Latest / The Financial Exchange Show / Oil Chaos: Strategic Reserve Release, Strait of Hormuz Fears & Wild Market Swings

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Oil Chaos: Strategic Reserve Release, Strait of Hormuz Fears & Wild Market Swings · The Financial Exchange Show

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Speaker 2: Chuck, Paul, and Tucker with you here as we kick
1:14
Speaker 2: things off for the day. A couple pieces of news
1:21
Speaker 2: here that will start what they want to start first
1:23
Speaker 2: with what was just announced a couple of minutes ago.
1:27
Speaker 2: The International Energy Agency the i EA. They're missing owen you,
1:32
Speaker 2: but they have all the other vowels, sixty percent of them.
1:35
Speaker 2: The IA announced a four hundred million barrel release of
1:41
Speaker 2: oil from global strategic petroleum reserves. And this was not
1:46
Speaker 2: entirely unexpected. It's kind of been discussed and rumored over
1:49
Speaker 2: the last couple of days and they've come to an
1:52
Speaker 2: agreement now to do so it's going to be kicking
1:59
Speaker 2: off over the next week or two. As an example,
2:03
Speaker 2: Japanese Prime Minister today Takaichi indicated that they were going
2:07
Speaker 2: to begin releasing reserves from their spr as early as
2:12
Speaker 2: next week. So it takes, you know, a little bit
2:14
Speaker 2: of time to get this going. It's not like you
2:16
Speaker 2: just you know, pull the plug in, hey, like you're
2:18
Speaker 2: ready to go. There's some stuff that you have to
2:20
Speaker 2: do in order to get into this process. So just
2:25
Speaker 2: to do a little bit of math, pol four hundred
2:26
Speaker 2: million barrels is the release that is being done here.
2:30
Speaker 2: According to the data from the IA, the thirty two
2:35
Speaker 2: members of IT hold about one point two billion barrels
2:38
Speaker 2: of emergency oil supplies, with another six hundred million off
2:43
Speaker 2: in industry stocks that are held under government obligation. So
2:47
Speaker 2: you're talking about one point eight billion in total. So
2:49
Speaker 2: this is a little bit more than twenty percent of
2:52
Speaker 2: that total being released here. It would be the largest
2:55
Speaker 2: release ever from the from IA countries. And the math
3:02
Speaker 2: on and why it matters is, look, to this point,
3:04
Speaker 2: we're now in day twelve of this conflict here, it's
3:09
Speaker 2: unclear exactly how much oil during that time has been
3:13
Speaker 2: able to be you know, re routed through a there's
3:15
Speaker 2: a pipeline that runs east west in Saudi Arabia that
3:18
Speaker 2: at this point, the estimates are that it's you know,
3:20
Speaker 2: pumping somewhere around five to six million barrels a day,
3:23
Speaker 2: but other than that, you're not really looking at anything
3:26
Speaker 2: else getting out of the region. But I think it's
3:28
Speaker 2: safe to say that somewhere around fifteen million barrels a
3:31
Speaker 2: day is a good estimate of what has been cut
3:33
Speaker 2: off to this point. And so if we do our math,
3:37
Speaker 2: we pull out our calculator and do fifteen times twelve,
3:40
Speaker 2: we got somewhere in the ballpark of one hundred and
3:41
Speaker 2: eighty million barrels that normally.
3:43
Speaker 3: Would have been moving that have not.
3:46
Speaker 2: So this release here is going to you know, be
3:51
Speaker 2: able to cover that. But remember it's not just about
3:53
Speaker 2: the amount, it's about the flow rate. And this is
3:55
Speaker 2: where you do get into a problem, which is, hey,
3:58
Speaker 2: it's it's these spo do not have the ability to
4:02
Speaker 2: pump fifteen million barrels a day in oil. Just as
4:05
Speaker 2: an example, in the United States, even at the peak
4:09
Speaker 2: rate that we saw during the draw down back in
4:11
Speaker 2: twenty twenty two, it was doing about one point two
4:14
Speaker 2: million barrels a day, about eight and a half million barrels.
4:16
Speaker 3: A week, and just one of just domestically correct.
4:19
Speaker 2: Ye, the estimates that I've seen are that, you know,
4:21
Speaker 2: maybe you can get somewhere between like four and five
4:24
Speaker 2: or four and six million barrels a day coming through
4:27
Speaker 2: these global releases, but that obviously still leaves a deficit
4:31
Speaker 2: that builds day in, day out. So even if these
4:34
Speaker 2: were to begin tomorrow, which they're not most you know
4:37
Speaker 2: the chatters, Hey, this will begin sometime early next week,
4:40
Speaker 2: you're probably looking at like a two hundred and twenty
4:43
Speaker 2: to two hundred and forty million barrel deficit to begin with,
4:46
Speaker 2: that still is growing by anywhere from like eight to
4:50
Speaker 2: ten million barrels a day for each day that the
4:53
Speaker 2: Strait remains blocked. So this release here buys you time
4:58
Speaker 2: such that if the strait is blocked through the rest
5:00
Speaker 2: of the month, your net neutral in terms of you know,
5:04
Speaker 2: basically the overall supply. But there's still is a problem
5:08
Speaker 2: with Hey, you're still not getting the barrels as quickly
5:11
Speaker 2: as you need them, so that that still is building
5:13
Speaker 2: up a problem not so much in the US but
5:16
Speaker 2: in international markets that are not as energy independency.
5:19
Speaker 1: Yeah.
5:19
Speaker 4: And then you have the compounding problem that all of
5:21
Speaker 4: these countries in the Middle East have mentioned that they're
5:24
Speaker 4: likely to cut their output.
5:25
Speaker 3: So it's sort of number already half.
