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Fed Decision Could Define the Next Era for Bonds · The Financial Exchange Show

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  Speaker 1: This is the Financial Exchange with Chuck Zada and Mark Vandetti.
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  Speaker 2: It's Chuck, Mark, and Tucker with you here on a
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  Speaker 2: Fed Wednesday at 2 p.m. Eastern time today. The Federal Reserve,
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  Speaker 2: led by Kevin Warsh, will announce their latest changes or
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  Speaker 2: lack of changes to interest rate policy. And so all
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  Speaker 2: eyes are on the Fed for that 2 p.m.
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  Speaker 3: Announcement.
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  Speaker 2: We are also going to be getting a summary of
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  Speaker 2: economic projections during this meeting. The SEP, commonly referred to
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  Speaker 2: as the dot plot, tells us what Fed members think inflation, growth, unemployment,
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  Speaker 2: the Fed funds rate are going to be over the
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  Speaker 2: next two years. And so it gives us a sense
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  Speaker 2: of what they are thinking about how the economy may
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  Speaker 2: evolve and how their policy response may evolve. with it.
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  Speaker 2: This is very much a direct example of forward guidance
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  Speaker 2: in terms of the Fed members being able to say,
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  Speaker 2: here is what we think policy needs to be in
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  Speaker 2: the future, not just what it is today. Remember, forward
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  Speaker 2: guidance is distinctly different from actually saying what you think
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  Speaker 2: about the economy. That is just saying what you think
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  Speaker 2: about the economy. Forward guidance refers to we are going
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  Speaker 2: to do this at a point in the future. And
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  Speaker 2: so the SEP is something that I do think potentially
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  Speaker 2: is on the chopping block for the Worsh Fed, given...
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  Speaker 2: Warsh's preference to remove forward guidance as a policy tool.
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  Speaker 2: But for today, we will get it, at least we're
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  Speaker 2: expecting it. I think it would be quite the surprise
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  Speaker 2: and quite interesting if we just didn't unexpectedly, like no announcement, just, hey,
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  Speaker 2: there's no SEP, and, you know, we're going to just
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  Speaker 2: proceed then. I do think that would be interesting. But
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  Speaker 2: this is teed up as a pretty important meeting, and... Look,
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  Speaker 2: those of you who have listened to us for a
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  Speaker 2: long time, there are some meetings where, quite honestly, like
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  Speaker 2: a week before, we say, hey, there's nothing interesting at
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  Speaker 2: this meeting, forget about it, it's not going to matter.
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  Speaker 2: This one I do think matters, not just in what
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  Speaker 2: happens at the meeting, but in terms of what is
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  Speaker 2: said after, simply because the last time that Kevin Warsh
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  Speaker 2: had a press conference after a Fed meeting in July...
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  Speaker 2: By nearly all accounts, it didn't go particularly well for him,
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  Speaker 2: and we saw a significant bond sell-off in the weeks
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  Speaker 2: to follow.
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  Speaker 4: Yeah, we've got a new philosophy that's working itself out
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  Speaker 4: in real time, Warsh's philosophy. We know he's a hawk,
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  Speaker 4: by which I mean he puts more weight on the
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  Speaker 4: Fed's price stability.
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  Speaker 2: We know he talks like a hawk.
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  Speaker 4: He does.
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  Speaker 2: We don't know that he's actually a hawk.
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  Speaker 4: I feel like, based on his public statements over the
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  Speaker 4: last couple of decades, he is one, but he's probably conflicted. Well,
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  Speaker 4: you might be right.
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  Speaker 3: I don't know the guy.
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  Speaker 4: I'd be deeply disappointed if he wasn't, obviously, because I'm
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  Speaker 4: emotionally invested in him being a hawk. A hawk, just generically,
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  Speaker 4: because you hear the term a lot, but to define
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  Speaker 4: it in this context, and obviously it's taken from foreign policy,
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  Speaker 4: but when applied to monetary policy, it means a policymaker
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  Speaker 4: who puts more weight on the inflation part of the
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  Speaker 4: Fed's so-called dual mandate than on the unemployment part. For them,
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  Speaker 4: for a hawk, price stability is sort of paramount. And
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  Speaker 4: then the unemployment part takes care of itself, which makes
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  Speaker 4: sense if you think about it. The Fed really can't
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  Speaker 4: change the natural rate of unemployment in the long run.
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  Speaker 4: It's a function of the structure of the economy. So
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  Speaker 4: there's a good intellectual grounding behind this sort of mode
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  Speaker 4: of thinking. I think he's a hawk, but we don't
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  Speaker 4: know yet, like you said. So we've got to determine,
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  Speaker 4: are we dealing with a Volker, or are we dealing
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  Speaker 4: with a Volker's, not immediate, but the person before his
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  Speaker 4: immediate predecessor, Arthur Burns, who was not, who sort of
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  Speaker 4: blew it. That's a little bit unfair, but we don't
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  Speaker 4: have time to get into it.
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  Speaker 2: Might be unfair, but look, this is the business that
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  Speaker 2: he chose. To paraphrase, you know, not quite nailed the.
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  Speaker 4: Burns recognized it.
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  Speaker 2: If you're going to be in the big chair and
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  Speaker 2: inflation does what it did, it doesn't matter if it's
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  Speaker 2: your fault or not. You're going to get blamed for it.
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  Speaker 1: No, it's true.
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  Speaker 4: You own it. And Burns recognized it.
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  Speaker 1: He gave.
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  Speaker 4: I'm not going to get into this. Anyway, it's just
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  Speaker 4: so interesting, but nobody cares. So we got that. To
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  Speaker 4: figure out who is Kevin Walsh? What does he believe?
