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Is wait-and-see the right approach for the Fed? · The Financial Exchange Show

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Speaker 1: Paul Lane and Mark Fandetti.
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Speaker 2: The S and P five hundred remains one percent off
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Speaker 2: of its record high set back on February nineteenth. Markets
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Speaker 2: continue to rally over the course of the last couple
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Speaker 2: of days here as we head into this hot Wednesday show,
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Speaker 2: Paul Lane, Mark Ndetti, and Tucker Silva here with you.
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Speaker 2: Where we've seen on Monday some positive market reaction, then
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Speaker 2: yesterday we saw a one percent increase on most of
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Speaker 2: the major indices. It seems that for the time being,
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Speaker 2: the Israel and Iran ceasefire led to a bit of
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Speaker 2: optimism that that will continue to say, stay as such,
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Speaker 2: and we turn our focus more towards FED Chairman Jerome Powell,
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Speaker 2: who was making his way through Congress yesterday testifying in
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Speaker 2: front of the House and today testify in front of
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Speaker 2: the Senate Banking Panel where he will be interrogated by
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Speaker 2: different members of Congress. So it seems to be more
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Speaker 2: of the focus, at least for the time being, to
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Speaker 2: be on the Federal Reserve and what it will do
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Speaker 2: from an interest rate perspective. Certainly, we had a tremendous
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Speaker 2: amount of volatility on the energy markets, where we saw
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Speaker 2: oil decline a combined close to about ten percent over
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Speaker 2: the course of the last several days, as the Israel
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Speaker 2: and Iran conflict at least simmered down for the time being.
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Speaker 2: And Mark, we'll start here more towards the Federal Reserve
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Speaker 2: and J. Powell meeting with members of Congress. Ultimately, from
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Speaker 2: most of the his speaking with lawmakers, it didn't seem
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Speaker 2: as if this was very different than what he has
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Speaker 2: been sort of reiterating in monthly meetings. But certainly we'll
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Speaker 2: start with just what we see from an interest rate
2:57
Speaker 2: perspective over the next couple of months here.
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Speaker 3: Yeah, it couldn't be any different because the short term
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Speaker 3: out look for the economy, which the FED is obviously
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Speaker 3: keenly tuned into as they try to balance the forces
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Speaker 3: of inflation against the forces of unemployment, and those two
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Speaker 3: sets of forces are in perfect tension all the time.
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Speaker 3: That is the Fed's job. I think it's important to
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Speaker 3: keep that in mind. And it follows from that if
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Speaker 3: you do keep that in mind, and the tools that
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Speaker 3: they have mainly won the money supply. They target a
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Speaker 3: short term interest rate called FED funds, but they do
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Speaker 3: it by increasing or slowing the rate of growth or
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Speaker 3: even shrinking the supply of money that makes its way
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Speaker 3: into the banking system, which in turn influences short term
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Speaker 3: and sometimes longer term interest rates too, though the effect
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Speaker 3: on longer term interest rates of Fed moves is ambiguous
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Speaker 3: when you study it. So all this clamoring for lower
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Speaker 3: interest rates by politicians from the President on down is
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Speaker 3: not new. The way the President vocalizes it is new,
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Speaker 3: that's just his style. But pressure for the Fed to
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Speaker 3: ease is not new. The irony, of course, is that
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Speaker 3: some times when the FED eases, they increase longer term
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Speaker 3: inflation expectations, thus pushing up longer term interest rates. So
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Speaker 3: be careful what you wish for. That's the lesson of
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Speaker 3: history that keeps going through my mind when I listen
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Speaker 3: to politicians complain about the FED being too slow or
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Speaker 3: not acting quickly enough.
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Speaker 2: Some of the variables that we have in place, as
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Speaker 2: you mentioned, is trying to parse out the impact of
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Speaker 2: higher tariffs. You know, President, or rather Chairman Jerome Powell
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Speaker 2: was quoted yesterday as saying, if inflation pressures remain contained,
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Speaker 2: we will cut But the large variable, of course that
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Speaker 2: remains out there is the higher terriffs. And what's so
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Speaker 2: difficult about the tariffs in place is when and how
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Speaker 2: much are these companies going to potentially pass on some
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Speaker 2: of these higher import prices to consumers. We haven't really
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Speaker 2: seen conclusive data yet that has indicated significant inflationary pressure.
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Speaker 2: The report that we got from last months indicated that
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Speaker 2: we saw inflation on a year over year basis running
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Speaker 2: at about two point four percent, and I believe month
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Speaker 2: over month we saw very much.
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Speaker 3: These have been very mild increases the past few months.
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Speaker 3: Some people suspect there are technical reasons behind that. I
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Speaker 3: won't get into how any time series, any any data
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Speaker 3: is adjusted for so called seasonality. Suffice to say, over
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Speaker 3: the past few years, the adjustments for traditional big increases
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Speaker 3: in January followed by decreases may have been too big
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Speaker 3: or too small. Again, the details are unimportant. The more
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Speaker 3: important point in the FED knows this is that the
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Speaker 3: trend in inflation is even more obscure than is than
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Speaker 3: it usually is. And I just I use that term quickly,
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Speaker 3: just kind of glossing over it. But the trend is
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Speaker 3: what we're really concerned with. Headline inflation. The number you
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Speaker 3: just quoted, zero point one percent for headline CPI month
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Speaker 3: over month, I think is what it was that doesn't
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Speaker 3: tell the story, just like any snapshot in time doesn't
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Speaker 3: tell the story. I always use the analogy of if
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Speaker 3: you weigh yourself in the morning, and you weigh yourself
5:56
Speaker 3: at that you get a different picture of where you
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Speaker 3: are relative to your weight goals. There is obscured by
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Speaker 3: when you last ate, by how active you were, if
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Speaker 3: you're dehydrated or not. Similarly, the trend in any economic
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Speaker 3: time series, any variable could be GDP, could be unemployment
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Speaker 3: could be Inflation is obscured by short term forces that
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Speaker 3: mask what's really going on. So the FED is always
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Speaker 3: pulling its hair out, asking what's really going on? Are
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Speaker 3: the last few months representative of where inflation really is?