5:27
Speaker 4: Yeah, and so you have a band aid being covered
5:30
Speaker 4: up for perhaps some of the issues that we're dealing
5:32
Speaker 4: with today. But the future is you've got you know,
5:35
Speaker 4: shortened output that needs to be put back online. And
5:38
Speaker 4: as has been discussed, the longer this lingers on than
5:41
Speaker 4: the more that issue compounds itself. It looks like energy
5:44
Speaker 4: markets at the moment on the release of this news
5:47
Speaker 4: not moving too substantially, with West Texas Intermediate sent around
5:50
Speaker 4: eighty three dollars a barrel relatively unchanged and Brent is
5:54
Speaker 4: up to eighty eight, only a half percent increase. Back
5:57
Speaker 4: in twenty twenty two, one hundred and eighty two million
5:59
Speaker 4: barrels were released when Russia invaded Ukraine. It seems like
6:04
Speaker 4: if you look at the history of these, it's kind
6:06
Speaker 4: of mixed impacts. I mean, when they did this release
6:09
Speaker 4: in twenty twenty two, it caused a huge spike of
6:11
Speaker 4: twenty percent when traders sort of looked up and said, oh, jeeszu,
6:14
Speaker 4: this might be more serious and anticipated, But then if
6:18
Speaker 4: you look at the analysis later, it was helpful. I mean, clearly,
6:21
Speaker 4: it is something that is a measure that can be
6:24
Speaker 4: impactful from a short term standpoint, but obviously, as you mentioned,
6:29
Speaker 4: with the RELI reserves that they have, there's only so
6:32
Speaker 4: much that can be done. This is, you know, something
6:34
Speaker 4: that can cover up for the next few weeks, but
6:36
Speaker 4: it's not something that can act as a hero or
6:40
Speaker 4: a saving measure as this continues on.
6:42
Speaker 3: Later into April.
6:43
Speaker 2: Yeah, the other thing that I think is important to
6:44
Speaker 2: talk about on this is that not every country has
6:47
Speaker 2: the same level of reserves, and it's not like these
6:49
Speaker 2: just go out to every country like hey, here's your oil,
6:52
Speaker 2: and here's your oil, Like this is released into the market.
6:56
Speaker 2: And what this means, quite honestly, is wealthy countries like
6:59
Speaker 2: the United States combination of our production and if we
7:03
Speaker 2: need to buy anything, we'll.
7:04
Speaker 3: Be able to.
7:05
Speaker 2: Like it's really, really, really unlikely that you're going to
7:09
Speaker 2: have gas shortages in the United States. They're a past
7:13
Speaker 2: that you could get there, but like things have to
7:14
Speaker 2: get really bad for an extended period of time, and
7:17
Speaker 2: I don't think that those are the most likely outcomes.
7:20
Speaker 2: But if you're talking about poorer countries that simply can't
7:23
Speaker 2: afford to pay for this oil and don't have significant
7:27
Speaker 2: supplies set aside, you're very likely going to see shortages
7:31
Speaker 2: in those countries that develop in the next couple of weeks.
7:34
Speaker 2: And that does have the potential to impact the global
7:37
Speaker 2: economy in a number of ways.
7:39
Speaker 3: If you are you.
7:41
Speaker 2: Know, again like pull out you know, poor country that
7:44
Speaker 2: still has you know, a manufacturing base, Pakistan or Thailand,
7:49
Speaker 2: they don't have, you know, significant strategic oil reserves. They
7:53
Speaker 2: may not be able to afford to buy the oil
7:56
Speaker 2: that is being released or the finished products that are
7:59
Speaker 2: being released on the form of you know, diesel or
8:01
Speaker 2: jet fuel or gasoline from you know, this reserve. Once
8:06
Speaker 2: it's it's all said and done here. So there are
8:09
Speaker 2: again in the short term, going to be some shortages
8:11
Speaker 2: that pop up worldwide, just because if you have ten
8:14
Speaker 2: million barrels a day, twenty million barrels a day, that's
8:16
Speaker 2: not you know, not being able to be delivered. Ultimately,
8:21
Speaker 2: there's one way that that goes, and that is okay,
8:23
Speaker 2: demand has to move downward to adjust to where supply is,
8:26
Speaker 2: and that means that certain services cannot be provided because
8:32
Speaker 2: of the difference. That's probably not going to be happening
8:35
Speaker 2: in the US because we'll be willing to pay more
8:37
Speaker 2: for oil, either in the form of producing it here
8:40
Speaker 2: or buying it from somewhere else than other countries that
8:43
Speaker 2: don't have the vast wealth that we do would be
8:46
Speaker 2: able to. So worldwide shortages likely going to be a thing.
8:50
Speaker 2: The duration and magnitude up for question. In the United States,
8:54
Speaker 2: I don't think that's where you're getting. But remember, even
8:58
Speaker 2: if you get a resolution today, which as of our
9:01
Speaker 2: speaking we don't have, but again, the situation's very fluid.
9:04
Speaker 3: Really could change by the hour, it can change by
9:06
Speaker 3: the minute.
9:06
Speaker 2: And we'll get into what happened yesterday, because yesterday was
9:09
Speaker 2: the most insane like hour of oil trading that I've
9:14
Speaker 2: ever seen, even more so than Monday when the moves
9:16
Speaker 2: were bigger, but you were gonna say.
9:17
Speaker 5: Yeah, And just moments ago, President Trump spoke to Axios saying,
9:23
Speaker 5: anytime I want it to end, it will end. There's
9:25
Speaker 5: practically nothing left to target.