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  Speaker 4: We've got the operational part of it. How are they
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  Speaker 4: going to implement policy? And this is related to some
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  Speaker 4: of the innovations, one of which you mentioned, forward guidance,
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  Speaker 4: the other of which is large-scale asset purchases, otherwise known
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  Speaker 4: as QE, quantitative easing. These came out of the crisis
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  Speaker 4: of 2008, 2009, when the worry was not how do
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  Speaker 4: we get inflation under control? It was how do we
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  Speaker 4: get some inflation?
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  Speaker 2: How do we get any kind of growth going in
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  Speaker 2: the U.S.
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  Speaker 1: Economy?
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  Speaker 4: Yeah, when Fed funds is at zero, how does the
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  Speaker 4: Fed stimulate the economy? Well, you could do negative interest rates.
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  Speaker 4: Some central banks did that. You could charge money on...
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  Speaker 4: banks' reserves at the Fed. You could do large-scale asset purchases, QE,
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  Speaker 4: which Japan sort of innovated. Really, it was Bernanke's brainchild,
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  Speaker 4: and he brought it to fruition as Fed chair. You
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  Speaker 4: could use forward guidance. So these are all extraordinary. It's
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  Speaker 4: sort of like the Great Depression was the big bang
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  Speaker 4: of macroeconomics. We got fiscal policy out of it. We
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  Speaker 4: got automatic stabilizers. We got social insurance. It was a
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  Speaker 4: fruitful time, so to speak. Similarly, so was the great
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  Speaker 4: recession for monetary policy. But we're clearly, as you said,
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  Speaker 4: and I'll just wrap up with this because I've already
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  Speaker 4: talked too long. We're clearly at a turning point.
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  Speaker 2: No, we've got two hours to fill, Mark. Oh, great.
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  Speaker 4: Yeah. We're clearly at a turning point in monetary policy.
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  Speaker 1: And in U.S.
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  Speaker 4: Economic history, too, you've got in the backdrop of all this,
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  Speaker 4: this great populist tide of tariffs and other sort of
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  Speaker 4: hostile economic policies being pursued. And that's going to continue
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  Speaker 4: no matter who the next president is, probably. So we're
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  Speaker 4: at sort of a turning point in U.S. economic history.
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  Speaker 4: I don't think you can understate that.
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  Speaker 1: No.
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  Speaker 2: And look, even just, you know, when we talk about
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  Speaker 2: that turning point, you've got, you know, large deficits that
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  Speaker 2: are being run. You've got Social Security coming to a
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  Speaker 2: head in the next six years as far as the
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  Speaker 2: funding for that. Like, There are all these convergences that
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  Speaker 2: are happening that make the next five to ten years,
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  Speaker 2: I think, one of the more consequential time periods for
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  Speaker 2: not like just what happens in the economy then, because honestly,
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  Speaker 2: we're going to have to live through whatever that is,
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  Speaker 2: but in terms of, hey, we've seen this century of
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  Speaker 2: tremendous American economic growth where America became... the leader of
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  Speaker 2: the world from an economic perspective. People forget that before
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  Speaker 2: World War I, the American economy wasn't anything to write
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  Speaker 2: home about. It's not to say that it was inherently
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  Speaker 2: bad or anything, but it didn't distinguish itself in any
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  Speaker 2: meaningful way.
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  Speaker 4: Many advanced economies.
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  Speaker 2: Correct.
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  Speaker 4: Not first among equals.
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  Speaker 2: It did not distinguish itself in any particular way. World
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  Speaker 2: War I, and again, if you actually want to talk about, like,
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  Speaker 2: where the foundation for the 20th century U.S. economy came from,
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  Speaker 2: it was basically from the U.S. financing the European war
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  Speaker 2: effort in World War I.
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  Speaker 4: Yeah, we became a net creditor.
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  Speaker 2: We became a huge creditor there. And then coming out
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  Speaker 2: of that, based on the fact that everyone was still
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  Speaker 2: on the gold standard, we had this tremendous wealth that
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  Speaker 2: we could then play with and deploy into what was
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  Speaker 2: eventually World War II. And from there, then we're able
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  Speaker 2: to set the stage as far as, hey, here are
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  Speaker 2: how the rules of the road are going to work
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  Speaker 2: for the global economy such that we are able to
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  Speaker 2: benefit from them in a number of ways. And then,
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  Speaker 2: you know, in the 1970s, as the gold standard was
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  Speaker 2: ending and you went through the Nixon shocks, you had
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  Speaker 2: the deals with the Saudis in order to then set
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  Speaker 2: the dollar kind of as the standard of exchange for
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  Speaker 2: energy in the next 50 years. And so you kind
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  Speaker 2: of see this whole path moving from what happened in
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  Speaker 2: World War I to what the last hundred years looked like.
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  Speaker 2: I think we are very much in a period now
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  Speaker 2: where the next five to ten years could define kind
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  Speaker 2: of what overall economic leadership looks like heading into the
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  Speaker 2: remainder of the 21st century.
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  Speaker 4: The way Warsh behaves, and it is singular... he is
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  Speaker 4: the big man in history right now, monetary policy history,
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  Speaker 4: because he could either blow it or stabilize things. Inflation
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  Speaker 4: is high. It's not going to spiral out of control,
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  Speaker 4: but it could remain uncomfortably high for years and years
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  Speaker 4: because of some of the forces that you mentioned, some
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  Speaker 4: of the immediate forces that we're dealing with, like the
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  Speaker 4: energy price surge and the fiscal, the danger that fiscal
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  Speaker 4: policy will dominate monetary policy over the next several years.
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  Speaker 4: How Warsh responds to that is going to be critical.
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  Speaker 2: Let's take a quick break here. When we return, we've
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  Speaker 2: got a piece in the Wall Street Journal. What comes
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  Speaker 2: next now that the 10-year Treasury yield has crossed 5%?
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  Speaker 2: We'll discuss that next.
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  Speaker 2: I think more than.
