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Hot Inflation Puts Fed Rate Hikes Back on the Table · The Financial Exchange Show

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  Speaker 1: is The Financial Exchange with Chuck Zada and Paul Lane.
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  Speaker 2: It's Chuck, Paul, and Tucker with you here today, and.
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  Speaker 2: Top story, unsurprisingly, is today's inflation report. At 8.30 a.m.
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  Speaker 2: Eastern Time, we received the CPI data, Consumer Price Index data,
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  Speaker 2: for the month of September. And it was not great. Now,
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  Speaker 2: it was expected to be not great, but it was
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  Speaker 2: even more not great than we were expecting. Headline came
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  Speaker 2: in pretty much in line with expectations at 0.6% month
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  Speaker 2: over month, though on the high side of there. Remember,
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  Speaker 2: When you round anything to one decimal point, a. 6
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  Speaker 2: could be as low as. 56 or as high as.
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  Speaker 1: 64.
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  Speaker 2: And in this case, it was closer to the latter
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  Speaker 2: than the former. So it was a high. 6 rating.
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  Speaker 2: This ended up pushing up the annual inflation rate to 3.7%
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  Speaker 2: versus expectations of 3.6%. Again, the headline is what it is.
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  Speaker 2: I don't think there's a ton of meat on that bone,
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  Speaker 2: and I don't know that there's much there, other than
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  Speaker 2: it just being not good. But we knew it was
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  Speaker 2: going to be not good because we've all seen what's
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  Speaker 2: happened with gas prices and with diesel prices in the
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  Speaker 2: past month, and that is largely what was captured by this,
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  Speaker 2: with gasoline prices being up 9.1% and fuel oil prices
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  Speaker 2: being up 15.3% for the month. Not a surprise to anyone.
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  Speaker 2: The part that was a little bit surprising to people
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  Speaker 2: was that the core number came in at 0.3% versus
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  Speaker 2: expectations of 0.2. And again, remember, when we're talking about rounding,
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  Speaker 2: you can have a 0.26 that rounds up to 0.3
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  Speaker 2: or a 0.34 that rounds down. And so what we
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  Speaker 2: end up with here, this was 0.33%. So it was
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  Speaker 2: a hot 0.3% if you want to call it that.
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  Speaker 2: And so, yes, thank you, Michael. What we have here,
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  Speaker 2: it is a little warm. You're right. What we have
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  Speaker 2: here is a case where you've got inflation coming in
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  Speaker 2: hotter than expected. And so the obvious predictable response is
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  Speaker 2: Bonds have sold off over the course of the morning
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  Speaker 2: so far, Paul, though if we look at where they
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  Speaker 2: are now, 10-year Treasuries up 5.7 basis points. At one point,
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  Speaker 2: the 10-year was up around 10 basis points, almost 11
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  Speaker 2: at one point, and so yields have come in from
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  Speaker 2: their highs, but you've got a bunch of dollars strengthening.
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  Speaker 2: The dollar's up 0.66% today, so a huge move in
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  Speaker 2: the dollar taking place on this with the idea of, Hey,
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  Speaker 2: more inflation means more rate hikes, and that's attracting capital
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  Speaker 2: into dollars at this point.
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  Speaker 3: Yeah, in the U.S.
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  Speaker 4: Two-year treasury, similarly, we're seeing a spike of about 10
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  Speaker 4: basis points there to up at 4.89%. So that is
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  Speaker 4: the largest takeaway from this report. It was certainly hotter
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  Speaker 4: than anticipated. What was attributable to some of those increases?
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  Speaker 4: Shelter prices, we did see about a 0.4% increase there
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  Speaker 4: on the shelter side of things. This is specific to
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  Speaker 4: the core PCE numbers that I'm breaking down here. It's
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  Speaker 4: very obvious on the headline numbers what was the mechanism
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  Speaker 4: behind that.
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  Speaker 3: It was gas prices.
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  Speaker 4: We saw a 9.1% gas jump.
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  Speaker 3: So that is very well spoken for. We've all felt that.
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  Speaker 4: But on the core PCE side of things, shelter, and
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  Speaker 4: then we also saw used car and truck prices up
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  Speaker 4: about 0.7% month over month. So that core number coming
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  Speaker 4: in hotter than anticipated has had those trickle down impacts
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  Speaker 4: on the interest rate side of things. Already had been
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  Speaker 4: a very difficult few months for bond markets. This continues
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  Speaker 4: that sell-off pressure here and does point to opening up
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  Speaker 4: the door a little bit to the Federal Reserve potentially
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  Speaker 4: hiking in about two weeks here at its next meeting.
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  Speaker 4: And we'll get into that. But that certainly is, I think,
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  Speaker 4: at the forefront of investors' minds as they digest this report.
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  Speaker 2: Now, the question that is out there is the move
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  Speaker 2: that we've seen in interest rates recently has mostly been
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  Speaker 2: in the last, call it 45 days now, since the
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  Speaker 2: beginning of September. On September 1st, the 10-year Treasury opened
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  Speaker 2: at 4.75%. And you can go back to mid-May, and
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  Speaker 2: it was at like 4.69 at one point. So there
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  Speaker 2: basically wasn't a ton of movement this summer on interest rates.