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Speaker 3: Or did we get lucky or was there some technical
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Speaker 3: reason why inflation went down month over month. The bulk
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Speaker 3: of the learned feeling on this researchers who who follow
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Speaker 3: and study this carefully, not like armchair people who comment
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Speaker 3: on it and then move on to whatever is whatever
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Speaker 3: else their day consists of, is that it's probably a
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Speaker 3: statistical illusion. The fall over the past few months combine
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Speaker 3: a little bit of luck, energy prices falling, and stuff
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Speaker 3: like that, and that's not necessarily those can feed into
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Speaker 3: the trend and inflation. They can also o mask it.
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Speaker 3: If this sounds confusing, it should. It's confusing to the
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Speaker 3: Fed too, which is why Powell is always saying on
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Speaker 3: the one hand, on the other handging and it sounds
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Speaker 3: it's infuriating, You're like, take a position, would you? And
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Speaker 3: the fact is you can't with something like this because
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Speaker 3: you never really know at any point in time exactly
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Speaker 3: where the economy and thus things like inflation stand.
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Speaker 2: There's a pcre from Bloomberg by Connorsen where I highlighted
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Speaker 2: just the one word that sort of epitomizes what you
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Speaker 2: were just mentioning there, that it's it's inconclusive. You know,
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Speaker 2: we have some indicators that the Fed's major focus is
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Speaker 2: keep inflation under control and keeping the labor market stabilized.
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Speaker 2: And if you look at both of those areas, like
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Speaker 2: you just mentioned with the inflation data, and also if
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Speaker 2: you look at the labor market data, there are some
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Speaker 2: indicators that you could point to on the labor market
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Speaker 2: where we're seeing an uptick in the acceleration of people
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Speaker 2: collect on employment benefits. We've reported that the professional business
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Speaker 2: services sector kind of the white caller job market for
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Speaker 2: those college graduates has been quite poor recently, but in
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Speaker 2: terms of the again headline numbers, we have seen unemployment
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Speaker 2: ticking up by small decimals, but still sitting at that
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Speaker 2: round number of four point two percent.
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Speaker 3: Yeah, you know the question there, and you can go
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Speaker 3: down a lot of i'll call them rabbit holes. I
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Speaker 3: don't like the expression, but you can really get lost
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Speaker 3: in this topic. Is that because the broader economy is weakening?
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Speaker 3: Could be?
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Speaker 4: Is?
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Speaker 3: Or is it because the natural rate of unemployment is
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Speaker 3: rising and if you tried to push it back down
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Speaker 3: you'd actually get more inflation and no additional growth. This
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Speaker 3: was the problem in the nineteen seventies. So I think
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Speaker 3: the the evidences you just sort of briefly recapped it
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Speaker 3: is exactly the state of things. You've got potential labor
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Speaker 3: market softening, but softening relative always have to ask relative
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Speaker 3: to what sure should unemployment be three point five percent?
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Speaker 3: Or is that unnaturally low?
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Speaker 4: In a fifty year low? Right?
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Speaker 3: Was that a naturally low?
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Speaker 1: I don't know.
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Speaker 3: When it got to below five in the nineties, we
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Speaker 3: all freaked out because it hadn't been that low for
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Speaker 3: decades and the last time it crossed that rubicon we
9:07
Speaker 3: got high inflation for like thirteen years, the economy changes,
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Speaker 3: though structurally, maybe we can support a lower rate of unemployment.
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Speaker 3: The FED knows about all of these considerations and trade offs,
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Speaker 3: and the word inconclusive is probably the best way to describe,
9:23
Speaker 3: but you know, the data is always inconclusive. You're always
9:26
Speaker 3: using judgment to strike the right balance, strike.
9:29
Speaker 4: The right balance.
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Speaker 2: The last economic piece that is not of the Fed's concern,
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Speaker 2: but something that certainly we monitor is the housing market.
9:36
Speaker 2: Mike and I talked a little bit yesterday, which has
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Speaker 2: been just quite tepid in terms of what we've seen
9:42
Speaker 2: from the spring housing market. Not nearly as robust as
9:45
Speaker 2: it has been not over the last several years, but
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Speaker 2: what it used to be. We do see that there's
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Speaker 2: about twenty percent more inventory available nationally compared to where
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Speaker 2: it was in May of last year. The month of
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Speaker 2: May did see a little bit uptick in terms of
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Speaker 2: the sell the sales volume, but in general, it is
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Speaker 2: a housing market where there is more inventory, but not
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Speaker 2: a tremendous amount of demand on the buyer side of things.
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Speaker 2: From a seasonally adjusted basis, there are not a tremendous
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Speaker 2: amount of real estate transactions that have been closed, and
10:17
Speaker 2: you have buyers that are fighting the same fight that
10:20
Speaker 2: they fought the last couple of years, where the affordability
10:23
Speaker 2: is challenging. You have interest rates sitting, you know, in
10:26
Speaker 2: around seven percent or so on the thirty year fixed mortgage,
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Speaker 2: and home prices that are more difficult to afford than
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Speaker 2: they were back you know, pre pandemic levels. Here, we're
10:36
Speaker 2: going to take a quick break here on the Financial Exchange.