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  Speaker 2: More than anything that we get from the Fed this week,
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  Speaker 2: the piece that is most interesting to me over the
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  Speaker 2: next 18 months-ish is what happens with bonds, and specifically
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  Speaker 2: the question of hey, what is the regime that we
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  Speaker 2: are in for bonds going forward? Has the regime of
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  Speaker 2: the previous 20 years, basically, has the post-great financial crisis
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  Speaker 2: regime for bonds broken down? And that, I think, is
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  Speaker 2: the whole question here in terms of, hey, when we
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  Speaker 2: look at the metrics that are ultimately important to the
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  Speaker 2: pricing of bonds and what drives yields, the biggest thing
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  Speaker 2: that we're seeing right now is that long-term real interest
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  Speaker 2: rates are approaching cycle highs for this time period. And
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  Speaker 2: by long-term real interest rates, what I mean is if
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  Speaker 2: you take the 10-year treasury right now and you look
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  Speaker 2: at what it is yielding, you come away and you say, okay,
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  Speaker 2: the 10-year treasury is basically at 5%. If you decompose
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  Speaker 2: that into real interest rates and break even inflation expectations, basically,
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  Speaker 2: what's the composition there? And right now, we've got 10-year
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  Speaker 2: real interest rates at 2.6%.
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  Speaker 1: 2.6%.
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  Speaker 2: Now, you might be like, okay, Chuck, what does that
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  Speaker 2: actually mean? Here's what it means. is that the good
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  Speaker 2: news that we have data on this because of the
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  Speaker 2: introduction of tips back in the late 90s, we can
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  Speaker 2: very clearly see this decomposition in the 10-year treasury. The
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  Speaker 2: last time that we had the 10-year real interest rate
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  Speaker 2: at this point for any extended period of time, you've
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  Speaker 2: got to go back to like 2007 to find the
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  Speaker 2: last time that we got here, like July of 2007.
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  Speaker 2: And other than that, real interest rates on the 10
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  Speaker 2: year treasury in the post great financial crisis era have
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  Speaker 2: basically been between negative one and 1% for that entire time.
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  Speaker 2: So what this is telling you is that for the
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  Speaker 2: first time since the financial crisis, The market is pricing
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  Speaker 2: in a real rate of growth on the U.S. economy
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  Speaker 2: over the next 10 years that is in excess of 2.5%.
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  Speaker 2: I don't know if.
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  Speaker 4: I'd read it that way. Real rates could be real rates.
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  Speaker 4: And to be clear, we're talking about the tips yield here,
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  Speaker 4: not the real, real rate, which is a theoretical concept.
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  Speaker 4: So I don't want to split it too much. But
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  Speaker 4: the real, real rate. which is closely related to the
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  Speaker 4: neutral rate that the Fed tries to determine, it is
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  Speaker 4: a product of economic growth, true, but there could be.
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  Speaker 2: Forget the real, real rate for a second. How would
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  Speaker 2: you interpret what I'm seeing here?
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  Speaker 4: I'm not sure it's possible that it's due to more
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  Speaker 4: optimistic growth prospects. It's Also possible that it's due to
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  Speaker 4: people requiring more compensation to hold bonds because the balance
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  Speaker 4: of risks has shifted toward something adverse.
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  Speaker 2: Why do you think that would show up in the
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  Speaker 2: real rate instead of showing up in break-evens?
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  Speaker 4: Why would it show up in the... In which real rate?
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  Speaker 2: On the tip shield? Why would it show up? Yes.
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  Speaker 2: Why would it show up in the real rate on
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  Speaker 2: the tip shield.
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  Speaker 4: Instead of on break-evens? As opposed to the expected inflation component? Well,
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  Speaker 4: because inflation is not the only risk, I guess. It's volatility, too.
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  Speaker 4: So you need to be compensated for that.
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  Speaker 3: Okay.
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  Speaker 2: I'm not disagreeing.
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  Speaker 4: I'm saying it's probably a number of things.
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  Speaker 2: In any case, what we are seeing now are real
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  Speaker 2: interest rates that are higher than any point for the
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  Speaker 2: last 20 years. And the question to me is, is
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  Speaker 2: this sustainable or not? And really, that's like the $ 40
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  Speaker 2: trillion question. And I say $ 40 trillion for a very
• 15:52
  Speaker 2: specific reason. That's the amount of debt that the U.S.,
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  Speaker 2: That the U.S. government carries now. And most of that
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  Speaker 2: is not in, you know, 10 year and longer term treasuries.
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  Speaker 2: The vast majority of that is in shorter duration. So
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  Speaker 2: let's be clear, the U.S. is not going to have
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  Speaker 2: a problem where it's like, oh, like all their, you know,
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  Speaker 2: interest has to be like paid out. That's not what
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  Speaker 2: I'm saying. But what I am saying is that if
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  Speaker 2: you look at the way that you get to this,
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  Speaker 2: it's effectively by extrapolating out, okay, what are real rates,
• 16:24
  Speaker 2: you know, over different time periods, one year, the one
• 16:26
  Speaker 2: to two year period, you can bootstrap all the way out.
• 16:30
  Speaker 2: And where you get to is a place where across
• 16:32
  Speaker 2: the yield curve, real interest rates in terms of what
• 16:35
  Speaker 2: the US government has to pay out are basically at
• 16:38
  Speaker 2: a point where they're higher than they've been for the
• 16:39
  Speaker 2: last 20 years or so. And that makes it more
• 16:42
  Speaker 2: and more challenging for the U.S. government to service that debt,
• 16:46
  Speaker 2: which is what leads to the question of, hey, if
• 16:48
  Speaker 2: this is actually a regime in bond yields that has
• 16:53
  Speaker 2: higher rates for a longer time period, it has major
• 16:57
  Speaker 2: implications for what needs to happen to the U.S. system
• 17:00
  Speaker 2: fiscally in order to be able to cover this. Because
• 17:03
  Speaker 2: the way things are currently set up, it will absolutely
• 17:06
  Speaker 2: either crowd out all other spending or... annual deficits are
• 17:10
  Speaker 2: going to have to continue to grow in order to
• 17:12
  Speaker 2: cover the cost of it, which can become a self-fulfilling
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  Speaker 2: cycle where then rates have to move higher in order
• 17:18
  Speaker 2: to cover that. And so now you end up with
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  Speaker 2: this spiraling in a way that gets uncomfortable, potentially.