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  Speaker 2: They were pretty steady. between around 4.4% and 4.6%, 4.7%
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  Speaker 2: on the 10-year treasury. Since the start of September, we've
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  Speaker 2: gone from 4.75% up to the 5.25% range, and we've
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  Speaker 2: been sitting at 5.25% for the last few weeks. Now,
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  Speaker 2: the reason why there's this phrase when it comes to
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  Speaker 2: monetary policy about long and variable lags, and it gets
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  Speaker 2: at the idea that, look, most of you listening right
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  Speaker 2: now are not buying a house today. Most of you
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  Speaker 2: listening are not buying a car today. You know, in
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  Speaker 2: any given year, they're around between new and existing home
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  Speaker 2: transactions today. There's somewhere around like 4.6, 4.7 million homes
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  Speaker 2: that are bought or sold in the US. And there's,
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  Speaker 2: you know, 16 million vehicles that are bought or sold
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  Speaker 2: in the United States. And so like you do the
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  Speaker 2: math and you're like, okay, most people aren't buying a
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  Speaker 2: house today. So the idea behind long and variable lags
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  Speaker 2: is that hey, well, the housing market might feel an
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  Speaker 2: immediate impact if everyone were buying and selling homes today
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  Speaker 2: because you have to borrow money to do so. Most
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  Speaker 2: of us don't just have $ 400, 000 sitting around like, yeah,
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  Speaker 2: let's go buy the house. So the reason why we
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  Speaker 2: talk about this is, okay, so interest rates have moved
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  Speaker 2: up now. We might not actually feel the impacts of
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  Speaker 2: these higher rates in slowing the economy. for another month
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  Speaker 2: or two, for another three to five months. Sometimes it
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  Speaker 2: takes six to nine months for these to kick in.
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  Speaker 2: It depends on the economy at any particular point in
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  Speaker 2: time and what's driving it, what's changing under the hood.
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  Speaker 2: There's a lot that goes into it. So it's not
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  Speaker 2: physics where you just say, whoa, higher rates, U.S. economy
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  Speaker 2: must be slowing. But what I can tell you is
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  Speaker 2: you look at the rates that we're seeing right now,
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  Speaker 2: specifically in terms of real rates, netting out inflation expectations.
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  Speaker 2: And 10-year real rates are almost 3% now. 30-year real
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  Speaker 2: rates are at almost three and a third. And those
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  Speaker 2: are levels that generally would be accepted as pretty restrictive
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  Speaker 2: on the U.S. economy. And it wouldn't surprise me if
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  Speaker 2: in the next six to nine months, you see a
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  Speaker 2: little bit of drag created on the economy as a whole.
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  Speaker 2: The piece that's challenging to reconcile with this is, hey,
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  Speaker 2: all of this AI CapEx spending, if you really believe
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  Speaker 2: how much return you're going to generate, do you care
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  Speaker 2: that interest rates have gone up by half a percent
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  Speaker 2: in the last month?
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  Speaker 1: No.
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  Speaker 2: Not really. So these are some of the ideas that
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  Speaker 2: we're trying to reckon with and see how they play
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  Speaker 2: out over the next six to 12 months because it's
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  Speaker 2: a very dynamic, very complicated economy right now that clearly has...
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  Speaker 2: some high inflation at the moment. And I think that's
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  Speaker 2: the biggest piece that is upsetting to a lot of
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  Speaker 2: people is that prices just keep on moving up, and
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  Speaker 2: specifically at a pace that's just uncomfortable for them. And
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  Speaker 2: I think that's the toughest thing in the economy right now.
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  Speaker 2: The question that I have is, do these higher real
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  Speaker 2: rates lead to a weaker job market as we turn
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  Speaker 2: into 2027? And that's something we're just going to have
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  Speaker 2: to wait and see on.
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  Speaker 4: Yeah, we haven't seen any evidence of that yet. Obviously,
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  Speaker 4: like you said, it's only been 45 days or so.
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  Speaker 4: The labor market was a bigger concern heading into this year.
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  Speaker 4: Those fears have largely faded, and our major focus has
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  Speaker 4: been on inflation. It has been so interesting to follow
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  Speaker 4: the equity markets over the last month or two, where
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  Speaker 4: we have just been so heavily reliant upon tech and
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  Speaker 4: communication services, which incorporates some companies that you'd think are
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  Speaker 4: tech companies. versus all the other sectors of the market
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  Speaker 4: that are reliant upon borrowing costs or need fuel to
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  Speaker 4: move their goods around have really continued to suffer. So
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  Speaker 4: it is just an interesting market. This inflation report doesn't
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  Speaker 4: do anything to dispel some of the fears on pricing pressure.
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  Speaker 4: But again, just one data point. So we'll have to
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  Speaker 4: see what we get out of the Fed in a
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  Speaker 4: couple of weeks here.
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  Speaker 2: Let's take a quick break. When we return, we'll talk
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  Speaker 2: a little bit about what some of the Fed are saying.
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  Speaker 2: This is some comments from yesterday from New York Fed
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  Speaker 2: President John Williams. We'll discuss next.
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  Speaker 2: So, uh, yesterday, the, uh.
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  Speaker 2: President of the Federal Reserve Bank of New York, John Williams,
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  Speaker 2: gave a speech. Excuse me. It really does just sound
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  Speaker 2: better with the music. Otherwise, just like, okay, who's this
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  Speaker 2: weird dude breathing? And it's like, that's just how Chuck sounds.
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  Speaker 2: So Williams gave a speech yesterday and said, quote, I
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  Speaker 2: haven't changed my view that it may be appropriate to
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  Speaker 2: have one more rate hike. I don't think at this
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  Speaker 2: time I have any reason to believe that we would
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  Speaker 2: need to do more after that. He said there are
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  Speaker 2: still signs that inflation will slow quite a bit and
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  Speaker 2: approach the Fed's 2% target next year. And so he's
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  Speaker 2: basically saying, look, I don't think we need to do
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  Speaker 2: anything more. So the part that I have a problem
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  Speaker 2: with on this, and again, Williams is no dummy. You
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  Speaker 2: don't get to be president of the New York Fed
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  Speaker 2: by being stupid. It's not possible, really. But here's the
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  Speaker 2: piece I have a tough time with, Paul. Historically, you
• 12:03
  Speaker 2: look at the history of rate hikes and what is
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  Speaker 2: needed to bring down inflation or slow the economy... There's
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  Speaker 2: basically nothing in history that suggests, like.
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  Speaker 3: Oh, just do... Two hikes is going to get the
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  Speaker 3: job done.
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  Speaker 2: Not even two. He's saying none. He's basically like, no,
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  Speaker 2: we don't need any more.