10:38
Speaker 2: When we come back, we're talking a little bit about
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Speaker 2: fixed income and the bond market and how this government
10:44
Speaker 2: is going to continue to cover its deficits from a
10:48
Speaker 2: borrowing perspective. That's right after this break here on the
10:51
Speaker 2: Financial Exchange.
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12:02
Speaker 2: The bond market was of a tremendous amount of focus
12:05
Speaker 2: and scrutiny during the April and May months as concerns
12:10
Speaker 2: about the tax The big beautiful bill that is making
12:13
Speaker 2: its way through the House and now sitting in the
12:17
Speaker 2: Senate would potentially add two point four trillion to the
12:21
Speaker 2: federal deficit over the course of the next decade, and
12:24
Speaker 2: that is done by the Congredual Bus Budget Office. But
12:28
Speaker 2: also important to note that's under the assumption that it
12:32
Speaker 2: would be a two point four trillion dollars increase if
12:35
Speaker 2: the current tax rates were just to expire, which really
12:39
Speaker 2: wasn't going to be the case anyway. Just as a
12:41
Speaker 2: refresher back in twenty seventeen, during Trump's first term in office,
12:45
Speaker 2: the lower tax brackets that we have today were instituted
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Speaker 2: with a sunset provision for eight years from now, which
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Speaker 2: is where we sit today in twenty twenty five. Then
12:56
Speaker 2: in twenty twenty six they were set to revert back
12:58
Speaker 2: to what they were prior to twenty twenty seven. Being
13:01
Speaker 2: added in here, but specifically to the bond market, there
13:06
Speaker 2: is dynamics in play here that Mark, I think you
13:09
Speaker 2: can probably do a pretty good job explaining. But the
13:12
Speaker 2: longer term treasury yields, So the US tenure treasury is
13:16
Speaker 2: often the bell weather for mortgage rates and long term
13:19
Speaker 2: borrowing costs. If there is a larger deficit, typically speaking,
13:23
Speaker 2: the government is going to need to borrow more, and
13:26
Speaker 2: as a result, to borrow more, they issue more treasuries.
13:29
Speaker 2: If you flood the market with more inventory and there
13:33
Speaker 2: is tepid demand to buy those treasuries that they're issuing
13:36
Speaker 2: from a government perspective, then you have to increase interest
13:39
Speaker 2: rates in order to fuel more demand to purchase up
13:43
Speaker 2: some of those treasuries, and that was what was in
13:46
Speaker 2: focus in May, But there are many other factors here.
13:49
Speaker 2: So Mark, maybe if you can sort of take us
13:51
Speaker 2: through sort of what goes into play in terms of
13:54
Speaker 2: the term premium and everything that goes on the longer
13:57
Speaker 2: term interest side of thing.
13:58
Speaker 4: In the yeah overview, I think.
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Speaker 3: You just you just hit the main points. When the
14:04
Speaker 3: supply increases, the price goes down, which is what would
14:08
Speaker 3: happen with any good or service. And when the price
14:12
Speaker 3: goes down on a bond is you know, Paul, and
14:15
Speaker 3: is as you've probably heard, if you're listening because you
14:18
Speaker 3: care about finance, you know you've heard, prices and yields
14:21
Speaker 3: are inversely related or negatively related. Price goes down, yield
14:25
Speaker 3: goes up. The reason for that is that the yield
14:27
Speaker 3: on newly issued bonds has to be competitive, or better,
14:31
Speaker 3: it would be better to say it this way, the
14:34
Speaker 3: yield on existing bonds has to be competitive with the
14:38
Speaker 3: yield on newly issued bonds. And if yields are dropping,
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Speaker 3: yield is just interest rate divided by price. If that
14:46
Speaker 3: ratio is going down, that's because either the numerators going
14:50
Speaker 3: down or the denominators going up. That's a really complicated
14:53
Speaker 3: way of saying it's it's it's a good it's a
14:55
Speaker 3: good framework to have in mind, though, because then you're
14:57
Speaker 3: not then you're not a prisoner to just this this usage,
15:01
Speaker 3: you can you can think about yield on any security
15:04
Speaker 3: when you keep that little framework in mind. So they're
15:07
Speaker 3: invert So this this will make you more versatile if
15:09
Speaker 3: you care about these types of things. So yields and
15:11
Speaker 3: price are inversely related in the case of bonds or
15:14
Speaker 3: any asset dividen yield on stocks or cap rate on
15:17
Speaker 3: real estate. Right, and so when you have more issuance
15:21
Speaker 3: of longer term bonds to finance debt, now the question
15:24
Speaker 3: is how are the Fed's going to finance this. They're
15:26
Speaker 3: shifting issuance to the short term end of the curve lately,
15:28
Speaker 3: probably a good idea, given that short term rates should
15:31
Speaker 3: come down, But nevertheless, all elseql there'll be an increase
15:35
Speaker 3: in interest rates of whatever term to maturity. The most
15:40
Speaker 3: of this new debt is finance debt. That's why when
15:43
Speaker 3: most people wring their hands about deficits and debt, they
15:47
Speaker 3: usually cite the rising cost of financing out just follows mechanically.
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Speaker 2: Yeah, we had, I believe in the month of May
15:54
Speaker 2: it was the first time that the monthly costs for
15:57
Speaker 2: interest were was one of the highest line items in
16:00
Speaker 2: the Yeah, it's.