9:28
Speaker 2: Which again, just on that the price of crew dropped
9:31
Speaker 2: three percent and then went back up three percent five
9:34
Speaker 2: minutes later. So like the markets are still trying to
9:38
Speaker 2: like suss out what's going on here. And again, as
9:42
Speaker 2: of best case scenario for like oil production and energy
9:46
Speaker 2: production is, hey, if the thing ends today, it still
9:49
Speaker 2: is going to be you know, a couple months before
9:52
Speaker 2: you're back up to full speed at the very least.
9:55
Speaker 2: And again, as of this moment, things haven't ended today.
10:00
Speaker 2: There are paths where, hey, if Iran is actually you know,
10:03
Speaker 2: mining the straight of horror moves and if you know,
10:06
Speaker 2: you actually have this continue on, where you know, the
10:09
Speaker 2: you know, iron says, Okay, you might be done, but
10:11
Speaker 2: we're not.
10:11
Speaker 4: That that's the question I just was gonna go to.
10:13
Speaker 4: Like you can say it's over, but it's until the
10:16
Speaker 4: straight opens up. It's not over from an energy production
10:19
Speaker 4: an energy transportation.
10:20
Speaker 2: Stand And look, Iran might be still, you know, looking
10:22
Speaker 2: for an off ramp, and they might be saying, okay,
10:24
Speaker 2: like we want to be done with this too. But
10:26
Speaker 2: what if they're not, like, yeah, I don't know, I
10:28
Speaker 2: don't have any insight into that. And so like there
10:31
Speaker 2: are paths where if this continues for like three or
10:33
Speaker 2: four months, things get pretty hair. And remember we're talking
10:37
Speaker 2: about a release of oil here from these sprs. There's
10:41
Speaker 2: all kinds of other stuff that goes through this straight
10:43
Speaker 2: of horror moves too. You've got LNG, which you know
10:46
Speaker 2: you don't have, you know, big excess supplies that you
10:48
Speaker 2: can tap into in a lot of these Asian countries
10:51
Speaker 2: that rely on it for a portion of their power.
10:53
Speaker 3: You're talking about fertilizer, you're talking about.
10:55
Speaker 2: Aluminum copper, like all kinds of global trade. Yeah, it's
10:59
Speaker 2: it's all kinds raw materials. And this is something where okay,
11:04
Speaker 2: you're gonna have to navigate what this looks like. You know,
11:07
Speaker 2: the longer this goes on so we'll see what happens here.
11:09
Speaker 2: But again, this is kind of the lay of the
11:12
Speaker 2: land right now. Let's take a quick break. When we
11:14
Speaker 2: come back, we have to talk about just the most
11:17
Speaker 2: insane hour of trading that I've ever seen in energy markets,
11:21
Speaker 2: even more so than the thirty plus percent move that
11:25
Speaker 2: we saw on Monday and energy markets.
11:27
Speaker 3: We'll talk about that right after this.
11:30
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12:37
Speaker 2: So yesterday I was just again one of the most
12:44
Speaker 2: insane days.
12:47
Speaker 3: Of oil trading I get. I mean, like more than
12:52
Speaker 3: the negative in April twenty twenty.
12:54
Speaker 2: Yes, like oil going negative last year or sorry five
12:58
Speaker 2: years ago, six years ago.
12:59
Speaker 3: Now, wow, that happened fast.
13:00
Speaker 2: Yeah, oil going negative six years ago was something where
13:02
Speaker 2: you're like, wow, I never seen that before.
13:05
Speaker 3: But it was also.
13:06
Speaker 2: Entirely like predictable and that hey you had like the
13:09
Speaker 2: taps turned on and there was again oil going negative
13:12
Speaker 2: basically told you there's nowhere to store this. Someone will
13:17
Speaker 2: pay you to take barrels of oil and put him
13:19
Speaker 2: in a swimming pool somewhere, which would have been great.
13:21
Speaker 2: If if if I could have built my own strategic
13:23
Speaker 2: reserve then in order to navigate this, it would.
13:26
Speaker 3: Have been great.
13:26
Speaker 2: I would have had to you know, also, you know,
13:29
Speaker 2: build a refinery on the premises and things like that,
13:31
Speaker 2: which you know, I'm told refineries are big and smelly,
13:33
Speaker 2: which is not me, but neither here nor there in
13:37
Speaker 2: any case.
13:38
Speaker 3: So here's what we had yesterday.
13:40
Speaker 2: It was mid afternoon, I want to say, around one
13:43
Speaker 2: thirty or so, and the Energy Secretary, Chris Wright, put
13:48
Speaker 2: up a post on X that said, quote, the US
13:51
Speaker 2: Navy successfully escorted an oil tanker through the Strait of
13:53
Speaker 2: Hormones to ensure oil remains flowing to global markets. Oil
13:58
Speaker 2: immediately dropped about fifty teen percent, and then twenty minutes
14:03
Speaker 2: later the post was deleted and everyone kind of sussed out,
14:08
Speaker 2: and there was then a CBS report from their chief
14:12
Speaker 2: I think Pentagon correspondent who said the Pentagon has indicated
14:17
Speaker 2: that this did not actually happen in so many words,
14:21
Speaker 2: and so oil recovered all of those losses, and then
14:26
Speaker 2: about ten minutes later, CBS comes out with another report
14:29
Speaker 2: saying US intelligence has indicated that Iran may be making
14:33
Speaker 2: preparations to mine the Strait of Hormuz, and oil went
14:37
Speaker 2: even higher then. So it was just like an hour
14:39
Speaker 2: and a half period where things were absolutely nuts. So
14:44
Speaker 2: deciphering what's going on here, there's one of two possibilities.
14:48
Speaker 2: The first is that something got lost in a game
14:50
Speaker 2: of telephone, and the Energy Secretary and his staffers mistakenly
14:55
Speaker 2: posted something that wasn't true.
14:57
Speaker 3: That's one possibility. The other pos disability is that the.
