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What happens to gas prices if tariffs continue? · The Financial Exchange Show

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1:08
Speaker 2: Wednesday here on the Financial Exchange, Chuck Paul talker with you,
1:12
Speaker 2: and we are now over twenty four hours into the
1:18
Speaker 2: implementation of the Canada and Mexico tariffs, as well as
1:23
Speaker 2: the jump in the China tariff rate from ten percent
1:27
Speaker 2: up to twenty percent, and sure seems to me, Paul,
1:31
Speaker 2: that we're gonna be getting some announcement this afternoon. Treasurer
1:35
Speaker 2: Secretary Howard Lutnik has said a number of times now
1:39
Speaker 2: that there is going to likely be some kind of
1:42
Speaker 2: modification and compromise that we see on these tariffs this afternoon,
1:47
Speaker 2: but it's unclear exactly what form that takes, whether it's
1:51
Speaker 2: certain goods that end up being excluded from them, whether
1:54
Speaker 2: it's a reduction in the rate. It does sound like
1:57
Speaker 2: they're not going away entirely based on the interview that
2:00
Speaker 2: I saw this morning, I think it was around eight
2:03
Speaker 2: am he was on. Honestly, I don't know if it's
2:06
Speaker 2: Bloomberger SMBC. He's on one of the financial news channels.
2:09
Speaker 2: And so I think that where I continue to now
2:14
Speaker 2: Land is look specifically in the New England region. Tariffs
2:19
Speaker 2: would have a huge impact on energy costs, just because
2:21
Speaker 2: we get a ton of our energy from Canada in
2:24
Speaker 2: this part of the country, but ultimately for the entire country.
2:29
Speaker 2: It's something that would raise prices and potentially force supply
2:32
Speaker 2: chains to be significantly disrupted in the short term. But
2:36
Speaker 2: now we continue to have this uncertainty as to what's
2:39
Speaker 2: the playing field going to look like, and I continue
2:43
Speaker 2: to think that that's just not a great environment for
2:45
Speaker 2: business if you don't know day to day, week to week,
2:49
Speaker 2: what the situation is, because it makes it very challenging
2:53
Speaker 2: for you to want to invest if you don't know
2:55
Speaker 2: if that investment is going to have not a certainty
2:58
Speaker 2: of success like there's always but you don't want additional
3:03
Speaker 2: risk caused by policy moving back and forth too quickly.
3:07
Speaker 3: That is as a great point to emphasize, and I
3:09
Speaker 3: don't think it's been mentioned enough, is the uncertainty in
3:12
Speaker 3: the environment. There's a ripple effect across a bunch of
3:15
Speaker 3: different industries. I mean, we saw and this is just
3:18
Speaker 3: probably the tip of the iceberg on this. We got
3:20
Speaker 3: some manufacturing data from ISM on Monday this week where
3:23
Speaker 3: we saw new orders on the manufacturing side contract pretty
3:26
Speaker 3: significantly from the month of January. Sentiment from homebuilders that
3:30
Speaker 3: you talk to or polling there is very negative too,
3:35
Speaker 3: just because of the same thing that we talk about
3:38
Speaker 3: on a daily basis, the uncertainty with tariffs. You know,
3:40
Speaker 3: what we're going to talk about is some of the
3:42
Speaker 3: impacts that these tariffs have, and specific to homebuilding. You
3:45
Speaker 3: have seventy percent of both lumber and gypsum which is
3:50
Speaker 3: used for drywall, coming from either Canada or Mexico. So
3:54
Speaker 3: if you have homebuilders out there, that amount of uncertainty
3:57
Speaker 3: as to whether or not those products that they're in
4:00
Speaker 3: importing from Mexico or cana are going to be assessed
4:02
Speaker 3: to twenty five percent teriff when they import them over
4:05
Speaker 3: That will lend to businesses and home builders pausing their efforts.
4:10
Speaker 3: So it would be a lot more helpful, hopefully over
4:14
Speaker 3: the next four to six weeks or so. The sooner
4:16
Speaker 3: the better, really if there was some certainty on what
4:20
Speaker 3: the path forward looks like and how long we're looking
4:24
Speaker 3: at these things for to wake up this morning and
4:27
Speaker 3: I wasn't surprised by it.
