's just a transfer money internally, quite frankly, because you're forgiving the... The interest is actually coming back to you. So, depending upon the size of your estate, sometimes you do it like Scott did. I did it with combination of the two of them with my kids. So, two of my children bought homes, and I did combination of the two of them. And, you know, one's in law school. I got to tell you for a daughter that didn't want to go to college, she sure likes school now.
Scott: Are you paying for her law school?
Lori: Well...
Pat: She was...
Scott: It sounds like a yes to me.
Pat: No, no, no. She got a full scholarship.
Scott: Oh, God bless her, and you.
Pat: Yeah, pretty good grades. So, there's lots of ways you can go about doing it, but I love the fact that you are using this as a time to actually educate.
Lori: Well, yeah, I mean, I feel like... You know, my hope is that they'll make some good decisions, but right now, you know, they've got different stuff. And I'm a widow, so I can't do the whole, like, you know, husband and wife giving kids. I don't have that option, it's me. So, I just want to make sure that I kind of got them set up, but not in a way that, like... You know, they've got 529, it's pretty much their school is going to be covered. Like, you know, they're lucky kids to be able to have that.
Pat: Luxury.
Lori: Exactly. So, you know, they're going to get out of school eventually, hopefully without debts. So, it's kind of like, I just want to help set them up for like, okay, what's their retirement stuff, you know, set up?
Scott: I mean, look, I think some of us are born savers and some of us are born spenders. It just seems that way to me, right? So, she's a spender. Just like other areas of our lives where we have certain temptations, a part of maturity is designed in our life in such a manner to put some protections in place so we don't succumb to those temptations. And for her, spending money is going to be one of those temptations, and she's going to have to learn how to budget her money, how not to go spend money on an impulse. But she's eventually going to have to learn that on her own. You can help guide her and teach her, but that's...
Lori: I hope so, and I did. Absolutely, yeah. She's going to be her own person. All ready, well, thank you.
Pat: All right. I appreciate the call.
Lori: I'm good.
Pat: It's funny.
Scott: It's funny because I think... You know, it's fun talking to, like, young parents that have, like, kids that are 2 and 4. They got it all planned out how everything's going to work out so perfectly and all that.
Pat: Scott, that was you.
Scott: I know it was me. It's every young couple.
Pat: It wasn't me.
Scott: No?
Pat: No. No, I just like, we'll see how it goes. Do you remember what you said to me years ago?
Scott: Oh, I apparently I said something that stuck with you.
Pat: You said to me...
Scott: Well, I apologize in advance.
Pat: ...you were talking about your kids. You said, "If I knew I didn't have any control, I wouldn't have tried so hard." When you're talking about raising your kids.
Scott: Oh, yeah. Yeah, yeah, yeah.
Pat: You said, "If I knew I couldn't influence the outcome that much, I wouldn't have tried so hard." But then you reflected on it and said, "But I had to." And you did, you made a difference. You didn't run them run willy nilly. Well, so you, you imprinted some values on them.
Scott: Oh, for sure. And I still have those conversations with even my older kids. I have one this morning. My wife and I, for those that don't know, we raised two kids, and then we adopted two girls from the foster system when we were empty nesters. They were 9 and 6 at the time. This was nine years ago. And I had a friend visiting with us for a while. It was for the afternoon or whatever. And he says to me, "Scott, you parent more like a grandparent than you do a parent." And I took it as a compliment. I don't know if he meant it as a compliment. But to your point, like you kind of realize that some of these things, maybe you don't sweat the small stuff.
Pat: I just kind of let it go.
Scott: Whatever, you know,
Pat: Let it go.
Scott: Whatever.
Pat: Let it go. All right. Before we go, I was talking about pig butchering.
Scott: Which is super exciting.
Pat: Well, this group in Cambodia... But this is the numbers that astounded me. The justice department sees $15 billion worth of Bitcoin from this guy.
Scott: Ah, here it comes.
Pat: Right? $15 billion.
Scott: I did see a headline on it. $15 billion?
Pat: $15 billion in Bitcoin. Americans lost at least $10 billion to scams originating from this region in Cambodia where this guy operates. They have hundreds of thousands of employees that operate in this pig butchering, and these are romantic scams.
Scott: So, it's not a pig.
Pat: No, they, they call pig butchering because you fatten these people up through romantic scams, and then slaughter them at the very end. So, they're multi months, if not year relationships where people think they're in a relationship.
Scott: I had a family member almost... I mean, this relationship went on months, several weeks, all scam.
Pat: So, the point being here is that if you have a relative that you think is susceptible to this, be it young or old, they say $10 billion. Americans lost at least $10 billion to scams originating just from this region in Cambodia. This is a region outside of Phnom Penh that has lost it. The enterprise employs hundreds of thousands of people, the enterprise, which is, they're multiple of these pig butchering. But the point being, if you have someone who's close to you that you believe is even slightly susceptible, get on their account somehow to monitor them. You can be cc'd or get on the application so that you see transactions. In any of the big brokerage firms, if you got an app on your phone, you can actually, you know, ask to have permission so that you can monitor this. And it's real. It happens every day. I've read an article from a local newspaper this morning, this person wired $125,000 in a bank fraud, it was a bank fraud, and the local authorities were able to get $97,000 of it back, which I thought was pretty incredible. But they're called pig butchering. So, if you have someone that's susceptible, you believe to be susceptible, start monitoring their accounts.
Scott: And have a conversation with them, too.
Pat: Oh, please, please, please.
Scott: Hey, it's been it's been fun doing the show with you, Pat. And I appreciate the callers. Again, if you would like to join us, have a question for us, just send us an email, questions@moneymatters.com. And if you like our program, a couple of things, one is let others know, some friends, forward this on, and then also, follow us, and give us a review. We appreciate that. So, this has been Scott Hanson and Pat McClain of Allworth's "Money Matters".
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