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  Speaker 1: Right.
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  Speaker 2: He said, like, it's just like, okay, like, I just,
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  Speaker 2: I don't really get that as a view unless he's
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  Speaker 2: basically saying, hey, this is all due to transitory features
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  Speaker 2: that are going to completely reverse and won't be a problem.
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  Speaker 4: Is he saying no more entirely, or I just thought
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  Speaker 4: it was one more this year and then see what
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  Speaker 4: next year looks.
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  Speaker 2: Like, right? One more this year, yes.
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  Speaker 6: Sorry.
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  Speaker 4: It is interesting how he's taken the mantle as what
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  Speaker 4: feels like the Federal Reserve Chair because he's the one
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  Speaker 4: that's most communicative, while Warsh doesn't really.
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  Speaker 3: say as much.
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  Speaker 4: And it is a guy who certainly has a ton
• 13:02
  Speaker 4: of credibility. He has been critical in some work regarding
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  Speaker 4: the neutral rate, which is just this kind of opaque
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  Speaker 4: sort of feature of the inflationary markets where you're trying
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  Speaker 4: to figure out whether the economy is restrictive or it
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  Speaker 4: is looser in terms of financial conditions. From a impact perspective,
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  Speaker 4: when he had given a speech on September 29th at
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  Speaker 4: the University of Buffalo, he had had similar sentiments to this,
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  Speaker 4: this idea that, gee, we don't really need to rush
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  Speaker 4: with our next rate hike. That had significantly brought down
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  Speaker 4: the futures market in terms of what investors expected on
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  Speaker 4: the interest rate front. Now looking at the CME futures
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  Speaker 4: after this inflation report that we digested this morning, it's
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  Speaker 4: now more of a 50-50 proposition as to whether or
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  Speaker 4: not the Fed will hike rates again a second time
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  Speaker 4: on October 28th. Heading into today, it was about a
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  Speaker 4: 78% probability that the Fed would stand pat. So certainly
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  Speaker 4: this inflation report is having a significant impact on what
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  Speaker 4: may happen at the end of October. Certainly, I can
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  Speaker 4: agree with him. There are clear sort of geopolitical events
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  Speaker 4: that if the US-Iran war was to come to some
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  Speaker 4: sort of agreement, you would think that would have a
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  Speaker 4: tremendous sort of easing on the inflationary pressures from energy
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  Speaker 4: and oil and gas.
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  Speaker 1: Sure.
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  Speaker 4: You can really point to that. He mentions the AI impact.
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  Speaker 4: We'll get into that later in the program, but not
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  Speaker 4: as concerned about that one. I think really the bigger
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  Speaker 4: fish to fry is everything going on between the war
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  Speaker 4: that could help provide a reprieve.
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  Speaker 2: I think the trouble there is, okay, if you want
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  Speaker 2: to make the ending of the war between the U.S.
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  Speaker 2: and Iran as a central pillar of your thesis as
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  Speaker 2: to why inflation is going to come down next year,
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  Speaker 2: then you need to be able to tell me when
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  Speaker 2: it's going to end and why.
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  Speaker 3: And that's the part... I would not venture to do that.
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  Speaker 2: Right, and look.
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  Speaker 3: Because I won't believe it until, jeez, months after.
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  Speaker 2: I mean.
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  Speaker 3: Exactly. This is the thing.
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  Speaker 2: We've talked about this for a while. We've had all
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  Speaker 2: these different false starts as it comes to the end
• 15:16
  Speaker 2: of the Iran war in one way or another, whether
• 15:18
  Speaker 2: it's an official one, whether it's an unofficial one. But
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  Speaker 2: the point I've made is we're not going to know
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  Speaker 2: when it's the one until we look back at it
• 15:28
  Speaker 2: and are like, Yep, that was actually it. Because we've
• 15:32
  Speaker 2: been fooled in a number of different cases by whether
• 15:35
  Speaker 2: it's pronouncements during the spring, whether it's the actual signing
• 15:39
  Speaker 2: of the Memorandum of Understanding, whether it's what we saw
• 15:42
  Speaker 2: in the course of September in terms of the increase
• 15:46
  Speaker 2: in transits through the Strait of Hormuz. These have all
• 15:50
  Speaker 2: been instances where you're like, oh, I want to be
• 15:52
  Speaker 2: optimistic now because I want this to be over. This
• 15:55
  Speaker 2: is not good for the world in any way, shape,
• 15:59
  Speaker 2: or form that this is still going on. And in
• 16:03
  Speaker 2: each of those instances, you can say, okay, in the
• 16:08
  Speaker 2: spring it was, okay, this didn't happen because the two
• 16:11
  Speaker 2: sides weren't able to actually reach an agreement. In the
• 16:13
  Speaker 2: summer it was, well, they reached an agreement and then
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  Speaker 2: it fell apart because they had different interpretations of the agreement.
• 16:19
  Speaker 2: In September, it was, hey, like, transits are increasing because
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  Speaker 2: Iran's not hitting as many ships. And now in the last, like,
• 16:25
  Speaker 2: five days, they've hit a dozen ships. And so it's like, okay, like,
• 16:29
  Speaker 2: what gives here? Like, when are we going to finally
• 16:32
  Speaker 2: get there? And I don't know, but the point I've
• 16:34
  Speaker 2: made since the beginning is I think you only get
• 16:37
  Speaker 2: a conclusive resolution when one side says this is simply
• 16:42
  Speaker 2: too painful for us to continue and And as such,
• 16:46
  Speaker 2: we need to negotiate an end to this, even though
• 16:49
  Speaker 2: we're not going to get what we want out of it.
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  Speaker 5: Right.
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  Speaker 2: That side might be Iran. It might be the United States.
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  Speaker 2: I don't know, because like we're clearly not there yet.