16:00
Speaker 3: Spend about a trillion dollars on interest, which is like
16:03
Speaker 3: half our deficit. Just let that sink in for a second.
16:06
Speaker 3: And you've also probably heard this isn't my observation that
16:09
Speaker 3: we spend more on interest or did last year last
16:11
Speaker 3: fiscal year, and we will like indefinitely unless defense goes up,
16:17
Speaker 3: spend more on interest last year than we did on defense.
16:20
Speaker 3: So this is one of the reasons why people are
16:23
Speaker 3: worried and have been for a long time about ballooning
16:25
Speaker 3: deficits and debt, particularly during expansions, when you should be
16:29
Speaker 3: running surplus is in theory, not deficits. You shouldn't be
16:32
Speaker 3: running deficits perpetually. Indeed you cannot. Governments have budget constraints,
16:37
Speaker 3: so to speak, just like people have their horizons a
16:40
Speaker 3: lot longer. Governments are, but they're bound by these same
16:43
Speaker 3: laws if you like. So the question is when's this
16:46
Speaker 3: going to break? When are interest rates and I'll use
16:49
Speaker 3: that term generically to mean longer term to maturity interest
16:53
Speaker 3: rates here and you asked about the term premium and
16:55
Speaker 3: the expectations theory of longer term interest rate a formulation.
17:01
Speaker 3: We could talk about that, but it's really I don't
17:03
Speaker 3: think not necessary for this little conversation. At some point
17:07
Speaker 3: markets are going to balk yet all this issue and
17:09
Speaker 3: so I think is the bigger point.
17:11
Speaker 4: And we have thirty sixty.
17:12
Speaker 2: Tillion dollars of debt ballpark as a country. At some
17:16
Speaker 2: point in time there's too much and we don't know.
17:20
Speaker 2: I'm not saying this is imminent, because we've been going
17:22
Speaker 2: on for a very long time, this deficit run up.
17:25
Speaker 2: So that's what we talk about when it comes to
17:29
Speaker 2: the bond market and specific to treasuries, that's what's really
17:32
Speaker 2: in focus. And the expectations for future deficits to shift
17:37
Speaker 2: and be higher, would you know.
17:39
Speaker 3: Typically matter at some point, But to quote the scriptures,
17:43
Speaker 3: if you're Christian, we know not the day nor the hour.
17:46
Speaker 3: At some point though, you have to pay that and
17:48
Speaker 3: to mix my metaphors here, you gonna have to pay
17:50
Speaker 3: the piper exactly.
17:51
Speaker 2: So in terms of the bill that I was alluding
17:54
Speaker 2: to before, really the biggest hang ups here. President Trump
17:58
Speaker 2: wants this to be complete by the self imposed deadline
18:02
Speaker 2: of July fourth, which is a week from Friday or
18:06
Speaker 2: else no one gets vacation, no soup for you.
18:09
Speaker 3: We should we talk yeah, right right, well, that that's fair. Look,
18:12
Speaker 3: he's had a good in terms of foreign policy and stuff,
18:14
Speaker 3: and presidents get no credit for this, which is the.
18:17
Speaker 4: I do like the urgency that yeah, it's good, it's.
18:19
Speaker 3: Good, it's good. I people hate the bill apparently according
18:22
Speaker 3: to polls, So they're really I guess they're paying attention
18:24
Speaker 3: to the deficit busting and debt busting nature of.
18:28
Speaker 2: The bill and listened to the program.
18:29
Speaker 3: But we're here to have. The closer we get to
18:32
Speaker 3: passing this bill, the more interest traits are falling for
18:38
Speaker 3: other reasons. So it's not obvious that the potential damage
18:43
Speaker 3: a long term fiscal damage is being priced in in
18:45
Speaker 3: any measurable way to financial market.
18:47
Speaker 2: The biggest hang ups on this bill, the one of
18:50
Speaker 2: the biggest ones that's been talked about the most, is
18:52
Speaker 2: the sall cap, the state and local income tax cap
18:55
Speaker 2: that with the prior tax bill there was a cap
18:58
Speaker 2: up to ten thousand dollars that you could utilize to
19:01
Speaker 2: itemize on your taxes from property taxes, your state income tax,
19:06
Speaker 2: and just any other type of local tax deductions. Big
19:10
Speaker 2: states like New York, New Jersey, and California, which have
19:13
Speaker 2: very high real estate taxes want to see that increase
19:15
Speaker 2: up to forty thousand. There's been some pushback as to
19:18
Speaker 2: how they get that passed through. There's been some progress
19:21
Speaker 2: recently perhaps lowering the income cap as to who could
19:25
Speaker 2: get that forty thousand dollars deduction there. We're going to
19:28
Speaker 2: take a quick break here on the Financial Exchange. When
19:31
Speaker 2: we come back, we're be doing Wall Street Rotch and
19:33
Speaker 2: get your state planning questions ready for Ask tod right
19:36
Speaker 2: after this break.
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19:48
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Speaker 1: Watch a complete look at what's moving market so far
19:57
Speaker 1: today right here on the Financial Exchange Network.
20:00
Speaker 5: On the heels of yesterday's rally Marcus, today our mixed territory,
20:04
Speaker 5: with the SMP nearly approaching a record high as Wall
20:08
Speaker 5: Street monitors day two of FED Chairman Jerome Pal's testimony.