4:28
Speaker 2: No, we got to already last night that this was coming.
4:31
Speaker 3: But why how are we already here within twenty four hours?
4:35
Speaker 3: Check that there's some reversal of positioning. It's just from
4:39
Speaker 3: our job to complain about it. It's hard to track,
4:42
Speaker 3: you know, it's just every hour there's something new.
4:44
Speaker 2: Well, and I think this is the thing is you
4:46
Speaker 2: want consistency. And I think that one thing that you
4:50
Speaker 2: got during the first Trump term was largely pretty consistent policy.
4:57
Speaker 2: You know, there were a couple of terrif things here
5:00
Speaker 2: and there. I mean there was one Mexico tariff scare
5:03
Speaker 2: that lasted you know, a week and a half. Uh,
5:06
Speaker 2: there actually were and still are tariffs that were put
5:08
Speaker 2: in place by the Trump administration on China. But again
5:11
Speaker 2: consistent kind of a long term approach that was taken there.
5:16
Speaker 2: But it was, hey, there's going to be tax cuts
5:18
Speaker 2: that come through. Here's how long they're going to be
5:20
Speaker 2: in place for. They're you know, they're pasted like it's
5:23
Speaker 2: it's legislated, and.
5:24
Speaker 3: Depreciation right off.
5:26
Speaker 2: Which also business you have like a situation where the
5:30
Speaker 2: things that happened in that first Trump term were largely okay,
5:34
Speaker 2: here's what the rules of the road are going to be,
5:36
Speaker 2: and here's how things are going to play out. And
5:38
Speaker 2: businesses loved it quite honestly, like it was it was fantastic.
5:41
Speaker 2: It was a great business environment. And you sit here
5:45
Speaker 2: right now, and I think that the challenge for businesses.
5:49
Speaker 2: And I've talked to a number of different business leaders,
5:54
Speaker 2: and it depends on the industry who you're talking to
5:57
Speaker 2: and what they're trying to do. But just this is
6:00
Speaker 2: an example. I have one person that I know that
6:04
Speaker 2: is in the process of trying to purchase potentially two
6:09
Speaker 2: different consumer goods companies in the ranges like we're talking
6:14
Speaker 2: tens of millions of dollars, that like, it's not them personally,
6:17
Speaker 2: their company is looking to do this and they're not
6:21
Speaker 2: sure that they are going to pull the trigger on
6:23
Speaker 2: it because basically all of the goods that this company
6:27
Speaker 2: makes are imported. And so he's sitting there saying, I
6:32
Speaker 2: don't know what to pay for these companies actually because
6:35
Speaker 2: I don't know what their revenues and profits are going
6:38
Speaker 2: to look like, because I don't know what the tariff
6:41
Speaker 2: situation is going to be. So you have, you know,
6:43
Speaker 2: someone saying, look, I'm not going to make that investment
6:46
Speaker 2: until I have more certainty. You have other people in
6:50
Speaker 2: the housing industry, as an example, I have a builder
6:54
Speaker 2: that I know who i've I've been asking him, like
6:56
Speaker 2: what's you know, what's the deal. He's like, I'm finishing
6:59
Speaker 2: up the projects that I have right now, but as
7:01
Speaker 2: far as like new stuff that's in the pipeline, he's cut.
7:06
Speaker 2: He's still doing some because like he's got to earn
7:08
Speaker 2: a living and he's got to take some risk. But
7:10
Speaker 2: he's like, I'm basically trying to take like thirty to
7:13
Speaker 2: forty percent of the risk that I previously would from
7:15
Speaker 2: a capital perspective. And that means either you know, hey,
7:19
Speaker 2: I'm gonna have fewer you know, permits that I pull
7:21
Speaker 2: or I'm gonna pull in more partners to help spread
7:23
Speaker 2: the risk around that. Like there's different stuff that he's
7:26
Speaker 2: doing on that end. So I think ultimately the uncertainty
7:31
Speaker 2: has the potential to create a slowdown even without implementation
7:37
Speaker 2: of all the tariffs in all different places. And this
7:41
Speaker 2: is the piece that I keep coming back to, which is,
7:44
Speaker 2: you know, the the uncertainty that we are used to
7:47
Speaker 2: seeing in the economy is will consumers keep spending? Will
7:55
Speaker 2: this trend in AI continue.