15:01
Speaker 2: Energy Secretary was just lying yeah, which is not great
15:06
Speaker 2: because here's the thing that you need in these markets
15:08
Speaker 2: for uh commodity, like basically any type of commodity pricing
15:14
Speaker 2: action to occur, is you need trust that the news
15:17
Speaker 2: is going to be true. Otherwise what ends up happening
15:21
Speaker 2: is the opposite of what any politician wants, which is
15:25
Speaker 2: if traders, and I'm saying traders not like me, I'm
15:30
Speaker 2: saying like actual commodity traders who need to buy this
15:33
Speaker 2: stuff if they can't trust where the news is. They say, Okay,
15:36
Speaker 2: there's uncertainty that I have to price into this. We're
15:39
Speaker 2: only going to sell at higher prices because we can't
15:44
Speaker 2: trust that the lower price news is actually real, creating
15:46
Speaker 2: more volatility in them correct and higher prices. So I
15:51
Speaker 2: don't know what actually happened yesterday. I do know it's
15:54
Speaker 2: a bad look because it's either hey, like we report,
15:57
Speaker 2: like not we reported, But it's either the secretary said
16:00
Speaker 2: something that just like wasn't true, which was like something
16:03
Speaker 2: that was a lie or they heard it wrong, in
16:06
Speaker 2: which case they didn't do any verification. And that's not
16:08
Speaker 2: good either.
16:09
Speaker 4: I have to get clearance to theoretically post something on LinkedIn,
16:12
Speaker 4: but the Energy Secretary could post something out there to
16:15
Speaker 4: the market and just be inaccurate on like the compliance
16:20
Speaker 4: standards of a regular advisor versus someone who has this
16:23
Speaker 4: government position.
16:24
Speaker 3: It's crazy. How does this happen?
16:27
Speaker 2: The other piece, Did either of you see the actual
16:30
Speaker 2: post while it was up?
16:31
Speaker 3: I did.
16:31
Speaker 5: I was in the car when it happened.
16:33
Speaker 2: So I saw it because I was again at times
16:36
Speaker 2: like this when you're a big nerd, you're sitting in
16:39
Speaker 2: front of your computer all the time, refreshing the Twitter feed,
16:42
Speaker 2: like what the heck's going on, What the heck's going on,
16:44
Speaker 2: what the Heck's going on? And so I saw like
16:47
Speaker 2: the news thing come across, and I'm like, okay, Like
16:49
Speaker 2: I got to go to his Twitter page and I
16:52
Speaker 2: pull it up and it's not just like a written thing.
16:55
Speaker 2: It's not just hey, this is what happened. It's a
16:58
Speaker 2: video completely with a picture like of a tanker that's
17:02
Speaker 2: moving on some ocean somewhere.
17:04
Speaker 3: Oh, I didn't know that.
17:05
Speaker 2: No, it was a video of him also like talking
17:08
Speaker 2: and saying this. It wasn't just text, it was a
17:11
Speaker 2: whole video, and so you're like, oh, that must be
17:14
Speaker 2: the tanker that sailed through, which feels an awful lot
17:17
Speaker 2: like the time that the guys at Nicola tried to
17:20
Speaker 2: push a truck downhill to say that it was, you know,
17:22
Speaker 2: operating on electric power. So again, this wasn't just like
17:26
Speaker 2: an off the cuff remark on Twitter, like, this was
17:29
Speaker 2: a prepared remark. And so it really doesn't feel great
17:34
Speaker 2: when you can't tell if the US Energy Secretary what
17:38
Speaker 2: they're tweeting out is real or not, because that's where
17:43
Speaker 2: we like got to yesterday, right, and it's pretty gnarly
17:47
Speaker 2: that that's where we are at this point. So again,
17:51
Speaker 2: just kind of wild stuff. Big thing I come back
17:54
Speaker 2: to on all of this, like nobody knows anything. You
17:58
Speaker 2: got to take a lot of these reports with grains
18:01
Speaker 2: of salt, either in terms of like good news or
18:04
Speaker 2: bad news. The CBS report that you know, Iran, you know,
18:07
Speaker 2: we've US intelligence services have detected that Iran may be
18:12
Speaker 2: making preparations to mine the straight I saw some you
18:16
Speaker 2: know reporting then went after like oh, Iran's minding the straits, Like, no,
18:19
Speaker 2: that's not what the CBS report said. It said they're
18:22
Speaker 2: making preparations. That might mean they're loading minds onto boats.
18:26
Speaker 2: It might mean that, like we've you know, seen like
18:30
Speaker 2: a bunch of minds like that they're carrying around like
18:33
Speaker 2: on their backs, Like hey, like we're gonna we have
18:37
Speaker 2: we have no idea because you and I don't have
18:39
Speaker 2: access to the actual intelligence. So, as I've been saying
18:42
Speaker 2: through this entire thing, like, don't get too excited either
18:46
Speaker 2: way by like one news report, because things are very
18:51
Speaker 2: fluid pun intended, and they can change from minute to
18:57
Speaker 2: minute right now in terms of what's actually happening, So
19:02
Speaker 2: take it slow, like you don't have to be the
19:04
Speaker 2: first to spread this rumor or that one.
19:07
Speaker 3: And we can see how.
19:08
Speaker 2: Things develop, because yesterday afternoon was just nutty, and like
19:16
Speaker 2: we'll see where things go from here.
19:19
Speaker 3: Let's take a.
19:19
Speaker 2: Quick break when we return. Todd Latsky from Christian Dolan
19:23
Speaker 2: joins us for us. Todd and we've also got Wall
19:25
Speaker 2: Street watch right after this.