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  Speaker 2: Like we're not at a point where both sides are
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  Speaker 2: just stepping aside and saying we're done with this. And
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  Speaker 2: so if someone, you know, whether it's Williams or anyone
• 17:08
  Speaker 2: else is going to say, yes, like, you know, the
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  Speaker 2: Iran war ending is why I think that inflation is
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  Speaker 2: going to get back to normal. Well, tell me what
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  Speaker 2: you're seeing in terms of when that's going to happen then.
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  Speaker 2: Because I don't know. It could be today. I don't
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  Speaker 2: think it's today based on what we're seeing. It could
• 17:27
  Speaker 2: be next week. It could be a month from now.
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  Speaker 2: It might not be a year from now. It might
• 17:32
  Speaker 2: not be for several years. I mean, we've seen this
• 17:35
  Speaker 2: thing in Ukraine continue on for almost five years now.
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  Speaker 2: And so if you want to be like, hey, I'm
• 17:42
  Speaker 2: pricing in that the Middle East will return to normal.
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  Speaker 2: Gosh, like, that's kind of a big assumption given the
• 17:51
  Speaker 2: Middle East, you know, in its totality.
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  Speaker 1: Right.
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  Speaker 2: You know, this is before you even get into what's
• 17:57
  Speaker 2: going on between, like, the Saudis and the Houthis and stuff.
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  Speaker 2: I mean, like, it's just a heavy lift for me.
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  Speaker 2: The AI stuff, yes, I think we can conclusively say
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  Speaker 2: that AI is not going to, like, expand CapEx by
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  Speaker 2: 70% every year for the rest of our lives.
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  Speaker 6: Yep.
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  Speaker 2: Because, like, there's other stuff that needs to be done
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  Speaker 2: that it can't do, and I don't know, maybe, like,
• 18:21
  Speaker 2: it can do it eventually, but it's just, like, if
• 18:25
  Speaker 2: we're actually all going to become robots, then what's the
• 18:27
  Speaker 2: point anyway? So who cares about that worldview? Like, it
• 18:31
  Speaker 2: just doesn't matter. But I think where I tend to
• 18:35
  Speaker 2: land is, hey, inflation is clearly being driven by transitory
• 18:40
  Speaker 2: items right now, But if they don't reverse quickly enough,
• 18:43
  Speaker 2: then those inflation expectations get embedded into everything. And that
• 18:46
  Speaker 2: becomes a much tougher nut to crack as far as
• 18:50
  Speaker 2: tamping down on it. You can also make a case
• 18:52
  Speaker 2: that structurally right now, the U.S. is fundamentally different than
• 18:55
  Speaker 2: it's been before. And that, hey, maybe the economy doesn't
• 18:57
  Speaker 2: respond to higher rates quite as effectively as it did
• 19:00
  Speaker 2: in previous cycles. Because housing isn't driving the ship as much.
• 19:04
  Speaker 2: You don't have.
• 19:06
  Speaker 2: As much income that's being generated by the labor force
• 19:10
  Speaker 2: as opposed to through investments and through Social Security. And
• 19:13
  Speaker 2: so maybe this is not an economy that's as responsive
• 19:17
  Speaker 2: to rate hikes. And maybe rates need to continue to
• 19:20
  Speaker 2: move higher because of that. I'm not hoping for that,
• 19:22
  Speaker 2: but maintain an open mind on these things because you
• 19:25
  Speaker 2: just never know.
• 19:25
  Speaker 3: Let's take a quick break.
• 19:27
  Speaker 2: When we come back, we got Wall Street Watch and
• 19:28
  Speaker 2: Todd Lutzky joins us for Ask Todd.
• 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
• 19:46
  Speaker 1: Financial Exchange Radio Network. Time now for Wall Street Watch.
• 19:52
  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.
• 19:59
  Speaker 5: Yields jumping higher in reaction to a harder than expected
• 20:02
  Speaker 5: inflation reading where consumer prices climbed 3.7% in September, higher
• 20:07
  Speaker 5: than forecast at 3.6%. Right now, the Dow is up
• 20:12
  Speaker 5: only 30 points. S & P 500 is down about
• 20:14
  Speaker 5: two-thirds of a percent to 47 points lower. NASDAQ down
• 20:18
  Speaker 5: over eight-tenths of a percent or 227 points lower. Rust
• 20:20
  Speaker 5: 2000 selling off by 1.3%. Ten-year Treasury yield is up
• 20:21
  Speaker 5: four basis points at 5.257%. And crude oil is up 1.3%.
• 20:24
  Speaker 5: Trading and $ 95 a barrel. More bank earnings this morning
• 20:36
  Speaker 5: after Bank of America missed third quarter revenue expectations after
• 20:40
  Speaker 5: being hit with a $ 1. 2 billion money laundering penalty by U.S.
• 20:44
  Speaker 3: Regulators.
• 20:45
  Speaker 5: Shares are dropping 7%. BlackRock up over 1% after the
• 20:50
  Speaker 5: bank beat Street Profit expectations. Morgan Stanley also beat expectations
• 20:55
  Speaker 5: on Blockbuster results in its equities trading franchise. However, the
• 21:00
  Speaker 5: stock is down by 3%. Meanwhile, Dutch semiconductor company ASML
• 21:05
  Speaker 5: lifted its annual forecast for the third time this year,
• 21:08
  Speaker 5: saying it was looking at ways to boost production. Shares
• 21:11
  Speaker 5: are down about half a percent. And The Wall Street
• 21:14
  Speaker 5: Journal reported that Netflix is cutting 6% of its staff
• 21:17
  Speaker 5: for about 1,000 jobs globally as it struggles with slowing
• 21:21
  Speaker 5: growth and customer engagement. This marks the streaming giant's biggest
• 21:26
  Speaker 5: round of layoffs since 2022. Netflix shares are down over
• 21:30
  Speaker 5: half a percent. I'm Tucker Silva, and that is Wall
• 21:34
  Speaker 5: Street Watch.
• 21:36
  Speaker 1: This is Ask Todd on the Financial Exchange Radio Network.