7:57
Speaker 3: It's stuff that's unemployment gonna do, yeah, stuff.
7:59
Speaker 2: Related to the broader economy and things like that, and
8:03
Speaker 2: this at least in the short term. And I'm not
8:05
Speaker 2: saying this will stick around. It it may not. Like
8:07
Speaker 2: this may pass in six weeks from now, we may
8:09
Speaker 2: be like okay, like we're through that and it's not
8:12
Speaker 2: a problem anymore. But one of the things right now
8:14
Speaker 2: is uncertainty as it relates to how the federal government
8:18
Speaker 2: is going to be implementing trade policy, how long, at
8:21
Speaker 2: what rates for tariffs. That there's just something there that
8:25
Speaker 2: is causing some hesitation in businesses in the short term,
8:28
Speaker 2: and the sooner it's resolved. The sooner I think that
8:32
Speaker 2: you can see, you know, potentially some positive movement on
8:35
Speaker 2: that front. At this point, the data that we are
8:39
Speaker 2: seeing is that the economy is slowing. I don't think
8:41
Speaker 2: that anyone needs to be talking about recession right now.
8:44
Speaker 2: I mean, I've seen some people, you know, out there
8:46
Speaker 2: being like, oh, it's the Trump session. It's like, guys,
8:48
Speaker 2: like it's been six weeks. The data is not showing
8:51
Speaker 2: like that kind of stuff. And I see people pointing
8:54
Speaker 2: to the Atlanta Fed GDP now, which is you know,
8:56
Speaker 2: showing you know, negative almost three percent right now, And
8:59
Speaker 2: I'm like, basically, even like people who study this stuff
9:02
Speaker 2: are like, yeah, it's it's probably going to bounce back
9:05
Speaker 2: because of how the impacts of certain reports are in here.
9:09
Speaker 2: So let's let's pump the brakes a little bit on
9:11
Speaker 2: the recession talk right now. I love how just everyone
9:17
Speaker 2: always wants to jump there. We've seen so many false
9:19
Speaker 2: recession calls the last few years, and it's not to
9:23
Speaker 2: say that this one will or won't, but guys, that
9:25
Speaker 2: the economic data has gotten worse for like three weeks. Now,
9:30
Speaker 2: we got to pump the brakes a little bit if
9:31
Speaker 2: we're gonna be calling three weeks of bad data a recession,
9:34
Speaker 2: because three weeks of bad data happens like three to
9:37
Speaker 2: four times a year, and I can't deal with four
9:42
Speaker 2: recession calls a year that we we have to make.
9:45
Speaker 2: So let's let's pump the brakes on the recession talk,
9:48
Speaker 2: and let's see how things develop over the next couple
9:51
Speaker 2: months or so. Let's let's be patient and see what
9:53
Speaker 2: happens here. And if we do see that the data
9:57
Speaker 2: you know, ends up worsening from here, and that becomes,
9:59
Speaker 2: you know, a potential reality. Okay, great, let's talk about it.
10:04
Speaker 2: But guys, I can't do recession talk after a couple
10:07
Speaker 2: weeks of bad data. I just I can't do that
10:11
Speaker 2: because it's gonna drive me insane, quite honestly. Take a
10:15
Speaker 2: quick break here. When we come back, let's see tariffs, tarifs, tarifs.
10:21
Speaker 2: Why don't we talk about tariffs as it relates to
10:23
Speaker 2: energy and food, just because those are things that people need.
10:27
Speaker 2: We need energy and we need food, lots of it,
10:33
Speaker 2: and so we'll talk a little bit about how tariffs
10:35
Speaker 2: could impact pricing in those areas.
10:39
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Speaker 2: Okay, So there's a company by the name of gas Buddy.