20:13
Speaker 5: At the moment, the Dow is off by nearly two
20:16
Speaker 5: tenths of one percent, or seventy four points, SMP five
20:20
Speaker 5: hundred is up by only eight points, and the Nasdaq
20:23
Speaker 5: is up nearly half a percent higher ninety two points,
20:27
Speaker 5: Russell two thousands, off about three quarters of a percent,
20:31
Speaker 5: Tenure Treasure realed up by three basis points, now a
20:34
Speaker 5: four point three three percent, and crude oil is up
20:38
Speaker 5: one and a half percent higher, trading just above sixty
20:41
Speaker 5: five dollars a barrel. FedEx said it expects a one
20:45
Speaker 5: hundred and seventy million dollar headwind in the current quarter
20:49
Speaker 5: from a change in tariff rules that cut demand for
20:51
Speaker 5: packages shipped to the US from China. As for its
20:54
Speaker 5: previous quarter, The delivery giant beat expectations. X shares are
21:01
Speaker 5: down by about three percent. Meanwhile, Tesla saw another month
21:04
Speaker 5: of steep sales declines in the European Union, where new
21:08
Speaker 5: car registrations fell more than forty percent in May. Tesla
21:12
Speaker 5: stock today is down over five percent. Elsewhere, BlackBerry jumping
21:17
Speaker 5: fifteen percent after the cybersecurity company saw its first quarter
21:20
Speaker 5: revenue win profit beat analysts expectations. BlackBerry also raised its
21:25
Speaker 5: full year guidance. Quantum Scape shares are surging thirty six
21:29
Speaker 5: percent after the startup announced a breakthrough in its process
21:33
Speaker 5: for making solid state batteries. General Mills Warren sales could
21:37
Speaker 5: fall this year as consumers spend less on snacks and
21:40
Speaker 5: tariffs raised costs, shares in the cheerios maker down about
21:45
Speaker 5: three percent, and Winnebago cut its annual guidance citing challenging
21:49
Speaker 5: macro economic environment. However, the motor home manufacturer saw its
21:54
Speaker 5: quarterly results beat forecast that stock, however, retreating by three percent.
21:59
Speaker 5: Tucker Sylvan, that is Wall Street Watch.
22:03
Speaker 1: This is Ask Todd on the Financial Exchange Radio Network.
22:07
Speaker 1: If you have an existing estate plan or in the
22:09
Speaker 1: market for one, Todd Lutsky is here to answer your
22:11
Speaker 1: questions and help you plan for later life. Ask Todd
22:14
Speaker 1: is presented by Cushing and Dolan, serving Massachusetts and New
22:18
Speaker 1: England for more than thirty five years, helping families with
22:21
Speaker 1: a state and tax planning, Medicaid planning, and probate law.
22:24
Speaker 1: Visit Cushingdolan dot com. Now here's Todd Lutsky.
22:30
Speaker 2: It is Wednesday, which means we are on the custom
22:34
Speaker 2: of our weekly segment of Ask Tod with Todd Lusky
22:36
Speaker 2: from Cushion Dolan. If you have any estate planning questions
22:40
Speaker 2: regarding gifting, trust, anything of that nature, give us a
22:44
Speaker 2: studio line a call at eight five to five to
22:46
Speaker 2: zero five two two six three. Again that again that
22:50
Speaker 2: number eight eight eight two zero five two two sixty
22:54
Speaker 2: three for anything that you have on the estate planning realm,
22:57
Speaker 2: any questions you'd like to have eight eight eight two
22:59
Speaker 2: zero five two two six three. Todd, how are we
23:02
Speaker 2: doing today?
23:03
Speaker 4: I'm never better and.
23:04
Speaker 2: You staying cool? Are you running in these temperatures? Pausing
23:08
Speaker 2: for the week?
23:09
Speaker 4: No running even indoors.
23:11
Speaker 2: It's hard, That's true, depending on how your center era
23:14
Speaker 2: is A.
23:14
Speaker 4: Yeah, exactly, can't keep up Todd.
23:17
Speaker 6: Uh.
23:18
Speaker 2: Oftentimes, when I'm speaking with clients about irvocal trust many
23:22
Speaker 2: are aware of the five year look back period that
23:25
Speaker 2: the assets need to be in there these irrevocal trusts
23:29
Speaker 2: for but I think there is a lot of confusing
23:31
Speaker 2: surrounding the type of access that they would have to
23:34
Speaker 2: those assets. So I was wondering if you could maybe
23:36
Speaker 2: speak to just some of the misconceptions that you hear
23:39
Speaker 2: often when you speak with clients about irrevocal trusts and
23:43
Speaker 2: some of the provisions associated with them in terms of access.
23:46
Speaker 7: Yeah, I think I think people still hear the word
23:49
Speaker 7: irrevocable and think they've lost control or think they've they've
23:55
Speaker 7: given up the ability to maybe change a trust later
23:58
Speaker 7: after it's been created, and and I think it's it's
24:01
Speaker 7: unfortunate because there are you know, many different kinds of trusts,
24:06
Speaker 7: right there are trusts that that are irrevocable, but you
24:10
Speaker 7: do lose a lot of control over and you do give.
24:13
Speaker 4: Up some access.
24:15
Speaker 7: But this particular kind, the one we're dealing with for
24:18
Speaker 7: this month, the irrevocable Medicaid trust, is not like that.