• 21:39
  Speaker 1: If you have an existing estate plan or are in
• 21:41
  Speaker 1: the market for one, Todd Lutzke is here to answer
• 21:44
  Speaker 1: your questions and help you plan for a later life.
• 21:47
  Speaker 1: Ask Todd is presented by Cushing & Dolan, serving Massachusetts
• 21:50
  Speaker 1: and New England for more than 35 years, helping families
• 21:53
  Speaker 1: with estate and tax planning, Medicaid planning, and probate law.
• 21:57
  Speaker 1: Visit CushingDolan.com. Now, here's Todd Lutzke.
• 22:02
  Speaker 2: We got Todd Lutzky all queued up for you here,
• 22:05
  Speaker 2: and this is your chance to ask Todd your estate
• 22:07
  Speaker 2: planning questions live on air right now, this very minute.
• 22:15
  Speaker 2: 888-205-2263 is the number. Again, it is 888-205-2263. Usually we
• 22:23
  Speaker 2: get time for about two or three of your questions,
• 22:26
  Speaker 2: so get calling early to make sure we can get
• 22:28
  Speaker 2: to you. You don't want to be... Stuck in the
• 22:32
  Speaker 2: way back of the line. That's no fun for anyone.
• 22:34
  Speaker 2: So again, 888-205-2263 is the number. Mr. Lutzky, how are
• 22:40
  Speaker 2: you doing today?
• 22:41
  Speaker 7: I am never better.
• 22:42
  Speaker 2: And you?
• 22:43
  Speaker 3: Pretty good.
• 22:45
  Speaker 2: Went out for dinner over the weekend. Yeah, you like dinner?
• 22:48
  Speaker 1: I do.
• 22:48
  Speaker 2: I love dinner. I ordered a whole roast duck.
• 22:52
  Speaker 1: Okay.
• 22:52
  Speaker 2: I was kind of shocked when I saw the bill.
• 22:54
  Speaker 7: That's right.
• 22:55
  Speaker 2: A little bit. Yeah, a little bit. Todd, I want
• 22:58
  Speaker 2: to talk to you a little bit about primary residence ownership.
• 23:02
  Speaker 7: Okay.
• 23:03
  Speaker 2: Give me the top two problems with selling or giving
• 23:11
  Speaker 2: your house to your kid or kids and maintaining a
• 23:15
  Speaker 2: life estate in said property. What are the biggest things
• 23:18
  Speaker 2: that can go wrong? Because I know you'll tell me
• 23:20
  Speaker 2: that There's a million things that can go wrong. Yeah,
• 23:22
  Speaker 2: there is. So I'm going to try and keep it.
• 23:24
  Speaker 2: You have two. Keep it to two.
• 23:26
  Speaker 1: Two.
• 23:27
  Speaker 8: And it's interesting that I thought you were going to
• 23:29
  Speaker 8: stop when you said giving your house to your kids.
• 23:31
  Speaker 8: And then you added that little piece about retaining a
• 23:34
  Speaker 8: life estate sort of in the back end. I know
• 23:37
  Speaker 8: a couple things. And that makes a difference in the
• 23:40
  Speaker 8: question because it would have been really easy with giving
• 23:43
  Speaker 8: it to your children.
• 23:44
  Speaker 2: It's just horrible. Why is that so horrible? What if
• 23:48
  Speaker 2: you just give your primary residence to your kids? Tell
• 23:51
  Speaker 2: me the biggest horribleness that comes out of it.
• 23:53
  Speaker 8: So if you give your primary residence to your kids, well,
• 23:57
  Speaker 8: obviously you don't own it anymore, so that's a problem.
• 23:59
  Speaker 8: I mean, kids could throw you out, kids could have
• 24:01
  Speaker 8: a divorce, kids could have creditors chasing them, and guess what?
• 24:03
  Speaker 7: You lose your house. So that, I think, is probably
• 24:06
  Speaker 7: the biggest reason.
• 24:07
  Speaker 8: Yeah, I talk a lot about taxes and planning and
• 24:10
  Speaker 8: all that stuff, but hey, losing my house, losing control
• 24:14
  Speaker 8: over my house, that's a horrible idea. But I'll throw
• 24:17
  Speaker 8: in one more. You know, you also assuming, you know,
• 24:22
  Speaker 8: they'll come back to you and they'll say, oh, no,
• 24:24
  Speaker 8: don't worry. My kids would never throw me out. Nothing
• 24:25
  Speaker 8: bad will ever happen. They'll just let me live there
• 24:28
  Speaker 8: and it'll be fine. I don't worry about selling it.
• 24:31
  Speaker 8: I'm never moving. You know, they give you all these
• 24:33
  Speaker 8: reasons why it's still such a great idea to do.
• 24:35
  Speaker 1: Sure.
• 24:36
  Speaker 2: So let's assume you, you know, you have that perfect family.
• 24:41
  Speaker 7: I still wouldn't do it.
• 24:43
  Speaker 6: Why?
• 24:44
  Speaker 7: Never mind that something could go wrong. But it's a
• 24:47
  Speaker 7: tax reason now.
• 24:48
  Speaker 8: I mean, I'm guessing that in this scenario we're talking about, Chuck,
• 24:52
  Speaker 8: it's probably someone who bought the house, you know, 30,
• 24:54
  Speaker 8: 40 years ago. They're older now and they, you know,
• 24:57
  Speaker 8: they want to give their house to their kids. The
• 24:59
  Speaker 8: kid might be needing a place to live. And they say, look, well,
• 25:02
  Speaker 8: just let us live there. Let you have the house. Well,
• 25:06
  Speaker 8: if they bought it a long time ago, even if
• 25:07
  Speaker 8: they improved it over the years with some capital improvements, right,
• 25:12
  Speaker 8: their cost basis, I suspect, is pretty low. So in
• 25:16
  Speaker 8: this example, let's say we've got a million dollar home.