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  Speaker 4: Yeah, the shorthand for that is if when R is
• 17:27
  Speaker 4: greater than G, R being the real rate that you
• 17:29
  Speaker 4: pay on your debt, and G being the real potential
• 17:34
  Speaker 4: GDP growth rate. It's a little technical, but you'll get it.
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  Speaker 4: Not you, but anybody listening who doesn't necessarily do this
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  Speaker 4: for a living. When R is greater than G, your
• 17:42
  Speaker 4: debt is growing faster than the economy's growing.
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  Speaker 2: The way to phrase it that I think a lot
• 17:48
  Speaker 2: of people would understand is, hey, if you've got $ 10, 000
• 17:51
  Speaker 2: on a credit card that you're paying 20% interest on,
• 17:55
  Speaker 2: and that's growing by $ 1, 000 a year, okay, if your
• 17:59
  Speaker 2: income isn't keeping up with that, then your credit card
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  Speaker 2: balance is going to continue to grow to the point
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  Speaker 2: where it cuts off your other spending, basically. Not quite
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  Speaker 2: the same for a government that can print its own money,
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  Speaker 2: but that's the general concept.
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  Speaker 4: The main upshot of that R & G framework is
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  Speaker 4: that it's not sustainable because debt eventually becomes quite large
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  Speaker 4: relative to the size of the economy. Most people know
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  Speaker 4: that debt owned by the public is now about 100%
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  Speaker 4: of GDP. How much higher can it go? Nobody really knows,
• 18:32
  Speaker 4: but most people think at some point it's going to
• 18:35
  Speaker 4: be a drag-on growth.
• 18:36
  Speaker 2: Tucker sent over a text message that we got. Again,
• 18:40
  Speaker 2: you can text us at 617-362-1385 as it relates to
• 18:43
  Speaker 2: the Fed meeting. Would a 50 basis point rate increase
• 18:47
  Speaker 2: today be too much? No, I think the U.S. economy
• 18:50
  Speaker 2: is strong enough to weather.
• 18:52
  Speaker 4: Rate hikes here. What do you think it needs to
• 18:55
  Speaker 4: get to to be neutral?
• 18:57
  Speaker 2: If I were Kevin Warsh, which I'm thankful each and
• 19:02
  Speaker 2: every day that I'm not.
• 19:03
  Speaker 6: Yes.
• 19:04
  Speaker 2: But if I were Kevin Warsh, and it's not a
• 19:06
  Speaker 2: Kevin Warsh thing, I was thankful each and every day
• 19:08
  Speaker 2: I wasn't Jay Powell either. If I were the Fed
• 19:10
  Speaker 2: chair today, hike interest rates 1% and call it a day.
• 19:15
  Speaker 2: The U.S. economy is strong enough to deal with it.
• 19:18
  Speaker 2: It would send a strong message that you're not going
• 19:19
  Speaker 2: to tolerate inflation, and things will be absolutely fine 6
• 19:23
  Speaker 2: to 12 months from now. They're not going to do that, obviously,
• 19:26
  Speaker 2: but it would be just fine. Quick break here. When
• 19:31
  Speaker 2: we return, we've got Wall Street Watch, and Todd Lutzky
• 19:33
  Speaker 2: joins us as well. Get your estate planning questions ready.
• 19:38
  Speaker 1: Like us on Facebook and follow us on Twitter at
• 19:41
  Speaker 1: TFE Show. Breaking business news is always first, right here
• 19:45
  Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
• 19:51
  Speaker 1: Street Watch. Tracking the stocks, the data, and the headlines
• 19:54
  Speaker 1: driving markets so far today, right here on the Financial
• 19:57
  Speaker 1: Exchange Radio Network.
• 19:59
  Speaker 5: A significant rate decision from the Fed is on the
• 20:02
  Speaker 5: way at 2 o'clock this afternoon where odds have the
• 20:05
  Speaker 5: central bank hiking rates for the first time in three
• 20:08
  Speaker 5: years by a quarter of a percentage point. Right now
• 20:11
  Speaker 5: the Dow is down about a third of a percent
• 20:14
  Speaker 5: or 152 points off. S & P 500 is up
• 20:18
  Speaker 5: over two-tenths of one percent or 16 points higher. NASDAQ
• 20:22
  Speaker 5: is climbing two-thirds of a percent or 161 points. Russell
• 20:24
  Speaker 5: 2000 is up over a third of a percent. 10-year
• 20:29
  Speaker 5: Treasury yield is down two basis points at 4.969%, and
• 20:34
  Speaker 5: crude oil down 2.5%, trading at $ 103 a barrel, Brent
• 20:39
  Speaker 5: retreating as well at $ 106. According to Reuters, SK Hynix
• 20:43
  Speaker 5: was in talks with Intel to manufacture memory chips in
• 20:46
  Speaker 5: the U.S. for the first time. However, no decisions regarding
• 20:50
  Speaker 5: a partnership have been made. Intel up by 4%, while
• 20:53
  Speaker 5: SK Hynix are up by 2%. Meanwhile, Transportation and logistics
• 20:58
  Speaker 5: company J.B. Hunt is sinking 12% after the company cautioned
• 21:02
  Speaker 5: that its earnings may decline in the third quarter between
• 21:06
  Speaker 5: 5% and 10% due to internal adjustments to account for
• 21:10
  Speaker 5: rising rates of purchased transportation. And Morgan Stanley downgraded online
• 21:15
  Speaker 5: travel company Expedia, where the bank said shares have a
• 21:19
  Speaker 5: weak risk-reward profile with greater exposure to a potentially weaker customer.