24:23
Speaker 7: So for example, you know, you could you could like
24:26
Speaker 7: put your your investment portfolio inside the trust. You can
24:30
Speaker 7: still manage your investment portfolio and and talk to your
24:34
Speaker 7: advisor about it even if you're not trustee. You're still
24:38
Speaker 7: allowed to have, you know, discussions about managing and investing
24:42
Speaker 7: the assets. And then once it's which would, by the way,
24:45
Speaker 7: is the same way it would be if it was
24:46
Speaker 7: not in the trust, So excuse me, no no difference there,
24:50
Speaker 7: And then you know, you can sit back and collect
24:53
Speaker 7: all the income that it generates, which is generally what
24:56
Speaker 7: you want to do anyway, So you're now going to
24:59
Speaker 7: collect the income from the trust, and so that's not
25:02
Speaker 7: a change. Then they say, well, what about income taxes?
25:07
Speaker 7: I always hear that when I put assets in these
25:09
Speaker 7: trusts that there's a huge income tax because trust pay
25:12
Speaker 7: taxes at a much higher rate, which is true unless
25:16
Speaker 7: it's a grand tor trust. Again different kind. These trusts
25:20
Speaker 7: are grand tor trusts, which in English means you're the owner.
25:24
Speaker 7: For income tax purposes, you don't own it. The trust
25:27
Speaker 7: owns it. But for income tax purposes, we're going to
25:30
Speaker 7: treat you as the owner. That means all of the
25:33
Speaker 7: interest and dividends on that investment portfolio, whether you pull
25:37
Speaker 7: them out of the trust or not, are still going
25:40
Speaker 7: to be reported on your personal income tax return. Same
25:44
Speaker 7: with the capital gain. Although capital gain is principal and
25:47
Speaker 7: generally you don't get principled directly. Even if the gain
25:51
Speaker 7: occurs inside the trust, it's still reported on your personal return. Yes,
25:56
Speaker 7: you need to file a separate tax return for the
25:59
Speaker 7: trust called a ten forty one, but since it's a
26:03
Speaker 7: grand tour trust, it doesn't pay tax. It just reports
26:08
Speaker 7: a letter to the donor telling them that here's what
26:12
Speaker 7: your trust earned, interest dividends right off to ten ninety
26:17
Speaker 7: nine like you normally get it. Put these items on
26:20
Speaker 7: your personal income tax return and pay tax. So folks,
26:25
Speaker 7: same income tax, same access to income, same ability to invest.
26:31
Speaker 7: And that's just one item we didn't talk about yet,
26:35
Speaker 7: which we can get to. What if I put my
26:37
Speaker 7: home in? What if I put a rental property in?
26:40
Speaker 7: How does that work? So I think we have lots
26:43
Speaker 7: of things to think about, and I can show you
26:46
Speaker 7: that those also will have way more control than you think.
26:50
Speaker 7: And whether or not there's even a completed gift. People say,
26:52
Speaker 7: oh my god, you make a big gift. No, not really,
26:55
Speaker 7: and we'll explain how all that works. So folks lots
26:58
Speaker 7: to understand a out these irrevocable trusts.
27:02
Speaker 2: If you have any questions related to irrevocable trust, revocable trusts,
27:07
Speaker 2: state planning, gifting, give our studio line a call. We've
27:11
Speaker 2: got Todd Lusky here fielding your questions. Studio number is
27:14
Speaker 2: eight eight eight two zero five two two sixty three.
27:18
Speaker 2: Again that number for any of your questions for Todd
27:21
Speaker 2: Lusky from Cushion Dolan eight eight eight to zero five
27:24
Speaker 2: two to two sixty three. We're going to take a
27:27
Speaker 2: quick break here on the Financial Exchange. When we come back,
27:31
Speaker 2: your questions with Todd right after this break.
27:35
Speaker 1: Ask Todd with Todd Lutsky every Wednesday at ten thirty
27:39
Speaker 1: only here on the Financial Exchange Radio Network Todd Letsky
27:45
Speaker 1: answers your questions about a state and elder life planning
27:48
Speaker 1: every Wednesday at ten thirty right here on the Financial
27:51
Speaker 1: Exchange Radio Network.
28:02
Speaker 2: We are back here with Todd Lusky from Cushion Dolan,
28:06
Speaker 2: answering all of your estate planning questions. If you have
28:09
Speaker 2: any questions regarding irvocal trust for vocable trusts, gifting taxation,
28:13
Speaker 2: anything of that nature, give our studio line to call
28:16
Speaker 2: it eight eight eight two zero five two two sixty
28:19
Speaker 2: three eight eight eight two zero five two two sixty
28:23
Speaker 2: three the number for any of your questions in the
28:27
Speaker 2: estate planning realm that you have for Todd Lusky. Todd,
28:31
Speaker 2: we spoke prior to the break about putting investment assets
28:35
Speaker 2: into this irrevocable Medicaid trust, but I want to segue
28:39
Speaker 2: and talk a little bit about the impact of putting
28:42
Speaker 2: your properties into it. And we'll first tackle the idea
28:45
Speaker 2: of just trying to put in your primary residence, oftentimes
28:48
Speaker 2: the biggest asset that many people have around this area.
28:51
Speaker 2: Are there any gift tax implications or what should people
28:54
Speaker 2: be aware of regarding putting your primary residence into this
28:57
Speaker 2: type of trust we're speaking of here.
28:58
Speaker 7: Yeah, I think that's a great question, because it's it's
29:01
Speaker 7: generally the most you know, the largest asset most clients have,
29:05
Speaker 7: and they want to put their home in and I
29:06
Speaker 7: get it, and so it's your primary residence and everybody
29:10
Speaker 7: I get it from accountants all the time as well.