• 25:18
  Speaker 8: It's not hard to have a million dollar home in
• 25:20
  Speaker 8: Massachusetts today. And if you bought it long ago, it's
• 25:22
  Speaker 8: probably grown to a million. Well, long ago, I might
• 25:26
  Speaker 8: have only paid 100 grand for it. And maybe I
• 25:29
  Speaker 8: put in another 200 grand in improvements over the years.
• 25:34
  Speaker 1: Maybe.
• 25:34
  Speaker 8: Sometimes you don't. Sometimes you have that 1970 house still.
• 25:38
  Speaker 8: And it looks like that. Time capsule. But let's just
• 25:42
  Speaker 8: give them the benefit of the doubt that maybe my
• 25:43
  Speaker 8: entire cost basis is $ 300, 000. Well, if I give that
• 25:46
  Speaker 8: to my kids now, yeah, it's out of my estate
• 25:49
  Speaker 8: and I save estate taxes perhaps. Again, I don't know
• 25:52
  Speaker 8: how large the estate is, but maybe it would save
• 25:54
  Speaker 8: some estate tax. Probably not federally, but maybe in Massachusetts.
• 25:59
  Speaker 8: But I've given my kids a $ 700, 000 gain, which is.
• 26:04
  Speaker 2: A capital gains tax bill. I don't like that, right?
• 26:07
  Speaker 7: Even at 30%. You'd prefer to avoid it. Yeah, it's
• 26:10
  Speaker 7: not helpful.
• 26:11
  Speaker 8: I mean, at 30%, you're looking at $ 210, 000 in tax,
• 26:14
  Speaker 8: and it's possible, depending on when they sell it, that
• 26:17
  Speaker 8: you might run across that million-dollar Massachusetts tax that we have,
• 26:21
  Speaker 8: the millionaire's tax, that would creep in there.
• 26:24
  Speaker 7: So it's a tax bill that you're giving them.
• 26:26
  Speaker 8: In reality, if you died owning it, you'd get a
• 26:28
  Speaker 8: step-up in basis, eliminating the entire built-in gain, let them
• 26:32
  Speaker 8: inherit it when you die, avoid all these problems, and
• 26:35
  Speaker 8: you probably still don't have a mass estate tax depending
• 26:39
  Speaker 8: on the size of your estate.
• 26:40
  Speaker 7: So be careful when you gift. It's not always.
• 26:44
  Speaker 8: It's not always the best thing to do. Sometimes not
• 26:46
  Speaker 8: gifting is the best thing to do.
• 26:47
  Speaker 2: Talking with Todd Lutzky from the law firm of Cushing
• 26:49
  Speaker 2: and Dolan. Still room on the phone lines at 888-205-2263.
• 26:54
  Speaker 2: That is the number to call to ask Todd your
• 26:58
  Speaker 2: estate planning questions live on air right now. 888-205-2263. We're
• 27:06
  Speaker 2: going to take a quick break here, but when we return,
• 27:09
  Speaker 2: we are going to get to your questions with Todd.
• 27:11
  Speaker 2: That number again is 888- 205-2263. Let's give it one
• 27:17
  Speaker 2: more time at 888-205-2263.
• 27:22
  Speaker 1: Ask Todd with Todd Lutzke. Every Wednesday at 1030. Only
• 27:26
  Speaker 1: here on the Financial Exchange Radio Network. You're listening to
• 27:32
  Speaker 1: Ask Todd with Todd Lutzke on the Financial Exchange Radio Network.
• 27:47
  Speaker 2: Talking with Todd Lutzky from the law firm of Cushing
• 27:49
  Speaker 2: and Dolan. Still room on the phone lines. 888-205-2263 is
• 27:55
  Speaker 2: the number to call to ask Todd your questions live
• 27:57
  Speaker 2: on air right now. Again, that number is 888-205-2263. Todd,
• 28:03
  Speaker 2: last segment we were talking about, hey, what if you
• 28:08
  Speaker 2: just sell or give your primary residence to your kids?
• 28:12
  Speaker 2: What's the problem there? And you outlined some of that.
• 28:14
  Speaker 6: Yeah.
• 28:15
  Speaker 2: What about if you just make them joint owners on
• 28:17
  Speaker 2: your property? Is that half as bad of a problem,
• 28:20
  Speaker 2: twice as bad, or the same bad?
• 28:22
  Speaker 7: Yeah, I'm going to say it's a different bad.
• 28:25
  Speaker 2: Different bad.
• 28:26
  Speaker 7: But it's still bad, right? So I guess there's actually
• 28:30
  Speaker 7: pros and cons to think about.
• 28:31
  Speaker 8: And by the way, when I talk about gifting, we
• 28:33
  Speaker 8: talk about gift tax, estate tax, income tax.
• 28:36
  Speaker 7: They all play into gifting.
• 28:38
  Speaker 8: But also I want you to think about creditor problems
• 28:41
  Speaker 8: like a Medicaid perspective. When you think about gifting. So
• 28:44
  Speaker 8: really all of those factors come into your question.
• 28:47
  Speaker 1: Okay.
• 28:48
  Speaker 8: So in this case, you know, let's say we added
• 28:52
  Speaker 8: a child's name, I'm guessing it may be joint with
• 28:55
  Speaker 8: a child, to a bank account. Just a bank account.
• 28:59
  Speaker 8: And by the way, it's different if it's a bank
• 29:01
  Speaker 8: account versus an investment account.
• 29:03
  Speaker 2: Okay.
• 29:04
  Speaker 8: So let's say you put a joint bank account. You say,
• 29:06
  Speaker 8: I'll just put my kid's name on. Well, I guess
• 29:08
  Speaker 8: there's some benefits there. If you die, it'll avoid probate.
• 29:10
  Speaker 8: It'll go right to that kid. Did I make a
• 29:13
  Speaker 8: gift though? The moment I put my child's name on
• 29:16
  Speaker 8: the account?
• 29:18
  Speaker 2: No, absolutely not.
• 29:19
  Speaker 8: So if I have $ 100, 000 account and I put down
• 29:23
  Speaker 8: my daughter's name on the account, nothing happens.
