Latest / The Financial Exchange Show / Rising Bond Yields Put Borrowers and the Fed Under Pressure

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Rising Bond Yields Put Borrowers and the Fed Under Pressure · The Financial Exchange Show

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  Speaker 1: is the Financial Exchange with Chuck Zotta and Mark Vandetti.
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  Speaker 2: It's Chuck, Mark, and Tucker with you here today. And
• 1:16
  Speaker 2: as we kick things off, markets today trying to break
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  Speaker 2: what's been a three-day losing streak on the S &
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  Speaker 2: P 500. Despite that, again, I think sometimes we lose
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  Speaker 2: sight of the big picture. even with where we sit
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  Speaker 2: today right now, the S & P 500 is 2.1%
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  Speaker 2: off its all-time high. So for anyone, you know, panicking
• 1:44
  Speaker 2: out there about like, oh, like stocks have sold off
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  Speaker 2: the last week and this and that, like, my dudes,
• 1:51
  Speaker 2: you got to chill a little bit. Like we've been
• 1:54
  Speaker 2: through some stuff in the last 20 years. We're 2%
• 1:58
  Speaker 2: off all-time highs right now. If you can't handle that,
• 2:01
  Speaker 2: then maybe stocks aren't for you. Just saying. We've got
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  Speaker 2: the G20 summit that is happening right now in Asheville,
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  Speaker 2: North Carolina, amongst the G20 finance ministers. And I couldn't
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  Speaker 2: be less interested in it, to be completely honest. I
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  Speaker 2: know everyone wants to talk about it, but there's nothing
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  Speaker 2: interesting that is going on there. No, that's actually pretty typical.
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  Speaker 2: And again, yeah, it's pretty standard for the case here.
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  Speaker 2: There's some squabbling that's going on, you know, in terms of, hey,
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  Speaker 2: we can't, you know, reach a unified statement because of,
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  Speaker 2: you know, reasons X, Y, and Z and this and that.
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  Speaker 2: But who cares about a unified statement?
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  Speaker 3: Well, we don't coordinate with our allies anymore. Bessent does
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  Speaker 3: what he wants to do. If he wants to intervene
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  Speaker 3: on behalf of the UN, he does it. If we
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  Speaker 3: want to bail out Argentina, so to speak.
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  Speaker 4: Correct.
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  Speaker 2: He sold euros without talking to the Europeans first.
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  Speaker 3: This is sort of my point. You either love this
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  Speaker 3: or you don't. Maybe you think this is a great
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  Speaker 3: way to conduct policy, foreign policy, geoeconomic policy. This is
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  Speaker 3: the new world, though.
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  Speaker 2: So I really don't have much to say about what's
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  Speaker 2: going on with the G20. We already know the fault
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  Speaker 2: lines are, you know, that are present there. And it
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  Speaker 2: would be kind of, you know, silly to think that
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  Speaker 2: anything substantive is going to come out of it as
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  Speaker 2: it relates to tariffs, bonds, China, like basically anything in there.
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  Speaker 2: Part of this, like I mentioned China, look, China's in
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  Speaker 2: the G20. And so like, obviously, They're going to have
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  Speaker 2: objections to anything related to currency and market manipulation and
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  Speaker 2: this and that. But the G20 summit is happening right now.
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  Speaker 2: And okay, like Scott Besson's continuing to talk up his
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  Speaker 2: plans for the bond market and this and that. And
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  Speaker 2: I will be honest, if you look at the broader
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  Speaker 2: picture here, everyone's paying attention to bonds now that they've
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  Speaker 2: sold off half a percent over the course of the
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  Speaker 2: summer into the early fall. No one was really talking
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  Speaker 2: and concerned about the bond market when the 10-year treasury
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  Speaker 2: was at 4.3% earlier this year. And so I do
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  Speaker 2: find it interesting that you have, you know, everyone talking
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  Speaker 2: up the potential for, oh, gee, like, you know, are
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  Speaker 2: bond yields, you know, going to go to 5% or
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  Speaker 2: 6% and this and that. No one was talking about
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  Speaker 2: that back when, you know, the 10-year was half a
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  Speaker 2: percent lower than this in the spring. And so I
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  Speaker 2: find that kind of interesting just in terms of, the
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  Speaker 2: dynamics that we are seeing there which brings us to
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  Speaker 2: this piece then from the new york times uh what
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  Speaker 2: rising global bond rates mean for your money and this
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  Speaker 2: i think is is a good piece to cover in
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  Speaker 2: terms of hey like why does the u.s 10-year treasury
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  Speaker 2: going up matter to you not just the u.s one
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  Speaker 2: why does the japanese 10 or 30-year treasury going up
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  Speaker 2: matter to you why does the uh UK guilt going up,
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  Speaker 2: you know, why do these things matter? And the most
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  Speaker 2: obvious place that you can look on this is in
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  Speaker 2: mortgage rates in terms of what we see on the
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  Speaker 2: 30 year fixed rate mortgage, which typically the 30 year
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  Speaker 2: fixed rate mortgage typically is benchmark off of the 10
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  Speaker 2: year treasury. Either of you know why the 10 year
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  Speaker 2: treasury is used instead of the 30?
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  Speaker 5: You serious?
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  Speaker 1: Yeah.
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  Speaker 2: Oh. I know you do, Mark.
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  Speaker 1: Yeah. Sorry.
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  Speaker 3: That's why I thought maybe we should let another student
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  Speaker 3: answer that question.
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  Speaker 2: No, you can answer, Mark.
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  Speaker 3: Well, because mortgages typically have a duration because they're paid off.
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  Speaker 3: They have a duration that's similar.
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  Speaker 2: Most people don't hold a mortgage for 30 years.
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  Speaker 6: Exactly.
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  Speaker 3: Yeah, you pay it off. It's on average over like
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  Speaker 3: 12 or 13 years.
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  Speaker 1: Correct.
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  Speaker 2: And so what we have right now is the 30-year
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  Speaker 2: fixed rate mortgage had bottomed in late February around 6%.