11:51
Speaker 2: They got a big website. Their whole thing is they
11:53
Speaker 2: track gas prices across the United States. And the guy
11:57
Speaker 2: who runs it, at least he's like the main face
11:59
Speaker 2: of it, is a guy by the name of Patrick Dehan,
12:01
Speaker 2: and Patrick is I will get him, and generally I
12:06
Speaker 2: followed him, you know, on various social media platforms for
12:08
Speaker 2: the last you know, eight ten years, and he's pretty
12:12
Speaker 2: darn good when it comes to what happens to gas prices,
12:15
Speaker 2: you know, in different situations. And he posted a piece
12:18
Speaker 2: on the gas Buddy website yesterday. It's titled Beyond Tariff's
12:22
Speaker 2: US Refineries and the continued reliance on Canadian crude. And
12:27
Speaker 2: this gets at the tariff issue in that as part
12:31
Speaker 2: of the tariff implemented yesterday, there was a ten percent
12:34
Speaker 2: tariff on Canadian energy exports to the US, not the
12:37
Speaker 2: twenty five that everything else gets, but a ten percent.
12:40
Speaker 2: And he answers a few different questions. The first is, Okay,
12:43
Speaker 2: why don't we just move away from using Canadian crude
12:47
Speaker 2: as part of you know, our supply in the US.
12:49
Speaker 2: And the first thing is the infrastructure isn't built for it.
12:53
Speaker 2: There are pipelines that are built that are designed to
12:55
Speaker 2: have oil flowing one way. You can't just reverse the
12:58
Speaker 2: flow and be like no to Canada. There's no reverse button.
13:02
Speaker 2: You know, it's not you know where you put the
13:04
Speaker 2: card down and you're like reverse like, so you can't
13:07
Speaker 2: do that. First of all, the second piece is that
13:11
Speaker 2: refiners in the oil business, there's not just one kind
13:15
Speaker 2: of oil, and so refineries have to be built to
13:17
Speaker 2: process very specific types of oil. And so the oil
13:20
Speaker 2: refineries that take oil from Canada, which is a very
13:25
Speaker 2: it's called heavy sour crude as opposed to the light
13:28
Speaker 2: sweet crude that we're more familiar with. You have specialized
13:31
Speaker 2: equipment that they spend billions of dollars on in order
13:35
Speaker 2: to process it. You can't just run light sweet crude
13:38
Speaker 2: through the same refineries and get the same product because
13:41
Speaker 2: it would produce something different. So you can't just say no,
13:45
Speaker 2: we're going to move away from this, because the entire
13:47
Speaker 2: ecosystem is not set up to move away from it instantly.
13:51
Speaker 2: So the problem is particularly profound in the Northeast. Basically
13:55
Speaker 2: the region that he identifies as main Roade Island, Connecticut,
13:58
Speaker 2: form Mount Newhampshire, Massachusetts, Upstate New y So, New England,
14:00
Speaker 2: plus the northern part of New York. I'm going to
14:03
Speaker 2: quote from him here, so this is not me, this
14:05
Speaker 2: is him. If you're filling up in the Northeast, you'll
14:07
Speaker 2: see price increases first, and more significantly, as a significant
14:11
Speaker 2: portion of this region's fuel comes from the Irving Oil
14:14
Speaker 2: Refinery in Saint John, New Brunswick, Canada, their fine products
14:17
Speaker 2: crossing the border would immediately incur the tariff costs. By
14:20
Speaker 2: the way, that Irving Refinery announced price increases at twelve
14:23
Speaker 2: oh one am yesterday and by mid March twenty twenty five,
14:28
Speaker 2: ten days from now, Northeast could expect fuel prices including
14:31
Speaker 2: gasoline diesel and other petroleum products to be twenty to
14:34
Speaker 2: forty cents per gallon higher for a typical fifteen gallon
14:38
Speaker 2: Philip that's an additional three to six dollars every time
14:40
Speaker 2: you visit the pump. The rest of the country would
14:43
Speaker 2: see smaller jumps because they're not as dependent on Canadian
14:47
Speaker 2: oil imports. The Midwest would see prices rise by five
14:51
Speaker 2: to twenty cents a gallon, Great Lakes ten to twenty
14:53
Speaker 2: five cents a gallon, the Rockies ten to twenty cents
14:56
Speaker 2: a gallon, and the Southeast would see negligible impacts because
14:59
Speaker 2: they get a lot of their oil from you know,
15:02
Speaker 2: the Gulf and you know, imported from overseas and stuff
15:05
Speaker 2: like that, so it's it's not as big of an impact.