• 29:27
  Speaker 1: Okay.
• 29:27
  Speaker 8: But the moment my daughter goes in and takes out
• 29:30
  Speaker 8: half or all of the money, because now she can,
• 29:33
  Speaker 8: because she's on the account, then I've completed the gift
• 29:37
  Speaker 8: for gift tax purposes.
• 29:38
  Speaker 7: So that's how.
• 29:39
  Speaker 8: The gifting works but so again I don't like it
• 29:43
  Speaker 8: because it's subject to her creditors she can get it
• 29:46
  Speaker 8: it's going to be subject to you know a potential
• 29:50
  Speaker 8: gift if she walks in and makes a gift so
• 29:53
  Speaker 8: we've got that problem so lots of issues that could
• 29:57
  Speaker 8: go on and And so, folks, gifting is never an automatic.
• 30:05
  Speaker 8: I want you to think about what to gift, how
• 30:07
  Speaker 8: to gift. Do we want to add joint accounts to
• 30:09
  Speaker 8: the names?
• 30:10
  Speaker 2: I wouldn't.
• 30:10
  Speaker 7: Do I want to put a kid's name on a
• 30:12
  Speaker 7: rental property or home?
• 30:13
  Speaker 4: No.
• 30:15
  Speaker 7: What to gift? How to gift? Well, what if I
• 30:17
  Speaker 7: give it away?
• 30:17
  Speaker 8: Do I want my kid to have it or do
• 30:18
  Speaker 8: I want to gift it to an irrevocable gifting trust?
• 30:21
  Speaker 8: What about if I make a gift? I might want
• 30:23
  Speaker 8: to continue to enjoy what I gave away. So maybe
• 30:26
  Speaker 8: I want to use a special trust that I can
• 30:27
  Speaker 8: do that with. Folks, there's examples in here, tax examples,
• 30:31
  Speaker 8: gift examples. What to gift, how to gift, when to gift.
• 30:36
  Speaker 2: Should I gift?
• 30:37
  Speaker 8: Folks, gifting can be a part of your estate plan
• 30:39
  Speaker 8: or maybe not. Call and get the guide, 866-848-5699 or LegalExchangeShow.com. Again,
• 30:46
  Speaker 8: 866-848-5699 or LegalExchangeShow.com and you can download it right there.
• 30:58
  Speaker 2: Todd, we've got Peter from Worcester on the line for you. Peter,
• 31:02
  Speaker 2: what's your question for Todd Lutzky?
• 31:04
  Speaker 9: Hi, good morning, Todd. Thank you for taking my call. Hey,
• 31:07
  Speaker 9: I talked to you about a month ago, and we
• 31:09
  Speaker 9: were at the end of the show. I really didn't
• 31:10
  Speaker 9: get a question in.
• 31:11
  Speaker 1: Okay.
• 31:11
  Speaker 9: I have a two-fold question for you. I have a
• 31:13
  Speaker 9: revocable trust right now with my two daughters. The only
• 31:17
  Speaker 9: thing that was left out of it at the time
• 31:19
  Speaker 9: I had it done, it was like six years ago,
• 31:21
  Speaker 9: is that the house didn't get put into the revocable trust.
• 31:25
  Speaker 1: Wow.
• 31:26
  Speaker 9: And I was anticipating on selling it. I never sold it.
• 31:29
  Speaker 9: I'm doing the trust over again right now and updating it.
• 31:33
  Speaker 9: That would be the first question I have. Should I
• 31:36
  Speaker 9: put the house in the trust?
• 31:37
  Speaker 7: Okay.
• 31:39
  Speaker 9: Number two, all right? My two girls are getting older
• 31:42
  Speaker 9: right now. Initially, they were younger, and I had the
• 31:46
  Speaker 9: attorney basically put the trust into uh uh 30 35
• 31:51
  Speaker 9: and 40 for distribution purposes yep and i'm thinking about
• 31:55
  Speaker 9: changing that and i wanted your opinion on the secure
• 31:59
  Speaker 9: act uh 2.0 because everything's got to come out within
• 32:02
  Speaker 9: 10 years and i'm i'm thinking to myself at the
• 32:05
  Speaker 9: right now that my daughter's just shy of 30 and
• 32:08
  Speaker 9: the other one's going to be like 26 so i'm
• 32:11
  Speaker 9: thinking about changing those parameters uh And I was basing
• 32:14
  Speaker 9: that on the SECURE Act.
• 32:16
  Speaker 8: Well, let me ask you then a couple of follow-up
• 32:19
  Speaker 8: questions because the first question is simple. Absolutely, the house
• 32:21
  Speaker 8: should be in the trust. It should have been in
• 32:22
  Speaker 8: the trust long ago. Folks, don't ever not fund your
• 32:26
  Speaker 8: trust because you think you're selling it because when you
• 32:28
  Speaker 8: sell it, it's exactly the same as if you sell
• 32:31
  Speaker 8: it whether it's in the trust or not in the trust.
• 32:33
  Speaker 8: So going forward, for everybody listening, don't not put your
• 32:36
  Speaker 8: house in the trust.
• 32:37
  Speaker 2: Put it in.
• 32:38
  Speaker 8: So that's an easy one for you. Peter, but the
• 32:41
  Speaker 8: other one is requiring a little more attention. So you've
• 32:46
  Speaker 8: got two daughters. I understand that because I have them
• 32:50
  Speaker 8: as well. And so we're deciding how do we want
• 32:53
  Speaker 8: to leave it. It's not necessarily just based on the
• 32:55
  Speaker 8: SECURE Act. So if you have IRA money, yes, I
• 32:59
  Speaker 8: want the IRA money beneficiary designation changed to the trust.
• 33:04
  Speaker 2: I agree. Good idea.
• 33:05
  Speaker 8: So that when you die, it ultimately gets into the trust.
• 33:09
  Speaker 8: Does it need to come out over 10 years? It
• 33:11
  Speaker 8: just needs to come out to the trust over 10 years.