• 21:25
  Speaker 5: Expedia shares are down nearly 2%.
• 21:29
  Speaker 2: On that downgrade. I'm Tucker Silva, and that is Wall
• 21:32
  Speaker 2: Street Watch.
• 21:34
  Speaker 1: This is Ask Todd on the Financial Exchange Radio Network.
• 21:37
  Speaker 1: If you have an existing estate plan or are in
• 21:39
  Speaker 1: the market for one, Todd Lutzke is here to answer
• 21:42
  Speaker 1: your questions and help you plan for later life. Ask
• 21:45
  Speaker 1: Todd is presented by Cushing and Dolan. Serving Massachusetts and
• 21:48
  Speaker 1: New England for more than 35 years. Helping families with
• 21:51
  Speaker 1: estate and tax planning, Medicaid planning, and probate law. Visit CushingDolan.com. Now,
• 21:58
  Speaker 1: here's Todd Lutzke.
• 22:00
  Speaker 2: We've got Todd with us here for Ask Todd because
• 22:04
  Speaker 2: you get to ask Todd your estate planning questions live
• 22:07
  Speaker 2: on air. Phone lines are wide open at 888-205-2263. That's
• 22:14
  Speaker 2: the number to call to ask Todd your estate planning
• 22:16
  Speaker 2: questions right now. 888-205-2263. We can normally get through two
• 22:25
  Speaker 2: to three of your questions, so make sure you get
• 22:27
  Speaker 2: calling early and often so that you get to ask
• 22:31
  Speaker 2: Todd your estate planning questions. That number again is 888-205-2263. 205-2263.
• 22:39
  Speaker 2: One more time, it is 888-205-2263. Todd, thanks for clearing
• 22:45
  Speaker 2: your throat into the microphone. We appreciate it.
• 22:47
  Speaker 5: And don't worry about that cough button.
• 22:50
  Speaker 3: This is live radio. That's what we love.
• 22:52
  Speaker 2: Yeah, Todd snorting is just the best. Usually you pay
• 22:57
  Speaker 2: extra for that.
• 22:58
  Speaker 3: Sorry about that. I didn't know it was live.
• 23:00
  Speaker 2: Yeah, it is every time.
• 23:02
  Speaker 7: Tucker never turns my microphone on until the end.
• 23:05
  Speaker 2: I think we might keep it off for the next segment.
• 23:08
  Speaker 1: Todd.
• 23:09
  Speaker 3: How's it going? Never better, you?
• 23:11
  Speaker 2: I'm good.
• 23:12
  Speaker 3: All cleared up.
• 23:12
  Speaker 2: I was hanging out with a buddy of mine who
• 23:14
  Speaker 2: got engaged five different times, actually.
• 23:17
  Speaker 3: Five?
• 23:17
  Speaker 2: Yeah, had a lot of near misses.
• 23:19
  Speaker 3: Yeah, I'd imagine so.
• 23:20
  Speaker 2: Yeah. Todd, let's talk a little bit about what happens
• 23:25
  Speaker 2: when someone passes away. If they have not done any
• 23:29
  Speaker 2: estate planning... No planning. What does the probate and settlement
• 23:33
  Speaker 2: process look like versus if they've done trust planning... What
• 23:38
  Speaker 2: does that process look like?
• 23:40
  Speaker 7: Wow, you want to talk about polar opposites, right? I mean,
• 23:43
  Speaker 7: that's about as polar opposite as it gets. And unfortunately,
• 23:47
  Speaker 7: the no planning kind of has to be broken down
• 23:49
  Speaker 7: into two categories. One, married for the first time, not
• 23:55
  Speaker 7: five like your guy that you were hanging out with.
• 23:57
  Speaker 3: Okay. Married, first marriage, or married, second marriage. Different, right?
• 24:05
  Speaker 7: And whether or not in the second marriage you've got
• 24:06
  Speaker 7: kids married from different marriages, right? So that all can
• 24:10
  Speaker 7: make a difference because if there's no planning, right? Planning
• 24:13
  Speaker 7: is a lot easier. When there's no planning though, you're
• 24:16
  Speaker 7: looking to an intestate succession statute, which is never what
• 24:19
  Speaker 7: you expect. In other words, your assets are not going
• 24:21
  Speaker 7: to go the way you had hoped they might go
• 24:23
  Speaker 7: or thought they might go.
• 24:25
  Speaker 1: Why?
• 24:25
  Speaker 7: Because you didn't tell anybody how you wanted them to
• 24:28
  Speaker 7: go by not planning. Example, if you're married, first marriage,
• 24:33
  Speaker 7: And every state, by the way, is different. Every state
• 24:36
  Speaker 7: statute has a different nuance. So please state specific in
• 24:39
  Speaker 7: this answer. If you're married and all the kids are
• 24:43
  Speaker 7: of the same marriage and you did no planning, it's
• 24:47
  Speaker 7: very likely all assets will end up with the spouse. However,
• 24:52
  Speaker 7: if you're married second time and you have kids from
• 24:55
  Speaker 7: each marriage, then you get the spouse would get the
• 25:00
  Speaker 7: first hundred thousand dollars. and 50% of what's left. And
• 25:06
  Speaker 7: the other 50% goes to the children of the other marriage.
• 25:11
  Speaker 6: Wow.
• 25:12
  Speaker 3: Interesting. So it's not what you'd expect.