29:12
Speaker 7: They'll say, well, wow, that's a you know, maybe it's
29:14
Speaker 7: a million dollar property. Isn't that going to create a
29:17
Speaker 7: gift tax problem? Because you're giving it to an irrevocable trust. Again,
29:23
Speaker 7: different kinds of trust result in different taxable events. In
29:27
Speaker 7: this case, we design the irrevocable trust as an incomplete
29:32
Speaker 7: gift for gift tracks purposes.
29:35
Speaker 4: How do we do that?
29:35
Speaker 7: There's there's language in the trust that allows the don or,
29:39
Speaker 7: the creator of the trust to keep the ability it's
29:44
Speaker 7: a power of appointment, keep the ability to appoint where
29:48
Speaker 7: those assets go when before you die. So if you
29:52
Speaker 7: want to leave more, usually it's equally to kids of
29:55
Speaker 7: all generations. Let's say, so if you want to leave
29:58
Speaker 7: a little more to one child than another, whether you
30:00
Speaker 7: can change your mind later. So, because when you gift
30:03
Speaker 7: to it trust designed like that, you've retained that power.
30:09
Speaker 7: Then you have not relinquished enough dominion in control over
30:13
Speaker 7: the asset to complete the gift, because we don't know
30:17
Speaker 7: where it's going to go, because you can change your
30:18
Speaker 7: mind anytime, so big deal. No gift tax is are
30:23
Speaker 7: going to be incurred for putting things like homes and
30:26
Speaker 7: rental properties in the trust. And I do want to
30:28
Speaker 7: talk a little bit about the house, but I also
30:31
Speaker 7: want to remind people that the things we're talking about
30:33
Speaker 7: right now are all in the guide as we approach
30:37
Speaker 7: the end of the month. The Power to the Power
30:40
Speaker 7: of irrevocable Medicaid trusts is the name of the guide,
30:44
Speaker 7: and it really it's over thirty years I've made the
30:48
Speaker 7: most frequently asked questions and answers come to me and
30:53
Speaker 7: I put them in this guide. So it's a very
30:55
Speaker 7: question and answer format guide telling you all the dos
30:58
Speaker 7: and don'ts putting real estate in, renting your house, selling
31:01
Speaker 7: your house, buying another house, moving, what are the income taxes?
31:05
Speaker 4: What can I do? What can I not do?
31:08
Speaker 7: If you've never understood these trusts and you were always
31:11
Speaker 7: on the fence as to whether you wanted one or not,
31:14
Speaker 7: or they're right for you or not, this guide will
31:17
Speaker 7: help you decide, call and get it eight six six
31:20
Speaker 7: eight four eight five six nine nine or Legal Exchange
31:24
Speaker 7: Show dot com again eight six six eight four eight
31:28
Speaker 7: five six ninety nine or Legal Exchange show dot com
31:31
Speaker 7: and you can request the guide.
31:33
Speaker 2: We're gonna hit the full line full lines here fill
31:35
Speaker 2: up from the keep you're on with Todd Lutsky.
31:39
Speaker 6: Yes, Todd, I think it's been like seven years ago.
31:44
Speaker 6: You did a irrevocable trust for me.
31:46
Speaker 4: Okay.
31:46
Speaker 6: I have four rental properties in it, and I also
31:50
Speaker 6: have personal properties in it. If mysell one of the
31:54
Speaker 6: rental properties, can I take that that that earned money
32:02
Speaker 6: portion or is all of it for my personal use?
32:06
Speaker 7: So let's let's ask this question, and let's let's let's
32:09
Speaker 7: say you sell it for five hundred thousand dollars. Okay,
32:13
Speaker 7: First and foremost, do you want to protect that five
32:17
Speaker 7: hundred thousand dollars going forward from the cost of long
32:20
Speaker 7: term care and probate?
32:23
Speaker 6: Yes, but not but not the total of five hundred thousand.
32:27
Speaker 6: Let's just say I want to protect three hundred thousand.
32:31
Speaker 7: So if you needed two hundred thousand for something right now,
32:35
Speaker 7: that the answer is, first of all, yes, you can
32:38
Speaker 7: sell it. Yes, there no, there is no adverse capital
32:42
Speaker 7: gains tax consequence, because these are all things other listeners
32:45
Speaker 7: are going to want to know as well as you.
32:46
Speaker 7: So you're gonna pay the same capital gains tax you
32:49
Speaker 7: would have paid had it not been in the trust. Yes,
32:51
Speaker 7: you can sell it with absolutely no additional paperwork or cost. Yes,
32:55
Speaker 7: the money does have to go back into the trust,
32:57
Speaker 7: so it's all in there. It's still protected from the
33:01
Speaker 7: cost of long term care. There, it's avoiding probate, and
33:04
Speaker 7: there's no issue with what you can do with it
33:07
Speaker 7: in terms of investing it. You can sit back and
33:09
Speaker 7: collect all the income and live off that. Now, how
33:13
Speaker 7: much can you take the money directly? No, because it's
33:18
Speaker 7: protected from the cost of long term care. So can
33:21
Speaker 7: you get money out of the trust? Yes, you can.
33:23
Speaker 4: You just have to go through your kids.
33:25
Speaker 7: Okay, so you have to make there's a two step
33:27
Speaker 7: approach in order to take money out of this trust.
33:32
Speaker 7: My advice though, and again we're always planning for whole life,
33:35
Speaker 7: so can you get it, yes, But my advice if
33:40
Speaker 7: I'm planning for you still would be do you have
33:43
Speaker 7: money outside the trust, like IRA money or just other
33:47
Speaker 7: money that you kept outside the trust. If you did,
33:50
Speaker 7: I'd want you to go there first, Right, it makes
33:53
Speaker 7: sense depending on how much you need. So I mean,
33:56
Speaker 7: how much do you need right now? Is a direct amount?