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  Speaker 2: And as of right now, it's at 6.89%. according to
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  Speaker 2: Mortgage News Daily. The 10-year Treasury bottomed around the same
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  Speaker 2: period at about 3.9%, and now is at 4.8%. So
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  Speaker 2: about a 0.8% rise in the 10-year Treasury and a 0.8%, 0.9%
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  Speaker 2: rise in mortgages. The reason why it's not direct one-to-one
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  Speaker 2: is there are times where banks may want, hey, additional
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  Speaker 2: cushion relative to the 10-year treasury. We've seen this in
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  Speaker 2: two different occasions in the last 25 years. The first
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  Speaker 2: was in the mid-2000s where banks started sniffing out, hey,
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  Speaker 2: we're not sure that these mortgages are worth the paper
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  Speaker 2: they're printed on. And so they demanded more interest from
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  Speaker 2: borrowers to try to compensate. Hint, it wasn't enough and
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  Speaker 2: it still resulted in big problems for them. The second
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  Speaker 2: time was back in 2022 and 23. When really 21
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  Speaker 2: and 22, I'll say banks started sniffing out, hey, there's
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  Speaker 2: some inflation here. And we don't want to just be
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  Speaker 2: stuck holding mortgages at really, really low rates. We want
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  Speaker 2: some additional interest over the treasury. And so they demanded
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  Speaker 2: higher premiums there as well because of concerns about inflation,
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  Speaker 2: not concerns about default. So I think that when we
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  Speaker 2: look at rising long-term rates, the number one place that
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  Speaker 2: it affects the average person is in mortgages. It's the
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  Speaker 2: single biggest place that you see it. What we are
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  Speaker 2: not seeing right now, by and large, are rising short-term rates.
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  Speaker 2: If you take a look at the US two-year treasury,
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  Speaker 2: just as an example, it's at 4.383% right now. It's
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  Speaker 2: up very modestly over the course of the last year,
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  Speaker 2: about three quarters of a percent, half a percent. But again,
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  Speaker 2: most people don't have short-term borrowing that they do in
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  Speaker 2: those kinds of markets. You can if you're taking out
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  Speaker 2: an auto loan. Those things do tend to be indexed
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  Speaker 2: towards shorter-term interest rates. And so if you do see
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  Speaker 2: movements there, those can move up. But the other side
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  Speaker 2: of the equation, not if you're a borrower, what if
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  Speaker 2: you're a saver? Hey, if you have a savings account
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  Speaker 2: or a CD, those are going to be influenced by
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  Speaker 2: short-term rates, which are typically... More determined by Fed policy
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  Speaker 2: and what the Fed is doing, and with the Fed
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  Speaker 2: not having moved interest rates this year, you probably haven't
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  Speaker 2: seen much of a shift in terms of what you
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  Speaker 2: receive on savings accounts and CDs. Maybe a slight move
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  Speaker 2: to the downside if your experience is anything like mine
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  Speaker 2: over the last six months or so. Why else do global,
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  Speaker 2: why else do bond rates matter to the average person, Mark,
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  Speaker 2: beyond some of those direct correlations and direct things there?
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  Speaker 3: Yeah, two come to mind for me. These are kind
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  Speaker 3: of mechanical, too. Government borrowing costs. We all know the
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  Speaker 3: federal government, our federal government, spends about a trillion on interest.
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  Speaker 3: Average interest rate is about 3.5%. You can get that
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  Speaker 3: right off the Treasury's website. As those go up, that
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  Speaker 3: leaves less money for other priorities. So it does affect us,
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  Speaker 3: whether you're a recipient or... of government largesse or a taxpayer.
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  Speaker 3: That's one channel that comes to mind. The other is
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  Speaker 3: through discounting effects on other asset prices. The higher interest
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  Speaker 3: rates are today, all else equal, an important caveat, the
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  Speaker 3: lower the cash flows, dividends in the case of stocks,
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  Speaker 3: rent in the case of real estate, competing bond coupons
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  Speaker 3: in the case of corporate bonds and stuff, the higher
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  Speaker 3: the discount rate, the so-called discount rate, which is usually
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  Speaker 3: the safe asset, the U.S., treasury bond rate, the lower
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  Speaker 3: the present value of those payments. So if you're a
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  Speaker 3: traditionalist and you like to value a stock using discounted
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  Speaker 3: cash flow methods, good old so-called Graham and Dodd, the
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  Speaker 3: guys that pioneered the concept, Warren Buffett being a contemporary disciple,
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  Speaker 3: he was being a modern disciple of their method, lower
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  Speaker 3: the present value of anything. So it matters through those
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  Speaker 3: two channels, certainly.
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  Speaker 2: Let's take a quick break here. When we return, We'll
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  Speaker 2: talk about how the conflict in the Middle East, as
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  Speaker 2: well as the one in Ukraine, may be influencing what
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  Speaker 2: the Fed does at its next meeting and subsequent ones.
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  Speaker 2: We'll discuss that right after this.
• 9:59
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  Speaker 2: Federal Reserve Governor Michael Barr says that the Fed should
• 11:01
  Speaker 2: be raising interest rates this month if new data doesn't
• 11:04
  Speaker 2: show that inflation is easing. Remember, we get CPI and
• 11:07
  Speaker 2: PPI data next week in advance of the following week's
• 11:10
  Speaker 2: Fed meeting. Treasury Secretary Scott Besant has said that the
• 11:14
  Speaker 2: Fed shouldn't raise rates into a temporary supply shock that is,
• 11:19
  Speaker 2: you know, driving prices higher. When we look at the
• 11:23
  Speaker 2: data that's out there, the conventional wisdom and what we've
• 11:26
  Speaker 2: seen historically, Mark, how do we untangle what the Fed
• 11:31
  Speaker 2: should be doing now? given the current landscape.
• 11:33
  Speaker 3: It's hard to untangle supply from demand shock. Sometimes the
• 11:36
  Speaker 3: debate still rages over was COVID's inflation predominantly, or even
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  Speaker 3: mostly supply induced or demand induced. So you can't just pronounce,
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  Speaker 3: I know Besson is a politician and he's got to
• 11:47
  Speaker 3: like say something to fill the airwaves, but that's a
• 11:49
  Speaker 3: stupid thing to say. It's, we just don't know. Uh, secondly,
• 11:52
  Speaker 3: it's also like, it's also, uh, fast. It's, it's, it's, well,
• 11:56
  Speaker 3: let's just say it's debatable. Um, What was your question?