19:40
Speaker 1: Like us on Facebook and follow us on Twitter at
19:43
Speaker 1: TFE show. Breaking business news is always first right here
19:47
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19:52
Speaker 1: Street Watch tracking the stocks, theodato, and the headlines driving
19:56
Speaker 1: markets so far today right here on the Financial Exchange.
20:00
Speaker 5: Well after another while day on Wall Street where traders
20:02
Speaker 5: witnessed a frenzy on the price of oil, Marcus today
20:05
Speaker 5: are mixed. Right now. The Dow is down two thirds
20:10
Speaker 5: of a percent, or three hundred and seventeen points, SMP
20:13
Speaker 5: five hundred is down a quarter of a percent, Nasdaq
20:16
Speaker 5: is edging eleven points higher, mostly flat, Russe the two
20:19
Speaker 5: thousand flat as well Tenure treasreeled is up six basis
20:24
Speaker 5: points at four point one nine eight percent, and crude
20:29
Speaker 5: oil is up three percent higher today, trading right around
20:32
Speaker 5: eighty six dollars a barrel. This comes after the International
20:35
Speaker 5: Energy Agency agreed to tap four hundred million barrels of oil,
20:40
Speaker 5: marking its largest ever release. Meanwhile, Oracle shares are rallying
20:44
Speaker 5: twelve percent after the cloud computing company raised its fiscal
20:48
Speaker 5: twenty seven revenue forecast, citing strong demand for AI and
20:52
Speaker 5: cloud computing. Sticking with tech, We're in Vidia announced this
20:56
Speaker 5: morning you will invest in AI cloud company. Nebulus groups
20:59
Speaker 5: sending shares and Nebutus jumping sixteen percent, while in video
21:02
Speaker 5: stock is rising by one percent. Elsewhere, food company Campbell's
21:07
Speaker 5: cut its outlook as weak demand for its snacks dragged
21:10
Speaker 5: sales shares and Campbell's are sinking over eight percent. Nike
21:14
Speaker 5: shares are edging higher after Barclays upgraded the athletic ware
21:17
Speaker 5: maker to overweight. Incentas agreed to buy uniform supplier Uniforse
21:22
Speaker 5: and a five and a half billion dollar deal. Uniforse
21:25
Speaker 5: shares are climbing by eight percent, while Sentas is up
21:29
Speaker 5: by two percent. I am Tucker Silva and that is
21:34
Speaker 5: Wall Street Watch.
21:35
Speaker 1: This is Ask Todd on the Financial Exchange Radio Network.
21:39
Speaker 1: If you have an existing estate plan or in the
21:41
Speaker 1: market for one, Todd Letsky is here to answer your
21:44
Speaker 1: questions and help you plan for later life. Ask Todd
21:47
Speaker 1: is presented by Cushing and Dolan, serving Massachusetts and New
21:50
Speaker 1: England for more than thirty five years, helping families with
21:53
Speaker 1: a state and tax planning, Medicaid planning, and probate law.
21:57
Speaker 1: Visit Cushingdolan dot com Now to Busky.
22:03
Speaker 2: As promised, We're now joined by Todd Lutsky from the
22:06
Speaker 2: law firm of Cushing and Dolan for Ask todda da
22:09
Speaker 2: da da da da da da. This is your chance
22:12
Speaker 2: to ask Todd your estate planning questions live on air
22:15
Speaker 2: right now. Phone lines wide open for you. We only
22:19
Speaker 2: usually have room for two to three questions, so get
22:22
Speaker 2: calling early and off and at eight eight eight to
22:25
Speaker 2: zero five two two six three. That number again is
22:29
Speaker 2: eight eight eight to zero five two two six three,
22:32
Speaker 2: So you can ask Todd your estate planning questions live
22:36
Speaker 2: on air right now again eight eight eight to zero
22:40
Speaker 2: five two two six three. Mister Lutsky, how are you
22:44
Speaker 2: doing today?
22:45
Speaker 6: I am never better and and and you I'm good.
22:48
Speaker 6: I took advantage of the warm weather yesterday. Oh yeah,
22:52
Speaker 6: I got a couple of croissants.
22:54
Speaker 3: Oh yeah, And I was out in the park and
22:56
Speaker 3: I had an extra and so I was feeding it
22:57
Speaker 3: to a couple of pigeons.
22:58
Speaker 1: Yeah.
22:59
Speaker 3: Turns out that I fill two birds with ones going.
23:01
Speaker 3: Oh yes, that's good. Yeah, not bad.
23:04
Speaker 2: Todd want to talk to you a little bit about
23:06
Speaker 2: life estates. What is a life estate?
23:12
Speaker 3: Yeah, so it's a great way to do. What does
23:15
Speaker 3: it mean?
23:15
Speaker 6: Yeah, it's it's so important to come back to the
23:18
Speaker 6: basics and help people understand this because what life estates
23:22
Speaker 6: are so commonly used and probably more commonly misunderstood. Okay,
23:30
Speaker 6: so let's start with that one. Normally, a life estate,
23:34
Speaker 6: just by definition, is you take your property and one
23:39
Speaker 6: of the ways, one of the most common ways, I
23:41
Speaker 6: like to call it the wrong way, but it's the
23:43
Speaker 6: most common way. You take the property and you need
23:47
Speaker 6: it to your children, and you reserve you keep this
23:51
Speaker 6: little nugget of ownership called a life estate. It gives
23:55
Speaker 6: you two primary things. One, the right to live there
24:00
Speaker 6: the rest of your life, which is what you had
24:02
Speaker 6: before you set it up. But that's good you kept that. Two,
24:07
Speaker 6: it gives you the right to income. So if for
24:09
Speaker 6: whatever reason you decide to rent this property, the rental
24:14
Speaker 6: income would come directly to you. So those are really
24:17
Speaker 6: the two things that gives you a little nugget of
24:19
Speaker 6: ownership and right to income.