• 25:16
  Speaker 7: And so you need to be careful that, you know,
• 25:18
  Speaker 7: did you mean to disinherit your second spouse?
• 25:21
  Speaker 3: No, maybe you didn't. Right?
• 25:23
  Speaker 7: So maybe you, you know, you need to have it go.
• 25:27
  Speaker 3: You need to do some planning. Folks, Planning, way easier.
• 25:31
  Speaker 7: Oh, and I guess I should mention if you're just
• 25:33
  Speaker 7: a single person and you die, it goes to your
• 25:36
  Speaker 7: next closest next of kin.
• 25:38
  Speaker 3: Who would that be? First, they look to a spouse. None.
• 25:41
  Speaker 7: Look to kids. If there are kids, stop there. If
• 25:45
  Speaker 7: there aren't, it's going to go to parents. If there aren't,
• 25:47
  Speaker 7: it's going to go down to siblings, then nieces and nephews,
• 25:51
  Speaker 7: and on down the line. So it's kind of a
• 25:53
  Speaker 7: Plinko board effect. So keep that in mind.
• 25:57
  Speaker 3: And planning, way better.
• 26:00
  Speaker 1: Why?
• 26:00
  Speaker 3: Simple answer. Because you can leave it any way you want.
• 26:03
  Speaker 3: Just put it in writing. I don't care if it's divorce-proof, creditor-protected, outright.
• 26:07
  Speaker 3: You name it. You decide who gets what, how, and when.
• 26:11
  Speaker 2: Talking with Todd Lutzky from the law firm of Cushing
• 26:14
  Speaker 2: & Dolan. Still room on the phone lines for your
• 26:16
  Speaker 2: estate planning questions. 888-205-2263 is the number.
• 26:19
  Speaker 1: Again, 888-205-2263.
• 26:27
  Speaker 2: Let's take a quick break here. When we return, it's
• 26:31
  Speaker 2: right to your questions with Todd. That number again is 888-205-2263.
• 26:37
  Speaker 1: Ask Todd with Todd Lutzke. Every Wednesday at 1030. Only
• 26:41
  Speaker 1: here on the Financial Exchange Radio Network. Todd Lutzke answers
• 26:46
  Speaker 1: your questions about estate and elder life planning. Every Wednesday
• 26:50
  Speaker 1: at 1030. Right here on the Financial Exchange Radio Network.
• 27:06
  Speaker 2: Let's get right to your questions with Todd. First up,
• 27:09
  Speaker 2: we've got Don in Chicopee. Don, what's your question for Todd?
• 27:14
  Speaker 6: My parents had their estate planning done. What was done
• 27:19
  Speaker 6: was a power of attorney and health care proxy. I
• 27:23
  Speaker 6: was under the impression that an executor was also named
• 27:26
  Speaker 6: in there. But when I spoke to my mother, they
• 27:31
  Speaker 6: said that they decided not to do that because the
• 27:34
  Speaker 6: house was put under our sibling's name, which was not
• 27:36
  Speaker 6: a problem. But they said there was nothing else to
• 27:40
  Speaker 6: really worry about. But I was under the impression that
• 27:42
  Speaker 6: the executor was the person that takes care of their
• 27:45
  Speaker 6: closing up their estate, like doing the final taxes and
• 27:47
  Speaker 6: all that stuff.
• 27:48
  Speaker 7: So let me try to help me because I'm trying
• 27:51
  Speaker 7: to follow the question. So you're saying your mom and dad,
• 27:55
  Speaker 7: are they both alive or did one die?
• 27:57
  Speaker 6: My father died.
• 27:59
  Speaker 7: Your father died, and let me ask the next question.
• 28:01
  Speaker 7: When he died, did they have a health care proxy,
• 28:04
  Speaker 7: a power of attorney, a will, and a trust in place,
• 28:07
  Speaker 7: or just a will?
• 28:08
  Speaker 6: They had just a will.
• 28:09
  Speaker 3: Just a will.
• 28:10
  Speaker 7: And so when you die with just a will, number one,
• 28:14
  Speaker 7: you are right. You are right that the executor of
• 28:18
  Speaker 7: the will is the person who gets appointed through the
• 28:23
  Speaker 7: probate court, which is a nightmare, right, going through the
• 28:26
  Speaker 7: probate process. And then that person would be in charge
• 28:29
  Speaker 7: of all assets that are owned by your dad alone,
• 28:35
  Speaker 7: in your dad's name alone. Did he have any assets
• 28:38
  Speaker 7: in his name alone?
• 28:41
  Speaker 6: I don't think so.
• 28:44
  Speaker 7: So if they were joint with your mom, which is
• 28:46
  Speaker 7: not uncommon, right? Jointly held bank accounts and brokerage accounts.
• 28:50
  Speaker 7: And if there was an IRA with a beneficiary attached
• 28:52
  Speaker 7: to it, Probably that beneficiary was your mom. And so
• 28:56
  Speaker 7: all of those assets would automatically pass to your mom.
• 29:00
  Speaker 3: No probate, no headache.
• 29:01
  Speaker 7: Doesn't matter who the executor is because the executor would
• 29:05
  Speaker 7: have nothing to do with those assets. So the last question,
• 29:10
  Speaker 7: I guess, is, you know, on the house. How was
• 29:14
  Speaker 7: the house owned? You said the house was already given
• 29:16
  Speaker 7: away or what happened?
• 29:17
  Speaker 6: The house was transferred into the five siblings' name in...
• 29:22
  Speaker 6: That really isn't an issue for us. We all get
• 29:24
  Speaker 6: along real well and everything. There's no problem there. But
• 29:27
  Speaker 6: my concern is always because my mom is, she's like
• 29:30
  Speaker 6: 90 years old now. When she passes, there's still no executor.
• 29:35
  Speaker 3: Oh, there will be.