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  Speaker 5: I'm sorry. I got right on a rant.
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  Speaker 2: How do we untangle how the Fed should approach this
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  Speaker 2: in terms of are they hiking into something that should
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  Speaker 2: go away or is the best thing or is doing
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  Speaker 2: nothing a bad thing because the supply shock is real?
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  Speaker 3: I was kind of answering the question. You don't know.
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  Speaker 3: Some of this might have a demand, an excess demand
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  Speaker 3: component to it. Inflation was elevated going into this. So
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  Speaker 3: there's an argument, and the Fed can influence demand. Just
• 12:29
  Speaker 3: keep that in mind. The Fed prints money. Money, in turn,
• 12:34
  Speaker 3: influences the short-term interest rate that they more or less control, which,
• 12:37
  Speaker 3: in turn, let's say they control the short-term interest rate
• 12:40
  Speaker 3: for simplicity. Let's take money out of the equation, which
• 12:42
  Speaker 3: all the textbooks do anyway. Nobody cares that they control
• 12:44
  Speaker 3: the money supply anymore. They just look at the policy tool,
• 12:47
  Speaker 3: the interest rate. And that in turn influences overall demand,
• 12:50
  Speaker 3: so-called aggregate demand, in a nominal sense. The Fed can virtually, well,
• 12:54
  Speaker 3: they can heavily influence it, not so much control. So
• 12:57
  Speaker 3: the Fed's got to ask, is the economy running too hot,
• 12:59
  Speaker 3: too cold, or just right? First answer that question. If
• 13:02
  Speaker 3: the answer is just right, maybe it is. Maybe GDP
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  Speaker 3: is in line with potential. So this is, I'm layering
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  Speaker 3: concept on top of concept here. You can go deep,
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  Speaker 3: and all of these things are sort of controversial. So
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  Speaker 3: we just got to kind of roll with it. Then
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  Speaker 3: they got to ask, Are supply shocks happening? Yeah, they
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  Speaker 3: seem to be. There's a war in the Middle East,
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  Speaker 3: for Pete's sake. That's like a classic supply shock.
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  Speaker 2: And Ukraine is causing supply issues as it relates to
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  Speaker 2: energy as well.
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  Speaker 1: Yeah, yeah, yeah.
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  Speaker 3: So, are these changing expectations, which is something the Fed
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  Speaker 3: can't control, the other key driver of the inflation process?
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  Speaker 5: Arguably, yes.
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  Speaker 3: Okay, maybe we should do something.
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  Speaker 5: I don't know.
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  Speaker 3: Is policy... Now, back to the demand side. Is policy rate...
• 13:43
  Speaker 3: Is Fed funds... Positive, is it restrictive? They use this
• 13:47
  Speaker 3: terminology a lot. Hard to make the argument that it's
• 13:50
  Speaker 3: restrictive because if you take Fed funds at three and
• 13:52
  Speaker 3: a half and if you subtract expected inflation somewhere between
• 13:55
  Speaker 3: three and four, you get close to zero. Many Fed
• 13:57
  Speaker 3: policymakers have said this over the past few weeks. Policy
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  Speaker 3: does not seem restrictive. So coupled potentially lax policy with
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  Speaker 3: supply shocks, you get a recipe for persistent inflation. That's
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  Speaker 3: the argument for. I'm not saying I'm totally convinced, but.
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  Speaker 2: Let me layer something else on in terms of the
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  Speaker 2: potential argument for a hike. We also have members of
• 14:20
  Speaker 2: the White House that are floating different ideas about potential
• 14:24
  Speaker 2: tax cuts heading into the fall. There's been chatter about
• 14:28
  Speaker 2: capital gains tax cuts, additional things along those lines. How does...
• 14:35
  Speaker 2: How does Fed action interact with what might be happening
• 14:39
  Speaker 2: on the fiscal side in terms of trying to balance
• 14:42
  Speaker 2: supply and demand there?
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  Speaker 3: Back to what we were talking about, excess demand. Textbook
• 14:47
  Speaker 3: answer to your question is that should stimulate demand. If
• 14:50
  Speaker 3: you think the economy is running too hot or is
• 14:52
  Speaker 3: in danger of doing so, fiscal stimulus pushes you farther
• 14:55
  Speaker 3: over the red line. But cap gains taxes, you get
• 14:59
  Speaker 3: that back like later in the year. I don't think
• 15:01
  Speaker 3: it's going to hit. I'm not sure it hits coincident
• 15:06
  Speaker 3: with the supply shock. So the Fed may be able
• 15:08
  Speaker 3: to say, well, let's see how that plays out. Moreover,
• 15:11
  Speaker 3: it could actually be contractionary, the opposite of the 1990s.
• 15:15
  Speaker 3: We raised taxes. It was paradoxically expansionary. Because people said, well,
• 15:19
  Speaker 3: they're getting their fiscal house in order. This is great.
• 15:21
  Speaker 3: Longer-term rates came down.
• 15:22
  Speaker 4: Sure.
• 15:23
  Speaker 3: This was good. The opposite could happen this time around.
• 15:26
  Speaker 3: More deficit spending? Are you people out of your minds?
• 15:29
  Speaker 2: Like what happened in the U.K. with Liz Truss a
• 15:30
  Speaker 2: few years ago.
• 15:31
  Speaker 3: Perfect example. Yeah, maybe a better example than my three-decade-old example.
• 15:35
  Speaker 3: But yeah, so you can have these paradoxically fiscal expansions
• 15:42
  Speaker 3: that end up being contractionary because... long-term interest rates go,
• 15:47
  Speaker 3: real rates go higher.
• 15:49
  Speaker 2: Let's look at the other side. What's the case right
• 15:51
  Speaker 2: now for the Fed to do nothing and say, yeah,
• 15:57
  Speaker 2: is there a legitimate case for the Fed to do nothing?