24:21
Speaker 2: What is the biggest downside in your opinion to using
24:27
Speaker 2: a life estate as in a state planning tool.
24:30
Speaker 6: Understand that you use the word biggest downside because there's
24:33
Speaker 6: so many and I'm glad you mentioned it that way.
24:36
Speaker 6: There's there's so many downsides to using it. I just
24:39
Speaker 6: want to throw that out there. But let me think
24:41
Speaker 6: of one when and again they're different depending on how
24:44
Speaker 6: you do them, but mostly the way most people do it,
24:47
Speaker 6: which is where they give the remainder interest to the kids.
24:51
Speaker 3: And reserve this right to live there.
24:53
Speaker 6: The biggest downside of that, I would say, is is
24:58
Speaker 6: you know your law of control, which which by itself
25:03
Speaker 6: isn't really the answer that. When I say loss of control,
25:07
Speaker 6: I mean what have you lost? You've really lost the
25:11
Speaker 6: ability to sell it and move. What if you know
25:15
Speaker 6: you did this when you're sixty five, Now you're seventy five.
25:18
Speaker 6: You want to move to Florida. It's nice and warm,
25:20
Speaker 6: and I want to sell my house.
25:22
Speaker 3: Why can't you do that? Yeah?
25:23
Speaker 6: Well, who how am I going to sell it?
25:25
Speaker 7: Well?
25:25
Speaker 6: I need two signatures now, and maybe more. What if
25:27
Speaker 6: I have three children and I put three kids' names
25:30
Speaker 6: on the deed and I reserve the right to live there? Now,
25:33
Speaker 6: I need four signatures mine and all three kids.
25:37
Speaker 3: Why?
25:37
Speaker 6: Because they own a large portion of the house. I
25:41
Speaker 6: own a little piece. So I don't know if all
25:44
Speaker 6: three kids want to sign, and even if they don't,
25:47
Speaker 6: it's hard for you to force them to. You can't Well,
25:49
Speaker 6: I guess you could file a petition to partition the property.
25:52
Speaker 6: And force the sale. But if you did, that doesn't
25:56
Speaker 6: really help you because where does the majority of the
25:58
Speaker 6: money go to the kids, And now you don't have
26:02
Speaker 6: the money that you want to buy your new house
26:05
Speaker 6: in Florida. Wow, this is like a rabbit hole that
26:09
Speaker 6: just keeps getting deeper, right, and so now you got
26:13
Speaker 6: to hope that they give you money back. I don't
26:18
Speaker 6: like all this permission nonsense, So folks that just just
26:20
Speaker 6: be careful with them.
26:23
Speaker 2: It would it also be a risk in that if
26:27
Speaker 2: anything happened that drew legal liability while that money was
26:30
Speaker 2: in their possession, like that might not even be able
26:32
Speaker 2: to come back to you even if.
26:34
Speaker 3: They wanted to.
26:35
Speaker 6: Well, I think the one issue is you know when
26:37
Speaker 6: you when you do that, yes, you are exposing it
26:39
Speaker 6: to the kids creditors, and now they can't credit. Like
26:41
Speaker 6: what if there's a divorce that starts while they have it.
26:43
Speaker 6: That's a very big creditor. So yeah, exactly, I think
26:47
Speaker 6: you you run into the problem of this this property.
26:50
Speaker 6: You know, they can't move against the life tenant at least,
26:52
Speaker 6: so that's good. But nevertheless, as you said, Chuck, it's
26:56
Speaker 6: going to result in having a division in the in
26:58
Speaker 6: the divorce.
27:00
Speaker 2: Take a quick break here. We still have a little
27:01
Speaker 2: bit of room on the phone lines at eight eight
27:03
Speaker 2: eight to zero five two two six three. But when
27:06
Speaker 2: we come back, we're gonna get right to your questions
27:09
Speaker 2: with Todd again. That phone number is eight eight eight
27:12
Speaker 2: to zero five two two six three. Your questions when
27:16
Speaker 2: we return.
27:17
Speaker 1: Ask Todd with Todd Lutsky every Wednesday at ten thirty
27:21
Speaker 1: only here on the Financial Exchange Radio Network. You're listening
27:27
Speaker 1: to Ask Todd with Todd Lutsky on the Financial Exchange
27:31
Speaker 1: Radio Network.
27:39
Speaker 2: Still a bit of room on the phone lines for
27:41
Speaker 2: your estate planning questions at eight eight eight to zero
27:45
Speaker 2: five two two six three. That is the number to
27:48
Speaker 2: call to ask Todd Lutsky your estate planning questions, live
27:52
Speaker 2: on air right now eight eight eight to zero five
27:56
Speaker 2: two two six three. Again it is eight eight eight
28:00
Speaker 2: zero five two two six three. Let's go to Fred
28:03
Speaker 2: in Framingham. Fred, what is your question for Todd Lutsky?
28:07
Speaker 7: Oh? Hi, thank you.
28:09
Speaker 8: I think this is a common question, or at least
28:11
Speaker 8: many people would have it, and I never hear it
28:13
Speaker 8: addressed really by anyone. Okay, I have a lot of
28:17
Speaker 8: assets in my IRA account, huh and I'm wondering if
28:21
Speaker 8: there's a tax efficient way to protect them in terms
28:25
Speaker 8: of medicaid.
28:26
Speaker 7: Ah.
28:27
Speaker 6: That's the reason it's not addressed is there's not a
28:30
Speaker 6: lot to do, right, so, but but I think it's
28:32
Speaker 6: a it's a great question. It's often asked and it's
28:35
Speaker 6: not addressed again because there's not a lot of options.