• 29:36
  Speaker 7: They'll appoint one then. I mean, your mom will probably
• 29:38
  Speaker 7: have a will, I guess. and there'll be an executor
• 29:42
  Speaker 7: listed in the will and when you pass away you
• 29:44
  Speaker 7: gotta go to probate court file the will you gotta
• 29:47
  Speaker 7: get through all that and get an executor appointed my
• 29:50
  Speaker 7: feeling is do planning for your mom don't leave it
• 29:53
  Speaker 7: leave things the way they are, and avoid the whole
• 29:57
  Speaker 7: probate process, which sounds like a lot of that might
• 29:59
  Speaker 7: have been avoided when your dad died. But folks, as
• 30:02
  Speaker 7: much as that is the case, I want you to
• 30:05
  Speaker 7: know that I don't love what happened because there was
• 30:08
  Speaker 7: no estate tax planning done. Everything passed to the surviving spouse,
• 30:11
  Speaker 7: which could result in more taxes when mom dies. Again,
• 30:14
  Speaker 7: I don't know the size of the estate. And while
• 30:17
  Speaker 7: the kids all get along great, I don't love what
• 30:19
  Speaker 7: happened if they gave the house away 100%. What you
• 30:22
  Speaker 7: need to know is you got all the built-in gain
• 30:24
  Speaker 7: as well. Unless mom or dad retained a life estate
• 30:27
  Speaker 7: and they gave away this property completely, you guys are
• 30:30
  Speaker 7: going to be stuck with a much bigger capital gains
• 30:32
  Speaker 7: tax bill than you would have had had they done
• 30:35
  Speaker 7: some estate planning. So I hope I answered the questions
• 30:38
  Speaker 7: at least regarding the executor and added a little bit
• 30:40
  Speaker 7: more information for everybody else as to what I see
• 30:43
  Speaker 7: as possible problems with what has happened. So folks, this
• 30:48
  Speaker 7: is a great question because that tells us exactly what
• 30:51
  Speaker 7: happens when you plan and when you don't plan in
• 30:53
  Speaker 7: a way. But the one asset that's always complicated to
• 30:56
  Speaker 7: plan for is your IRA. IRAs are difficult. They have
• 31:01
  Speaker 7: income tax associated with them. They have estate taxes to
• 31:05
  Speaker 7: deal with. And of course, if you're trying to protect
• 31:07
  Speaker 7: assets from the nursing home, you have that as well.
• 31:09
  Speaker 7: But this guide tells you how to use the IRA,
• 31:12
  Speaker 7: name the estate, the beneficiary, Couple it with a testamentary trust,
• 31:16
  Speaker 7: which is simply a will trust, a trust built into
• 31:19
  Speaker 7: your will. And use all that information to get the
• 31:23
  Speaker 7: best of both worlds here. You can have no adverse
• 31:26
  Speaker 7: income tax. You can shelter the asset for estate taxes
• 31:30
  Speaker 7: when the surviving spouse dies, the IRA. And if you
• 31:34
  Speaker 7: have it coupled with this testamentary trust, and as long
• 31:36
  Speaker 7: as you're over the required beginning date of 73 for
• 31:40
  Speaker 7: most people, You will also shelter that asset from nursing
• 31:44
  Speaker 7: home planning for the surviving spouse all without a five-year
• 31:48
  Speaker 7: waiting period. Folks, call and get this guide, 866-848-5699 or LegalExchangeShow.com. Again,
• 31:54
  Speaker 7: 866-848-5699 or LegalExchangeShow.com.
• 32:04
  Speaker 2: Todd, I got another one here for you. Let's go
• 32:06
  Speaker 2: to Pam in Braintree. Pam, you're on with Todd Lutzky.
• 32:12
  Speaker 8: Hey, Todd. Thanks for taking my call. My sister-in-law is
• 32:17
  Speaker 8: an able working person and her husband is retired, but
• 32:23
  Speaker 8: he has advanced Alzheimer's and they've tried to put him
• 32:28
  Speaker 8: in um, senior care during the day. And he's very combative. He,
• 32:33
  Speaker 8: he walks out and, um, calls her at work all
• 32:36
  Speaker 8: the time to the point where her bosses are not
• 32:39
  Speaker 8: happy with her.
• 32:40
  Speaker 3: Yeah.
• 32:41
  Speaker 8: Um, and I'm just wondering, you know, and they want
• 32:46
  Speaker 8: to put him into, um, you know, uh, 24-7 round-the-clock care,
• 32:52
  Speaker 8: but she's not able to afford that. Are there any
• 32:56
  Speaker 8: services for somebody that really has no assets?
• 33:00
  Speaker 7: Yeah, so the answer is if you do go to
• 33:03
  Speaker 7: a nursing home, when you say 24-7 care, I'm thinking
• 33:06
  Speaker 7: nursing home. So as long as it's a qualified, you know,
• 33:10
  Speaker 7: as long as it's a nursing home, not assisted living,
• 33:13
  Speaker 7: not independent living, but a nursing home. If it's a
• 33:17
  Speaker 7: nursing home, and there's been no planning done, you can still,
• 33:22
  Speaker 7: and you have a healthy spouse. It sounds like in
• 33:24
  Speaker 7: this case, Pam, there's a spouse that's not in the
• 33:28
  Speaker 7: nursing home, correct?
• 33:29
  Speaker 6: Correct.
• 33:30
  Speaker 7: Okay, so if that's the case, you likely, and I
• 33:34
  Speaker 7: don't even know the facts, right, but likely this person
• 33:38
  Speaker 7: would be eligible for Medicaid so the state will pay
• 33:43
  Speaker 7: the nursing home cost, not the sister-in-law, okay?
• 33:46
  Speaker 6: Okay.