• 15:59
  Speaker 3: Maybe we just made it. As you could tell, I'm
• 16:02
  Speaker 3: hedging here. I don't know the extent and duration of
• 16:05
  Speaker 3: these supply shocks. We don't know, as Milton Friedman used
• 16:07
  Speaker 3: to say over and over again, We don't know the
• 16:10
  Speaker 3: structure of the economy. We don't know what the economy
• 16:13
  Speaker 3: is doing in real time. He had a really funny
• 16:15
  Speaker 3: example of some people think we're going into an inflation.
• 16:17
  Speaker 3: They use different language in those days. Some people think
• 16:20
  Speaker 3: we're going into a deflation. Half of them are wrong,
• 16:23
  Speaker 3: but they're both equally authoritative. I didn't do his funny
• 16:26
  Speaker 3: example justice there. The point is we don't know where
• 16:28
  Speaker 3: the economy is right now. We get GDP now from
• 16:30
  Speaker 3: the Atlanta Fed. Various private sector estimates, they all end
• 16:33
  Speaker 3: up being wrong. Even with monthly data, it's noisy. We
• 16:37
  Speaker 3: don't know where the economy and inflation are. I wish
• 16:40
  Speaker 3: I had a better answer for you than that, Chuck.
• 16:41
  Speaker 3: All I can say is honest people can disagree. You
• 16:43
  Speaker 3: got to go with your gut. And Warsh is a guy,
• 16:45
  Speaker 3: he's not a trained economist. And in some ways, that's
• 16:48
  Speaker 3: going to help him go with his gut. I just
• 16:50
  Speaker 3: don't know what it's saying right now.
• 16:53
  Speaker 2: When we look at the overall picture then in terms
• 16:58
  Speaker 2: of you know, what is being priced into the Fed
• 17:02
  Speaker 2: funds market right now. Remember, we've got a Fed meeting
• 17:05
  Speaker 2: 14 days from now. It's two weeks from today. And
• 17:09
  Speaker 2: as of this very moment in time, there's a 66%
• 17:11
  Speaker 2: chance being priced in for a hike, 33% chance being
• 17:13
  Speaker 2: priced in of no action. There's a 0% chance of
• 17:16
  Speaker 2: a cut being priced in. None of us know if
• 17:26
  Speaker 2: this is right, but this is very reminiscent of what
• 17:28
  Speaker 2: we saw heading into the July meeting, which was kind
• 17:30
  Speaker 2: of a toss-up going into that meeting as far as
• 17:34
  Speaker 2: what we're going to get. There's two major data points
• 17:37
  Speaker 2: that are still left. We get jobs on Friday, and
• 17:40
  Speaker 2: the sense I get from.
• 17:43
  Speaker 2: Other from Fed watchers, like people, economists who, you know, really,
• 17:47
  Speaker 2: you know, actually earn their living watching the Fed. The
• 17:50
  Speaker 2: sense I get is that Friday's jobs report is unlikely
• 17:54
  Speaker 2: to move the Fed on its own, but a weak
• 17:57
  Speaker 2: jobs report could potentially offset a hotter inflation number to
• 18:02
  Speaker 2: be able to give the Fed cover like, hey, maybe
• 18:04
  Speaker 2: the economy's weakening and it just hasn't passed through into
• 18:07
  Speaker 2: inflation yet. The other side of it is, hey, if
• 18:11
  Speaker 2: you get a hot jobs number, which we haven't seen
• 18:13
  Speaker 2: in a few months now, you got to go back
• 18:15
  Speaker 2: to the spring to the last time we saw one
• 18:16
  Speaker 2: that was really cooking. But if we get a hot one,
• 18:20
  Speaker 2: it is something that could very much move the table towards,
• 18:23
  Speaker 2: you know, a hike. But again, we're two weeks out,
• 18:27
  Speaker 2: and it's basically a toss up. The piece that I
• 18:29
  Speaker 2: do find interesting is that if you look at the
• 18:33
  Speaker 2: longer term, not longer term, but through next year, the
• 18:35
  Speaker 2: Fed funds futures predictions, not predictions, but the market probabilities,
• 18:41
  Speaker 2: You basically have one hike being priced in now and
• 18:43
  Speaker 2: maybe one more at the end of the year. And
• 18:45
  Speaker 2: what I do know about Fed hiking cycles is rarely
• 18:49
  Speaker 2: do they happen just with one or two hikes because
• 18:52
  Speaker 2: that's not usually enough to staunch inflation. It doesn't do
• 18:55
  Speaker 2: anything to the underlying demand dynamics that are causing it.
• 19:01
  Speaker 2: So I do think that where I land is, hey,
• 19:04
  Speaker 2: I'm not necessarily convinced that they're going to hike. But
• 19:08
  Speaker 2: if they do, it's probably not going to be resolved
• 19:10
  Speaker 2: just with one or two hikes.
• 19:11
  Speaker 3: Yeah, I mean, underlying inflation is elevated. Real Fed funds
• 19:15
  Speaker 3: are probably close to zero. That's all we really know today.
• 19:19
  Speaker 5: Yeah, yeah.
• 19:20
  Speaker 2: Let's take a quick break. When we return, it's Wall
• 19:23
  Speaker 2: Street Watch. And then Todd Lutzky joins us from Cushing
• 19:26
  Speaker 2: and Dolan. Get your estate planning questions ready next.
• 19:39
  Speaker 1: Like us on Facebook and follow us on Twitter at TFEShow.
• 19:43
  Speaker 1: Breaking business news is always first, right here on the
• 19:47
  Speaker 1: Financial Exchange Radio Network. time now for wall street watch
• 19:53
  Speaker 1: tracking the stocks the data and the headlines driving markets
• 19:56
  Speaker 1: so far today right here on the financial exchange radio network.
• 20:00
  Speaker 4: The global bond sell-off continues and markets are edging higher
• 20:04
  Speaker 4: with the 10-year treasury yield hit its highest level since
• 20:07
  Speaker 4: November of 2023. Right now, the Dow is up two-thirds
• 20:11
  Speaker 4: of a percent or 348 points higher. S & P
• 20:14
  Speaker 4: 500 up about half a percent or 37 points up.
• 20:18
  Speaker 4: NASDAQ up over four-tenths of a percent or 111 points.