28:37
Speaker 6: But there's a few. Well, really there's one. So let
28:41
Speaker 6: me tell you first and foremost. We talk a lot
28:43
Speaker 6: about setting up irrevocable trusts to protect other assets. I
28:49
Speaker 6: got your FRED, that's not my IRA. Why can't I
28:53
Speaker 6: just put the IRA into these trusts like I do
28:57
Speaker 6: with other assets. Well, the big problem is, as we
29:00
Speaker 6: all might know, that would require us to take the
29:03
Speaker 6: money out of the IRA and put it into the trust. Well,
29:07
Speaker 6: if it comes out of the IRA, it's going to
29:10
Speaker 6: be subject to income tax. So if I got like
29:14
Speaker 6: a eight hundred thousand dollars eye run, I want to
29:16
Speaker 6: stick it in my trust, I'm going to get ready
29:19
Speaker 6: to get ready to lose forty percent of it in taxes.
29:22
Speaker 6: So what we just won't do that, and we can't
29:25
Speaker 6: do that, But what we will do is we will
29:27
Speaker 6: put everything else in the trust. Now here's where the
29:31
Speaker 6: change has come Effective twenty twenty two, the Secure Act's
29:36
Speaker 6: final version came out. The Secure Act governs IRA minimum
29:41
Speaker 6: distribution rules. Well, it also provides us this opportunity. Let's
29:48
Speaker 6: say you're married Fred and you have an IRA. If
29:52
Speaker 6: you're over seventy three, you have to reach at least
29:55
Speaker 6: seventy three, the required beginning date. But even if you haven't,
29:59
Speaker 6: you can set this up and then just change the
30:01
Speaker 6: beneficiary on your IRA. When you do get to seventy three.
30:05
Speaker 6: You create this estate plan. You put as many assets
30:09
Speaker 6: as you can into the irrevocable trust. Let those grow
30:12
Speaker 6: protected right live off your ERA, which you're going to
30:16
Speaker 6: be doing anyway. It's outside the trust, so it comes
30:18
Speaker 6: down over time. But if you happen to die and
30:22
Speaker 6: never go to the nursing home, if you've named your
30:26
Speaker 6: estate the beneficiary of your IRA, you can name your
30:30
Speaker 6: estate the beneficiary at seventy three. But if you're going
30:34
Speaker 6: to do that, when you're doing your estate plan, you
30:36
Speaker 6: must have a testamentary trust fancy word for a will
30:41
Speaker 6: built into the trust. Right, I'm sorry, a trust built
30:45
Speaker 6: into the will. And so you build your trust inside
30:49
Speaker 6: your will, name the estate the beneficiary, and then when
30:52
Speaker 6: you die, if you're seventy three or over and have
30:56
Speaker 6: never gone to a nursing home, which again we all
30:59
Speaker 6: kind of want that. So you're given yourself at least
31:01
Speaker 6: a fifty percent chance of saving this asset, but you
31:05
Speaker 6: have a spouse. Instead of naming the spouse, the money
31:08
Speaker 6: goes through probate. Yeah, I get it, one bad thing,
31:11
Speaker 6: but it's only one asset. Now it's stuck in this
31:15
Speaker 6: testamentary trust for the benefit of your wife. It'll be
31:18
Speaker 6: sheltered for state taxes. It'll be completely available to your
31:22
Speaker 6: wife both income and principle. There's no adverse income tax
31:26
Speaker 6: consequence to it. And if your wife gets sick the
31:29
Speaker 6: next day, no five year waiting period, it's immediately protected
31:33
Speaker 6: from the nursing home. Definitely worth exploring that option. It's
31:37
Speaker 6: the only way to at least give yourself a shot
31:40
Speaker 6: at protecting an IRA from the cost of long term care. Folks,
31:46
Speaker 6: I know that was a little complicated, but I want
31:49
Speaker 6: to spend a minute talking to you about our life
31:52
Speaker 6: estate situation, like Chuck was talking about earlier. Again, so
31:56
Speaker 6: many people have these, so many people misunderstand them. If
32:00
Speaker 6: you don't have If you have one, you should get
32:02
Speaker 6: the guide to learn what you have. If you don't
32:04
Speaker 6: have one, get it before you get one. And if
32:06
Speaker 6: you have one, you might figure out a way to
32:08
Speaker 6: get out of it. This guide gives you the three
32:13
Speaker 6: times that I would do a life estate. It gives
32:16
Speaker 6: you all the gift tax, income tax consequences associated with them,
32:21
Speaker 6: the selling of the property, the buying of another property
32:24
Speaker 6: once you have a life estate. It explains the creditor issues.
32:28
Speaker 6: It explains the few benefits that exist as well. I
32:30
Speaker 6: don't want to say there are no benefits to life estates.
32:33
Speaker 6: There are Call and get it eight six six eight
32:37
Speaker 6: four eight five six nine nine or Legal Exchange Show
32:41
Speaker 6: dot com again eight six six eight four eight five
32:44
Speaker 6: six nine nine or Legal Exchange Show dot com. And
32:48
Speaker 6: always go to our Instagram page Cushing Dolan PC for
32:51
Speaker 6: lots more information.
32:53
Speaker 2: Todd, I got another one here for you. Let's go
32:55
Speaker 2: to Carl in Plainville. Carl, what is your question for Todd?
33:00
Speaker 7: Hey, thanks for taking my call.
33:02
Speaker 8: Sure just get a quick question. I mean my sister, my.
33:05
Speaker 7: Mother's house is in an evocable trust in Ingham. Okay,
33:08
Speaker 7: it needs a lot of work, so she having a
33:12
Speaker 7: slight case of dementia. So can the house be sold
33:15
Speaker 7: by another house or as soon as you sell the house,
33:17
Speaker 7: does that become unprotected?
33:19
Speaker 4: Yeah?