• 33:47
  Speaker 7: You said they have no assets, but like if there's
• 33:49
  Speaker 7: a house, if there's money, you know, these things all
• 33:51
  Speaker 7: have to be considered, but I can assure you. So
• 33:54
  Speaker 7: when I teach this course at BU and you start
• 33:59
  Speaker 7: an example by saying, here's a family with $ 2. 2 million
• 34:03
  Speaker 7: of assets, a house, a rental property, life insurance, IRAs,
• 34:07
  Speaker 7: bank accounts, right? Husband goes in the nursing home, no planning.
• 34:12
  Speaker 7: By the end of the seminar, by the end of
• 34:14
  Speaker 7: the semester, I will have shown how that person is eligible.
• 34:18
  Speaker 7: The surviving spouse can get the sick spouse on Medicaid,
• 34:23
  Speaker 7: even with all of those assets in place. So my
• 34:25
  Speaker 7: advice is, while I don't know the factual situation here,
• 34:29
  Speaker 7: it sounds like they need to seek out an elder
• 34:30
  Speaker 7: law attorney and learn how they can get on Medicaid
• 34:34
  Speaker 7: and not pay privately and still get him the care
• 34:38
  Speaker 7: that he needs.
• 34:40
  Speaker 2: Todd, I got one more for you here on the list.
• 34:42
  Speaker 2: Let's go to Dan in Peabody. Dan, what's your question
• 34:46
  Speaker 2: for Todd?
• 34:48
  Speaker 9: Hi, Todd. My question is I have a revocable trust
• 34:52
  Speaker 9: right now, and I'm thinking about doing an irrevocable trust.
• 34:57
  Speaker 9: How long? What happens if I die a year from now?
• 35:00
  Speaker 9: I'm not planning on it, but, you know, you never
• 35:03
  Speaker 9: know what happens.
• 35:04
  Speaker 3: No, I hear you.
• 35:05
  Speaker 7: So a couple of things. Taking assets and transferring them
• 35:10
  Speaker 7: into the irrevocable, and again, I'm assuming it's the kind
• 35:13
  Speaker 7: of irrevocable trust where it will protect assets from the
• 35:15
  Speaker 7: nursing home. Is that what you're saying?
• 35:18
  Speaker 9: Yes.
• 35:18
  Speaker 6: Yeah.
• 35:19
  Speaker 2: So good.
• 35:20
  Speaker 7: So when you transfer the assets into this trust, it
• 35:22
  Speaker 7: does start that five-year waiting period. But remember, dying, I
• 35:28
  Speaker 7: try to tell people, dying is not the problem, except
• 35:31
  Speaker 7: for the fact that you're dead, of course. But dying
• 35:34
  Speaker 7: is not a problem when it comes to the planning
• 35:36
  Speaker 7: that you've done. In other words, you've got a revocable
• 35:38
  Speaker 7: trust now. The assets in there avoid probate. The assets
• 35:42
  Speaker 7: in there, you know, are you single or married at
• 35:44
  Speaker 7: this point?
• 35:45
  Speaker 9: I'm single.
• 35:46
  Speaker 1: Okay. Okay.
• 35:47
  Speaker 7: So the assets in there avoid probate. The assets in
• 35:49
  Speaker 7: there will also go to your family in a manner
• 35:52
  Speaker 7: in which you directed. So a nice estate plan, it
• 35:55
  Speaker 7: could have creditor protection, it could have divorce proof, whatever
• 35:58
  Speaker 7: you put in there. It will accomplish that on the
• 36:01
  Speaker 7: date of death. If you transfer assets to an irrevocable
• 36:04
  Speaker 7: trust now and you die within a year or you
• 36:08
  Speaker 7: die six months later or two days later, doesn't matter,
• 36:12
  Speaker 7: the assets in that irrevocable trust will still avoid probate,
• 36:16
  Speaker 7: will still provide that bloodline plan to your family, divorce proof,
• 36:20
  Speaker 7: creditor protection, whatever you like. So what you're hearing me
• 36:23
  Speaker 7: saying is you're losing none of the benefits of your
• 36:26
  Speaker 7: revocable trust from a dying perspective, regardless of time when
• 36:31
  Speaker 7: you move it into the irrev. But you are gaining,
• 36:34
  Speaker 7: and again, I'm going to go bet on you living.
• 36:36
  Speaker 7: I'm not betting on you dying. I'm betting on you living.
• 36:39
  Speaker 7: You're gaining the five-year clock starting to run. to give
• 36:43
  Speaker 7: your family a chance to have these assets protected from
• 36:47
  Speaker 7: the cost of nursing home care in five years. So
• 36:49
  Speaker 7: long-winded answer to say you really don't lose anything by
• 36:54
  Speaker 7: setting up the irrevocable trust. You just begin gaining on
• 36:57
  Speaker 7: protection from the nursing home.
• 36:59
  Speaker 1: Mr.
• 36:59
  Speaker 2: Lutzky, thank you so much for joining us today.
• 37:02
  Speaker 3: Always a pleasure. Thank you.
• 37:03
  Speaker 1: This has been Ask Todd on the Financial Exchange Radio Network.
• 37:07
  Speaker 1: Ask Todd with Todd Lutzke has been presented by Cushing
• 37:10
  Speaker 1: & Dolan, serving Massachusetts and New England for more than
• 37:12
  Speaker 1: 30 years, helping families with estate and tax planning, Medicaid planning,
• 37:16
  Speaker 1: and probate law. Call 800-393-4001 or visit CushingDolan.com. The views
• 37:22
  Speaker 1: expressed in this segment are solely those of Cushing & Dolan.
• 37:25
  Speaker 1: Armstrong Advisory does not provide any legal or tax advice.
• 37:27
  Speaker 1: Please consult with your legal or tax advisor on such matters.
• 37:30
  Speaker 1: Cushing & Armstrong do not endorse each other and are
• 37:32
  Speaker 1: not affiliated.