• 20:20
  Speaker 4: Russell 2000 is up by 1%. 10-year treasury yield flat
• 20:22
  Speaker 4: at the moment at 4.794% and oil down about half
• 20:23
  Speaker 4: a percent. Trading at $ 89 a barrel. Uber announced it
• 20:34
  Speaker 4: would cut about 3,300 jobs or 10% of its staff
• 20:37
  Speaker 4: globally in a massive restructuring with the intent of reducing
• 20:41
  Speaker 4: management layers and reallocating spending. Uber is up modestly on
• 20:46
  Speaker 4: the day. Meanwhile, shares in Dell Technology are rising 4%
• 20:51
  Speaker 4: after the computer maker beat expectations for the second quarter
• 20:54
  Speaker 4: and also lifted its forecast for fiscal 2027, citing strength
• 20:58
  Speaker 4: in its AI services business. Elsewhere, software development tools firm
• 21:02
  Speaker 4: GitLab is seeing its stock jump 13% after posting better
• 21:06
  Speaker 4: than expected second quarter earnings and revenue. Palo Alto Networks
• 21:10
  Speaker 4: is retreating despite beating quarterly earnings and expectations. Shares are
• 21:14
  Speaker 4: down by 7%. And after today's closing bell, we'll see
• 21:19
  Speaker 4: anticipated shipmaker earnings from Broadcom. I'm Tucker Silva.
• 21:25
  Speaker 2: That is Wall Street Watch.
• 21:28
  Speaker 1: This is Ask Todd on the Financial Exchange Radio Network.
• 21:32
  Speaker 1: If you have an existing estate plan or are in
• 21:34
  Speaker 1: the market for one, Todd Lutzke is here to answer
• 21:36
  Speaker 1: your questions and help you plan for later life. Ask
• 21:39
  Speaker 1: Todd is presented by Cushing and Dolan, serving Massachusetts and
• 21:42
  Speaker 1: New England for more than 35 years, helping families with
• 21:46
  Speaker 1: estate and tax planning, Medicaid planning, and probate law. Visit CushingDolan.com. Now,
• 21:52
  Speaker 1: here's Todd Lutzke.
• 21:55
  Speaker 2: As promised, we are now joined by the one, the
• 21:58
  Speaker 2: only Todd Lutzky from the law firm of Cushing and
• 22:01
  Speaker 2: Dolan for Ask Todd. Now, you might be asking yourself, gee,
• 22:04
  Speaker 2: why is this segment called Ask Todd? It's because you,
• 22:08
  Speaker 2: the listeners, get to ask Todd your estate planning questions
• 22:11
  Speaker 2: live on air right now at this very moment in time.
• 22:16
  Speaker 2: Phone lines are wide open at 888-205-2263. We can usually
• 22:17
  Speaker 2: get through two, maybe three of your calls. So.
• 22:25
  Speaker 2: Get calling early, get calling often, 888-205-2263. Again, that number
• 22:32
  Speaker 2: is 888-205-2263.
• 22:36
  Speaker 1: Mr.
• 22:36
  Speaker 2: Lutzky, how are you doing today?
• 22:38
  Speaker 5: I am never better.
• 22:40
  Speaker 1: You?
• 22:40
  Speaker 2: I'm good.
• 22:41
  Speaker 1: Yeah.
• 22:41
  Speaker 2: I'm good.
• 22:41
  Speaker 5: What's going on?
• 22:42
  Speaker 2: Well, I was watching a documentary over the weekend.
• 22:46
  Speaker 5: Yeah?
• 22:47
  Speaker 2: It's a Sean Connery documentary.
• 22:48
  Speaker 1: Oh, yeah?
• 22:49
  Speaker 2: And I didn't realize he got into making furniture.
• 22:53
  Speaker 5: He made his furniture?
• 22:53
  Speaker 2: All kinds of stuff.
• 22:55
  Speaker 4: Oh, yeah?
• 22:55
  Speaker 2: He was telling me, though, not me, but he was
• 22:57
  Speaker 2: speaking on the documentary, tried to build a bookshelf one time.
• 23:01
  Speaker 5: Yeah?
• 23:01
  Speaker 2: Built it wrong.
• 23:02
  Speaker 1: Yeah?
• 23:03
  Speaker 2: He's ashamed of himself.
• 23:06
  Speaker 5: He should be.
• 23:07
  Speaker 2: Todd, I want to talk.
• 23:07
  Speaker 5: You should be ashamed of yourself.
• 23:09
  Speaker 2: Well, we all are sometimes. Todd, I want to talk
• 23:11
  Speaker 2: a little bit about IRA beneficiaries. How does one focus
• 23:16
  Speaker 2: on coordinating... IRA beneficiary designations with an estate plan?
• 23:25
  Speaker 7: Yeah, that is a more loaded question than you probably
• 23:30
  Speaker 7: even are aware of. IRAs are just a tough asset
• 23:36
  Speaker 7: to deal with from an estate planning standpoint in general.
• 23:38
  Speaker 5: And we know it. We all have them.
• 23:40
  Speaker 7: The IRAs are generally like a house. Everybody's got a house.
• 23:43
  Speaker 7: Everybody's got the IRA. But it's an item that doesn't
• 23:49
  Speaker 7: fit well into your estate plan, just say in general,
• 23:54
  Speaker 7: let's start with that. In general, it doesn't fit well.
• 23:56
  Speaker 7: I can't move it. I can't put it in a
• 23:58
  Speaker 7: trust while I'm alive. I got big tax problem if
• 24:00
  Speaker 7: I move it because I have an income tax component
• 24:03
  Speaker 7: built into the estate tax component that I want to fit.
• 24:09
  Speaker 7: And of course, then comes the nursing home side of things. Well,
• 24:13
  Speaker 7: if you want to add that component to this overall
• 24:15
  Speaker 7: estate plan, now it makes IRAs even harder to deal with.
• 24:19
  Speaker 7: So I'll try to at least address some of these issues.
• 24:23
  Speaker 7: The first one is, if you're just doing basic estate
• 24:26
  Speaker 7: planning and you're not concerned about the nursing home, well,
• 24:29
  Speaker 7: the IRA primary beneficiary should probably be your spouse if
• 24:32
  Speaker 7: you have one. And the contingent beneficiary should either be
• 24:38
  Speaker 7: your trust, if you're doing one, or the kids.