33:19
Speaker 6: No, great question. The answer is I haven't read your trust,
33:22
Speaker 6: so I don't know all the answers, but I will
33:24
Speaker 6: answer it based on the way we drafted at Cushing
33:27
Speaker 6: and Dolan. Okay, so we drafted as a grand tour trust.
33:31
Speaker 6: You can absolutely sell the house. So out would go
33:33
Speaker 6: the house to the buyer and would come all the
33:36
Speaker 6: money into a bank account in the name of the trust.
33:39
Speaker 6: Follow me, and so that does not reset the five
33:42
Speaker 6: year waiting period. Now you have money in the trust
33:46
Speaker 6: because it's a grand tour trust. If it was your
33:48
Speaker 6: mom's primary residence, then your mom would still be entitled
33:53
Speaker 6: to that capital gains exclusion of two point fifty if
33:57
Speaker 6: she's single. If your mom and dad are both alive,
33:59
Speaker 6: and and you'll get a five hundred thousand dollars capital
34:02
Speaker 6: gains exclusion. So selling it no adverse income tax consequence.
34:08
Speaker 6: It does not reset the five year waiting period. And
34:12
Speaker 6: now there, of course, you know you're obviously homeless, you
34:14
Speaker 6: have no house, So what am I doing? We're going
34:16
Speaker 6: to buy another house? Out goes the money incomes a
34:20
Speaker 6: new house into the trust. So you see, all we
34:24
Speaker 6: did was convert what was already in there from one
34:27
Speaker 6: item to another. And by doing that, you never reset
34:30
Speaker 6: the clock. And now your parents have a new house.
34:32
Speaker 6: In fact, they could move and live in any state
34:35
Speaker 6: they want to and still do it within this irre
34:37
Speaker 6: irrevocable trust. So hopefully that was helpful.
34:42
Speaker 2: Todd, we were talking about life estates earlier in some
34:46
Speaker 2: of the uh kind of the problems with them. What
34:50
Speaker 2: are the redeeming characteristics of life estates? Are there things
34:54
Speaker 2: that you know could make them have a place in
34:57
Speaker 2: a comprehensive estate plan.
35:00
Speaker 6: Uh? Yes, Uh, there there can be. So so you know,
35:04
Speaker 6: is there a redeeming quality? Well, yeah, you have the
35:07
Speaker 6: right to live there. It It arguably will protect the
35:10
Speaker 6: house from the nursing home after five years, even though
35:14
Speaker 6: there's a lot of control issues that you've lost with that.
35:16
Speaker 6: It will provide that and it will get you a
35:20
Speaker 6: step up in basis when you die. So it you
35:23
Speaker 6: know when you die, you even though you think you've
35:25
Speaker 6: given away the house, it's still includable in your in
35:28
Speaker 6: your estate for for a state tax purposes. And so
35:32
Speaker 6: you get a full step up in basis and eliminate
35:35
Speaker 6: the built in gain for the beneficiary. So that's you know,
35:38
Speaker 6: that's that's helpful. And so I think all of those
35:42
Speaker 6: things are are are helpful. But you know, I I
35:46
Speaker 6: and and I guess when would I do it? You know,
35:49
Speaker 6: while those things are helpful, I think the negatives would
35:52
Speaker 6: still offset doing it unless I either put it into
35:56
Speaker 6: an irrevocable trust and retain the right to live there.
36:00
Speaker 2: What's the case for doing both the era of trust
36:03
Speaker 2: plus the life estate.
36:05
Speaker 6: Well, because I don't want to give my house to
36:06
Speaker 6: my kids. That's really the issue, right if I have to,
36:09
Speaker 6: if I have to take the house and give it
36:11
Speaker 6: to the kids, versus take the house and put it
36:13
Speaker 6: in an irrevocable medicaid trust and retain the right to
36:15
Speaker 6: live there, huge difference. I keep a lot more control
36:19
Speaker 6: over it. So that's an essence, you know why I
36:22
Speaker 6: would do it that way. And even to this last caller, right,
36:25
Speaker 6: even if you had the life estate and the remainder
36:28
Speaker 6: interest was in the trust, this caller that you could
36:32
Speaker 6: still do this. You could still sell the house. Just
36:34
Speaker 6: like we told the caller, they should do a large
36:37
Speaker 6: portion of the money would go into the trust, not
36:39
Speaker 6: to the kids, and mom would get a little piece
36:42
Speaker 6: and you could buy another house, you know, with the
36:45
Speaker 6: money that's in the trust. The only downside again, another
36:48
Speaker 6: downside is mom would have got a little nugget of ownership, right,
36:52
Speaker 6: so she would have got a piece of the proceeds
36:54
Speaker 6: in her hands. The peace of the proceeds that come
36:57
Speaker 6: to you, re expose that to the nursing home. Mister Lutsky,
37:02
Speaker 6: appreciate you joining us as always, always a pleasure. Thank you.
37:06
Speaker 1: This has been asked Todd on the Financial Exchange Radio network.
37:09
Speaker 1: Ask Todd with Todd. Lutsky has been presented by Cushing
37:12
Speaker 1: and Dolan, serving Massachusetts and New England for more than
37:15
Speaker 1: thirty years, helping families with the state and tax planning,
37:18
Speaker 1: Medicaid planning, and probate law. Call eight hundred three nine
37:21
Speaker 1: three four thousand and one or visit Cushingdolan dot com.
37:24
Speaker 1: The views expressed in this segment are solely those of
37:26
Speaker 1: Cushing and Dolan. Armstrong Advisory does not provide any legal
37:29
Speaker 1: or tax advice. Please consult with your legal or tax
37:31
Speaker 1: advisor on such matters. Cushing and Armstrong do not endorse
37:33
Speaker 1: each other and are not affiliated