• 33:14
  Speaker 8: The trust can still accumulate and hold assets for the
• 33:17
  Speaker 8: benefit of your children and make distributions of the income
• 33:20
  Speaker 8: if they want to in the discretion of a trustee.
• 33:23
  Speaker 8: Do I need to tie it to certain ages? Well, again,
• 33:27
  Speaker 8: that's up to you. You know your family, you know
• 33:29
  Speaker 8: your children. I mean, if the goal is, and you
• 33:32
  Speaker 8: know how much you're worth, but if the goal is
• 33:34
  Speaker 8: to ultimately get these assets to the kids... in a
• 33:38
  Speaker 8: way that they are protected from their future creditors, future divorces,
• 33:42
  Speaker 8: maybe even skip a generation if it can get to
• 33:45
  Speaker 8: the grandkids tax-free after your children die, then I'd eliminate
• 33:49
  Speaker 8: the ages altogether. I'm not a big fan of the ages.
• 33:53
  Speaker 2: I mean, you can do it.
• 33:53
  Speaker 7: It's okay.
• 33:55
  Speaker 8: It's better than just giving it to them. There's at
• 33:56
  Speaker 8: least a maturation process there. But I would probably set
• 34:00
  Speaker 8: these up as divorce-proof language where it's creditor-protected and sole
• 34:05
  Speaker 8: discretionary distribution can happen to kids and grandkids over their
• 34:09
  Speaker 8: whole life. That way it's protected from future divorces and
• 34:13
  Speaker 8: protected from estate taxes when they die at the same time.
• 34:18
  Speaker 8: And you've got all the flexibility you need built in
• 34:20
  Speaker 8: without an outright distribution. So hopefully that helps and satisfies
• 34:25
  Speaker 8: your situation.
• 34:27
  Speaker 2: Todd, I got another one here for you. Let's go
• 34:28
  Speaker 2: to Nan in Weymouth. Nan, you are on with Todd Lutzky.
• 34:33
  Speaker 6: Hi, thank you for checking my call.
• 34:35
  Speaker 9: Mm-hmm.
• 34:36
  Speaker 6: I'm not sure I can tell you everything that I
• 34:38
  Speaker 6: need to tell you to get an answer.
• 34:42
  Speaker 7: Just try to ask the question then.
• 34:44
  Speaker 2: Just go right to the question. No background.
• 34:46
  Speaker 5: Okay.
• 34:47
  Speaker 6: All right. I sold my house this year, and I'm
• 34:52
  Speaker 6: worried about the capital gains on it.
• 34:54
  Speaker 2: Okay.
• 34:56
  Speaker 7: Was it your primary residence?
• 34:59
  Speaker 6: Yes. It was there for 63 years.
• 35:02
  Speaker 2: So it's your home, and are you married?
• 35:05
  Speaker 6: No. My husband died many years ago.
• 35:07
  Speaker 2: Okay. So you have a house worth how much? Well,
• 35:11
  Speaker 2: I sold it for $ 600, 000.
• 35:14
  Speaker 7: $ 600, 000. How much did you pay for it?
• 35:15
  Speaker 6: $ 18, 500.
• 35:18
  Speaker 8: And how much money did you put into it over
• 35:20
  Speaker 8: the years? Roof, bathroom, kitchen, driveway, whatever, furnace?
• 35:24
  Speaker 6: Yeah. I have a list, but I've never totaled it.
• 35:27
  Speaker 6: And I did many things. Many roofs and many... bathroom
• 35:31
  Speaker 6: changes and kitchen changes and all of that.
• 35:34
  Speaker 8: So I can tell you based on what you're saying,
• 35:36
  Speaker 8: based on what you're saying with all of those things
• 35:39
  Speaker 8: and this many years, the government's not going to be
• 35:42
  Speaker 8: questioning the fact that you fix up a house over
• 35:44
  Speaker 8: 40 years.
• 35:45
  Speaker 2: That's just normal.
• 35:47
  Speaker 8: So if you paid $ 20, 000 and let's say you've.
• 35:50
  Speaker 7: Put $ 200, 000 in, okay, which is not uncommon.
• 35:56
  Speaker 8: Let's say your total cost basis is $.
• 35:58
  Speaker 3: 200, 000.
• 35:59
  Speaker 8: 220, let's call it 300 for easy numbers, right? 600
• 36:04
  Speaker 8: minus 300 is only 300,000 of gain, okay? And you
• 36:09
  Speaker 8: live there, so you get a $ 250, 000 capital gains tax
• 36:14
  Speaker 8: exclusion for selling your primary residence. So now we're talking
• 36:17
  Speaker 8: about a capital gain of.
• 36:18
  Speaker 2: $ 50, 000.
• 36:19
  Speaker 8: You know, even at 30%, that's 15 grand.
• 36:23
  Speaker 2: I mean, who cares, right? It's a home run win
• 36:27
  Speaker 2: for you.
• 36:28
  Speaker 8: You get to keep $ 600, 000 and you pay very little
• 36:31
  Speaker 8: in capital gains tax. So if nothing else, I'm hoping
• 36:34
  Speaker 8: that I'm alleviating some of your stress and concern over
• 36:37
  Speaker 8: the capital gains tax. I think the biggest thing you've
• 36:41
  Speaker 8: lost sight of here is, one, all the money that
• 36:44
  Speaker 8: you've put into it, and two, that.
• 36:47
  Speaker 7: $ 250, 000 exclusion.
• 36:48
  Speaker 8: So bump up your basis as much as you can
• 36:51
  Speaker 8: and include that $ 250, 000 capital gains tax exclusion in.
• 36:55
  Speaker 7: I think you're going to be just fine.
• 36:57
  Speaker 2: Mr. Lutzky, thank you so much for the time today.
• 36:59
  Speaker 2: We appreciate it.
• 37:00
  Speaker 7: Always a pleasure. Thank you.
• 37:02
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• 37:06
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• 37:08
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• 37:11
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