• 24:43
  Speaker 5: Let's say you have children. So in that case, you
• 24:47
  Speaker 5: would make it the trust....
• 24:50
  Speaker 7: If, as a contingent, if the goal of your estate
• 24:53
  Speaker 7: plan is to make sure the assets don't just go
• 24:57
  Speaker 7: outright to your children. You know, I'm trying to protect
• 24:59
  Speaker 7: them from future creditors. I'm trying to protect them from
• 25:02
  Speaker 7: divorces of the children. I want to keep it outside
• 25:06
  Speaker 7: of the estate for estate tax purposes when they die
• 25:09
  Speaker 7: so it grows estate tax free.
• 25:11
  Speaker 5: You know, those items.
• 25:13
  Speaker 7: Well, then I would make the contingent beneficiary of the
• 25:17
  Speaker 7: IRA the trust. Again, not during life. I can't get
• 25:21
  Speaker 7: it there during life because there'll be a huge income tax,
• 25:24
  Speaker 7: but I can get it there at death.
• 25:26
  Speaker 5: So that would be the reason.
• 25:27
  Speaker 7: Now, if on the other hand, your trust simply says,
• 25:31
  Speaker 7: oh yeah, just treat my kids equally, divide it and
• 25:33
  Speaker 7: pay it out. Well, then there's no reason to run
• 25:37
  Speaker 7: the IRA through the trust. You'd simply make the primary
• 25:41
  Speaker 7: beneficiary the spouse and the contingent beneficiary the the kids.
• 25:49
  Speaker 1: Why?
• 25:49
  Speaker 5: Because it's going to pay out anyway.
• 25:51
  Speaker 7: Now remember, when you're paying it out, it's going to
• 25:53
  Speaker 7: come out over 10 years to a child. That's the
• 25:55
  Speaker 7: new rule under the SECURE Act. That same 10-year payout
• 25:59
  Speaker 7: can be preserved even if you make the designated beneficiary
• 26:04
  Speaker 7: the trust. So that is just one way of incorporating
• 26:11
  Speaker 7: your estate plan and your IRA together, and that's for
• 26:15
  Speaker 7: revocable trust planning. Folks, When you want to do irrevocable
• 26:19
  Speaker 7: trust planning, that's a little different. But either way, we
• 26:24
  Speaker 7: know they can't get there during life. But can you
• 26:27
  Speaker 7: name your trust, the irrevocable trust, the designated beneficiary of
• 26:33
  Speaker 7: your IRA?
• 26:34
  Speaker 6: Yes.
• 26:35
  Speaker 5: And there's a lot more to learn about that, though.
• 26:37
  Speaker 5: We only have so much time, unfortunately.
• 26:39
  Speaker 2: Talking with Todd Lutzky from the law firm of Cushing
• 26:42
  Speaker 2: and Dolan. Still room on the phone lines at 888-205-2263.
• 26:48
  Speaker 2: That's the number to call to ask Todd your estate
• 26:50
  Speaker 2: planning questions. 888-205-2263. We're going to take a quick break here,
• 26:57
  Speaker 2: but when we return, we're going to get right to
• 27:00
  Speaker 2: those questions. Again, get calling. 888-205-2263 is the number because
• 27:04
  Speaker 2: when we return.
• 27:09
  Speaker 2: It is right to your questions with Todd. That number
• 27:11
  Speaker 2: one more time is 888-205-2263.
• 27:17
  Speaker 1: Ask Todd with Todd Lutzke. Every Wednesday at 1030. Only
• 27:22
  Speaker 1: here on the Financial Exchange Radio Network. Todd Lutzke answers
• 27:28
  Speaker 1: your questions about estate and elder life planning. Every Wednesday
• 27:31
  Speaker 1: at 1030. Right here on the Financial Exchange Radio Network.
• 27:45
  Speaker 2: We're joined here by Todd Lutzky for Ask Todd. We
• 27:47
  Speaker 2: do still have a little bit more room on the
• 27:48
  Speaker 2: phone lines at 888-205-2263. So call that number to ask
• 27:54
  Speaker 2: Todd your question live on air now. Again, 888-205-2263. Todd,
• 28:00
  Speaker 2: we do have a caller lined up for you. Let's
• 28:05
  Speaker 2: go to Peter in Worcester. Peter, what's your question for
• 28:07
  Speaker 2: Todd Lutzky?
• 28:09
  Speaker 6: Good morning, Todd. I love your show. I listen to
• 28:11
  Speaker 6: you all the time. And I'm right now in the
• 28:13
  Speaker 6: middle of... I had a trust done originally in 2012
• 28:17
  Speaker 6: for my two girls. I'm divorced. The attorney that set
• 28:24
  Speaker 6: it up, I had it redone back in 2001 by
• 28:29
  Speaker 6: a different attorney. She was a tax expert and elderly
• 28:33
  Speaker 6: and all that. Bottom line here is it's a revocable trust.
• 28:37
  Speaker 6: She instructed me. I have a 457B plan because I
• 28:40
  Speaker 6: was a state employee for 34 years. And she told
• 28:45
  Speaker 6: me to put the beneficiary of the 457 plan into
• 28:50
  Speaker 6: the trust.
• 28:51
  Speaker 5: Okay.
• 28:51
  Speaker 6: And I've had a couple people tell me that that's
• 28:53
  Speaker 6: probably not a smart thing to do with the new
• 28:56
  Speaker 6: SECURE Act and everything. I wonder if you could comment
• 28:58
  Speaker 6: on that for me.
• 28:59
  Speaker 7: So just let me just try to clarify what I
• 29:02
  Speaker 7: understood here is, regardless of how many times you've updated
• 29:05
  Speaker 7: or amended your estate plan, you currently have a revocable
• 29:10
  Speaker 7: trust in place, correct?
• 29:12
  Speaker 6: Correct.
• 29:12
  Speaker 5: All right. And how old are you?
• 29:15
  Speaker 6: I'll be 66 in October.