33:58
Speaker 7: Like is it a big chunk or do you just
34:00
Speaker 7: need it over time?
34:02
Speaker 6: Just over time?
34:03
Speaker 4: Okay?
34:04
Speaker 7: So you're not like I need to take two hundred
34:05
Speaker 7: thousand dollars out the day after I sell, correct?
34:09
Speaker 6: Right, that's correct.
34:10
Speaker 7: So then what I would do is I would just
34:11
Speaker 7: let it sit in there, I would let it grow.
34:14
Speaker 7: I would take my income from it if I need it.
34:16
Speaker 4: You know it's yours.
34:17
Speaker 7: But if you do need an extra chunk, I don't
34:19
Speaker 7: know how much. Say I need twenty grand, thirty grand
34:22
Speaker 7: whatever for something, I'd look to your other assets. Do
34:26
Speaker 7: you have any outside the trust anything in an IRA?
34:30
Speaker 6: Yes? But you know I'm retired now, so the income
34:34
Speaker 6: doesn't come in flourishing like it did you know when
34:37
Speaker 6: I was working.
34:38
Speaker 4: Very true?
34:39
Speaker 7: So how much is in your irah.
34:43
Speaker 6: To fifty two hundred and fifty thousand?
34:45
Speaker 4: Right?
34:45
Speaker 7: So my point is you're allowed to take out of
34:48
Speaker 7: your IRA if you need that extra thirty grand take it.
34:51
Speaker 7: Why do I suggest taking it from an IRA? Well,
34:54
Speaker 7: couple of reasons. One, it's not protected from the nursing home.
34:58
Speaker 7: Two you have to take it eventually anyway. And three,
35:02
Speaker 7: if I leave it for my kids, they ultimately have
35:04
Speaker 7: to take it out over ten years under the Secure Act,
35:07
Speaker 7: which may make it taxable at a higher rate for
35:10
Speaker 7: them if they're working and already earning money. So there's
35:13
Speaker 7: a lot of reasons to take it from there first
35:16
Speaker 7: before I take it from my trust. But if you
35:19
Speaker 7: need it from the trust, you absolutely can get it.
35:22
Speaker 7: You just have to go through that two step approach
35:24
Speaker 7: through family members.
35:26
Speaker 4: So I hope that helps a little.
35:28
Speaker 7: But again, planning is a whole it's a whole option, right,
35:32
Speaker 7: It's a whole way of thinking. It's not just set
35:35
Speaker 7: it and forget it. To a large degree it is.
35:38
Speaker 7: But when you do want to take money out, And
35:40
Speaker 7: by the way, great question, Philip, I think that's exactly
35:43
Speaker 7: what you should be doing, calling your attorney. Anybody who's
35:46
Speaker 7: done this planning should be calling their lawyer whenever they
35:50
Speaker 7: think they're going to do something that might change or
35:54
Speaker 7: mess up their estate plan before they do it. Don't
35:56
Speaker 7: call after, call before because after it's sometimes late. But
36:00
Speaker 7: if you call before, we can guide you through this. So,
36:04
Speaker 7: like with Philip, what's the smartest thing to do, sell
36:08
Speaker 7: the house if that's what you want to do, no problem,
36:11
Speaker 7: no adverse tax. Let the money go in there. Okay,
36:14
Speaker 7: how much do I need and why do I need it?
36:16
Speaker 7: All right, well we'll tell you where to take it from.
36:20
Speaker 7: Do we want to take it from the trust first?
36:22
Speaker 7: Or do we want to take it from money outside
36:24
Speaker 7: the trust first? What's the best overall planning play when
36:28
Speaker 7: it comes to that idea? So I think we've answered
36:32
Speaker 7: his question, and I hope if nothing else, this really
36:36
Speaker 7: serves to help people understand the flexibility that is involved here.
36:41
Speaker 7: Meaning think about Philip. He's had these trusts for years,
36:45
Speaker 7: seven years. He said, it's really not causing him any problem.
36:48
Speaker 7: He's been living, he's been renting property, he's been collecting
36:50
Speaker 7: his rent, he's been filing his tax returns. So he
36:53
Speaker 7: didn't call saying this has been a problem. It's working fine,
36:57
Speaker 7: and now when he wants to do something he APSOLU
37:00
Speaker 7: can do it.
37:00
Speaker 4: So there you go.
37:02
Speaker 2: Todd, thanks so much for your time this week and
37:04
Speaker 2: for answering those questions. Really appreciate it, and I hope
37:06
Speaker 2: you have a great day.
37:08
Speaker 4: Always a pleasure. Thank you.
37:10
Speaker 1: This has been asked Todd on the Financial Exchange Radio network.
37:14
Speaker 1: Ask Todd with Todd Lutsky has been presented by Cushing
37:16
Speaker 1: and Dolan, serving Massachusetts and New England for more than
37:19
Speaker 1: thirty years, helping families with the state and tax planning,
37:22
Speaker 1: Medicaid planning, and probate law. Call eight hundred three nine
37:25
Speaker 1: three four thousand and one or visit Cushingdolan dot com.
37:29
Speaker 1: The views expressed in this segment are solely those of
37:30
Speaker 1: Cushing and Dolan. Armstrong Advisory does not provide any legal
37:33
Speaker 1: or tax advice. Please consult with your legal or tax
37:35
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37:38
Speaker 1: each other and are not affiliated.