• 29:18
  Speaker 5: Okay. So a revocable trust, 66. Are you married?
• 29:22
  Speaker 6: I am divorced. I am not currently married.
• 29:25
  Speaker 1: Okay.
• 29:25
  Speaker 5: So single.
• 29:26
  Speaker 6: All right.
• 29:27
  Speaker 7: So the trust that you have in place, which I
• 29:31
  Speaker 7: assume nursing home planning is not on.
• 29:34
  Speaker 5: Your list, right? The revocable trust is okay for you?
• 29:38
  Speaker 4: Right.
• 29:39
  Speaker 5: Okay.
• 29:40
  Speaker 6: Yeah, you're absolutely right on that.
• 29:42
  Speaker 5: Okay. So then I'm okay. So the revocable trust is
• 29:45
  Speaker 5: in place.
• 29:47
  Speaker 7: Does it say when you die that you want the
• 29:50
  Speaker 7: assets to go equally to your children and pay it out?
• 29:56
  Speaker 5: Or does it say.
• 29:58
  Speaker 7: equally to the children, hold it in trust, and provide
• 30:01
  Speaker 7: creditor protection, divorce protection, etc.
• 30:04
  Speaker 5: Which one is it?
• 30:04
  Speaker 6: I think it would be the option one.
• 30:07
  Speaker 1: Okay.
• 30:08
  Speaker 7: So if the trust simply says, pay it out to
• 30:11
  Speaker 7: my kids, divide what's in there and pay it out,
• 30:15
  Speaker 7: then there is no reason, no reason to make the
• 30:20
  Speaker 7: designated beneficiary of your 457 plan the trust. just make
• 30:27
  Speaker 7: it the kids. Why is there no reason? Because your
• 30:31
  Speaker 7: trust says pay it out, right? So there's no reason
• 30:35
  Speaker 7: to run the qualified plan money through the trust just
• 30:41
  Speaker 7: to be paid out to the kids.
• 30:43
  Speaker 5: Follow me? It can just be paid directly from the
• 30:46
  Speaker 5: IRA or the 457 plan to the kids.
• 30:47
  Speaker 7: Now, Had you said, oh, no, Todd, I want to–
• 30:54
  Speaker 7: my trust is designed to hold these assets, protect them
• 30:56
  Speaker 7: from creditors, allow my children to enjoy them and use
• 31:00
  Speaker 7: them but not own them so in case they get divorced,
• 31:03
  Speaker 7: they don't lose the asset that's in there. Or I
• 31:06
  Speaker 7: want it to grow estate tax-free and then get to
• 31:09
  Speaker 7: my grandkids tax-free.
• 31:11
  Speaker 5: If you said all that, well, then I would say.
• 31:14
  Speaker 7: Depending on how large your qualified plan is– We would say, yeah,
• 31:20
  Speaker 7: as a single person, I would make the primary beneficiary
• 31:24
  Speaker 7: the trust.
• 31:26
  Speaker 3: Why?
• 31:27
  Speaker 7: Because I want to shelter those assets from all the
• 31:30
  Speaker 7: creditors and estate taxes and everything else going forward as well.
• 31:34
  Speaker 7: But in your case, I think you're fine. you just
• 31:37
  Speaker 7: go ahead and make the beneficiary, the children have it
• 31:40
  Speaker 7: pay out. I don't think there's any issue there. But folks,
• 31:45
  Speaker 7: you could see how in this case, even Peter sort
• 31:48
  Speaker 7: of getting different answers to whether or not you want
• 31:52
  Speaker 7: to leave an IRA to the trust or a qualified
• 31:55
  Speaker 7: plan of any kind to the trust versus.
• 32:00
  Speaker 5: Making the beneficiary children.
• 32:03
  Speaker 7: So in this case, I think we've answered his question,
• 32:07
  Speaker 7: but folks, the guide we're given away is going to
• 32:10
  Speaker 7: help us with that, right? Now, this guide is actually
• 32:13
  Speaker 7: explaining how to make your estate the beneficiary, never mind
• 32:19
  Speaker 7: a person, never mind a trust, the estate the beneficiary,
• 32:24
  Speaker 7: which sounds like it's a bad idea, but it's not.
• 32:29
  Speaker 7: provided you know all the rules that go along with it,
• 32:32
  Speaker 7: which this guide offers. You have to have reached your
• 32:35
  Speaker 7: required beginning date. You've got to have a testamentary trust
• 32:39
  Speaker 7: in place, which is a will trust, a trust built
• 32:41
  Speaker 7: into the will. One of your objectives of doing the
• 32:45
  Speaker 7: planning has got to be, I want to protect assets
• 32:47
  Speaker 7: from the nursing home. You should probably be married. when
• 32:51
  Speaker 7: you're doing this kind of plan. But doing it is
• 32:55
  Speaker 7: a great way of allowing you to fit your qualified
• 32:59
  Speaker 7: plan asset into your estate plan so as to protect
• 33:03
  Speaker 7: it from the nursing home, shelter it for estate tax purposes,
• 33:08
  Speaker 7: because leaving it directly to children or directly to a spouse,
• 33:11
  Speaker 7: excuse me, is not always great estate tax planning. allow
• 33:15
  Speaker 7: the spouse to have access to it, and at the
• 33:18
  Speaker 7: same time, not cause an adverse income tax problem on
• 33:24
  Speaker 7: the required minimum distribution. So a lot of balls in
• 33:28
  Speaker 7: the air when you're dealing with an IRA, folks. Call
• 33:30
  Speaker 7: and get the guide. Learn how to fit it into
• 33:32
  Speaker 7: your estate plan. 866-848-5699 or LegalExchangeShow.com.
• 33:35
  Speaker 1: Again, 866-848-5699.
• 33:44
  Speaker 5: Or LegalExchangeShow.com.
• 33:46
  Speaker 7: And you can always go to Cushing Dolan PC, our
• 33:49
  Speaker 7: Instagram page for more information.
• 33:51
  Speaker 2: Todd, how does that all also dovetail or does it
• 33:54
  Speaker 2: dovetail with other goals for estate planning in terms of
• 33:58
  Speaker 2: estate tax minimization and those types of things, you know,
• 34:02
  Speaker 2: bloodline planning for assets? How does that work in conjunction
• 34:06
  Speaker 2: with those ideas or does it not?
• 34:08
  Speaker 7: So when you're talking about an IRA, and again, Peter
• 34:11
  Speaker 7: had the 457 plan. I want to first clarify, folks,
• 34:14
  Speaker 7: that 457 plans, 401Ks, IRAs, defined benefit plans, 403Bs. When
• 34:23
  Speaker 7: I say IRA, I mean all of that. It's the
• 34:26
  Speaker 7: same for all of these. These are qualified retirement accounts.
• 34:31
  Speaker 7: So if you want your IRA... to fit into your
• 34:35
  Speaker 7: estate plan. And I think what you're asking me, Chuck,
• 34:37
  Speaker 7: is forget about nursing home planning for a minute. Let's
• 34:39
  Speaker 7: just talk about estate taxes, right?
• 34:42
  Speaker 3: Yeah.
• 34:42
  Speaker 7: Everybody's worried about estate taxes. Not everybody goes to a
• 34:45
  Speaker 7: nursing home, but everybody dies last I checked. So in
• 34:48
  Speaker 7: this case, I want to make sure my estate plan
• 34:51
  Speaker 7: is sheltered for estate taxes. Well, if I've got like
• 34:55
  Speaker 7: a $ 3 million IRA and I've got a million dollar
• 35:01
  Speaker 7: home and I got a $ 4 million estate, If I
• 35:06
  Speaker 7: set up a revocable trust and I put just my
• 35:08
  Speaker 7: house in there and it's a joint revocable trust, well,
• 35:12
  Speaker 7: on the first death, all that's in the trust is
• 35:15
  Speaker 7: a million dollar home, right? So all that can be
• 35:18
  Speaker 7: sheltered from estate taxes is a million dollars. So that's
• 35:22
  Speaker 7: going to slide into the remainder share. But you're saying, well,
• 35:26
  Speaker 7: wait a minute, Todd, what about the $ 3 million IRA? Well, again,
• 35:30
  Speaker 7: the common rule from an income tax play is name
• 35:36
  Speaker 7: the spouse as the beneficiary. Well, if you do that,
• 35:41
  Speaker 7: it's not going to go through the trust. It's going
• 35:43
  Speaker 7: to pass directly to the spouse. And when the spouse dies,
• 35:45
  Speaker 7: let's say the next day, her estate is worth how much?
• 35:50
  Speaker 5: $ 3 million. Not the house.
• 35:52
  Speaker 7: The house is sheltered in the trust in that B bucket.
• 35:56
  Speaker 7: But she's now worth $ 3 million. And the Massachusetts estate
• 35:59
  Speaker 7: tax exemption is how much? $ 2 million.
• 36:01
  Speaker 2: $ 2 million.
• 36:04
  Speaker 5: So we have an estate tax problem.
• 36:05
  Speaker 7: So we did not even completely eliminate estate taxes for
• 36:09
  Speaker 7: this individual in this hypothetical because of the way the
• 36:14
  Speaker 7: estate plan was designed and the type of assets that
• 36:18
  Speaker 7: they have that go with that estate plan. How do
• 36:21
  Speaker 7: we fix it? This is why every plan is different, right? Well,
• 36:25
  Speaker 7: in this case, we might say, you know what? I'm
• 36:27
  Speaker 7: going to make the designated beneficiary on my IRA The trust,
• 36:33
  Speaker 7: not the spouse.
• 36:35
  Speaker 3: Why?
• 36:35
  Speaker 7: Because I need to get more assets in there to
• 36:37
  Speaker 7: shelter it for estate tax purposes so I can do that.
• 36:41
  Speaker 5: It'll flow into the trust.
• 36:42
  Speaker 7: It'll still, the beneficiary of the Q-tip share will still
• 36:45
  Speaker 7: be my spouse. I'm still going to get great required
• 36:48
  Speaker 7: minimum distribution payouts. I'm not going to have an adverse
• 36:51
  Speaker 7: tax consequence. And it's going to shelter more for estate
• 36:54
  Speaker 7: tax purposes. So folks, lots to think about with an
• 36:58
  Speaker 7: IRA and your estate planning.
• 37:00
  Speaker 3: Mr.
• 37:01
  Speaker 2: Lutzky, thanks so much for joining us today. We appreciate it.
• 37:03
  Speaker 2: Always a pleasure.
• 37:04
  Speaker 5: Thank you.
• 37:05
  Speaker 1: This has been Ask Todd on the Financial Exchange Radio Network.
• 37:09
  Speaker 1: Ask Todd with Todd Lutzke has been presented by Cushing
• 37:12
  Speaker 1: and Dolan, serving Massachusetts and New England for more than
• 37:14
  Speaker 1: 30 years, helping families with estate and tax planning, Medicaid planning,
• 37:18
  Speaker 1: and probate law. Call 800-393-4001 or visit CushingDolan.com. The views
• 37:24
  Speaker 1: expressed in this segment are solely those of Cushing and Dolan.
• 37:27
  Speaker 1: Armstrong Advisory does not provide any legal or tax advice.
• 37:29
  Speaker 1: Please consult with your legal or tax advisor on such matters.
• 37:32
  Speaker 1: Cushing and Armstrong do not endorse each other and are
• 37:34
  Speaker 1: not affiliated.
• 37:35
  Speaker 2: Still a lot to come as we head towards the
• 37:38
  Speaker 2: second hour of the show. We're talking oil, we're talking Uber,
• 37:41
  Speaker 2: we're talking Broadcom, we're talking Ronald Reagan, healthcare, AI. I'm
• 37:48
  Speaker 2: tired just thinking about it, but we still have another
• 37:50
  Speaker 2: hour to do, and so we're going to make sure
• 37:52
  Speaker 2: we get through all of that, plus a whole lot more. Again,
• 37:56
  Speaker 2: quite a bit to get through. We've got some new
• 37:59
  Speaker 2: energy data out this morning that we'll incorporate into that,
• 38:02
  Speaker 2: and so make sure you stick around for hour two.
• 38:06
  Speaker 2: Because we are just getting started.