15:07
Speaker 2: But basically the northern part of the country, you know,
15:12
Speaker 2: out until Minnesota, would feel these impacts, and with the
15:17
Speaker 2: Northeast being most heavily impacted on the fuel side of things,
15:21
Speaker 2: we'll see if one of the changes that may end
15:23
Speaker 2: up happening today could be, hey, maybe you exempt energy
15:27
Speaker 2: products from these tariffs entirely. I don't know that that's
15:31
Speaker 2: going to be the case, but obviously if that were
15:33
Speaker 2: the case, then these price increases don't end up going
15:36
Speaker 2: through because you now have to compete with other you know,
15:40
Speaker 2: domestic products and so blah blah blah, you're you know,
15:43
Speaker 2: back to normal pricing. So I think that on the
15:47
Speaker 2: energy side of things, certainly there's the potential for some
15:50
Speaker 2: uptick in gas prices as a result of this. The
15:54
Speaker 2: counter is that Saudi Arabia has basically thrown in the
15:57
Speaker 2: towel on trying to keep oil prices high, and so
15:59
Speaker 2: glows Mobal crude prices are falling now into the mid sixties, Yeah,
16:03
Speaker 2: down a few percent, so that could offset some of this.
16:07
Speaker 3: Yeah, it's almost Look, if this continued on this trend
16:10
Speaker 3: from a pricing standpoint, you wouldn't even feel the impacts
16:13
Speaker 3: of it, just because of the ways that they were
16:14
Speaker 3: moving in different directions, where.
16:16
Speaker 2: If you got oiled down to like sixty instead of
16:18
Speaker 2: like sixty six where it is now.
16:19
Speaker 3: Right, Yeah, we were sitting at eighty dollars a barrel
16:22
Speaker 3: on January fifteenth for West Texas Intermediate. So it just
16:25
Speaker 3: points to the drop that we've seen over the course
16:28
Speaker 3: of the last what's that a month and a half
16:30
Speaker 3: or so, and a lot of that I believe is
16:33
Speaker 3: one hundred and thirty eight thousand of increase in output
16:36
Speaker 3: from OPECH plus.
16:37
Speaker 2: And when they've said that by like April, they're basically
16:40
Speaker 2: gonna let all all producers go like they have two
16:42
Speaker 2: million barrels a day that they're gonna be like, have
16:45
Speaker 2: at it.
16:45
Speaker 3: Now.
16:46
Speaker 2: The downside to this when we talk about the OPEC
16:48
Speaker 2: plus piece is if you've watched that gas prices in
16:52
Speaker 2: the last week since the announcement, they're moving up further.
16:55
Speaker 2: And the reason why is that OPEC plus doesn't produce
16:58
Speaker 2: much natural gas because of how they produce oil. It's
17:01
Speaker 2: not using a ton of hydraulic fracturing, fracking and stuff
17:03
Speaker 2: like that. Instead, it's more conventional processes that don't produce
17:07
Speaker 2: as much net gas as really kind of like a
17:10
Speaker 2: byproduct and kind of an offshoot of those processes. So
17:14
Speaker 2: net gas prices, if you look at the the futures
17:19
Speaker 2: contracts that are out there, in the last week, net
17:22
Speaker 2: gas has gone from three to ninety five per million
17:25
Speaker 2: cubic feed or whatever the heck it is, to four
17:27
Speaker 2: thirty five, up ten percent in that time. Why does
17:31
Speaker 2: this matter for anyone listening? If you're in any part
17:36
Speaker 2: of the country, and you use natural gas to either
17:38
Speaker 2: heat your home or if it's one of the primary
17:41
Speaker 2: feeders for your utility that generates power for you, higher
17:46
Speaker 2: cost coming on the heating side and on the electricity
17:50
Speaker 2: side because of that. So there's again a lot at
17:55
Speaker 2: play here. But ultimately energy prices, there's a ton of
18:00
Speaker 2: balls here in the air, and we don't know exactly
18:03
Speaker 2: where they're going to go, but tariffs, if they stay
18:06
Speaker 2: in place, all else being equal, pushing those costs up somewhat.
18:09
Speaker 3: Let's talk about some of the food stuff. You know,
18:11
Speaker 3: certainly avocados is one that would be a direct impact.
18:15
Speaker 2: And stocked up yesterday.
18:16
Speaker 1: Nice.
18:17
Speaker 3: Yeah, Chipotle has mentioned I believe that they're going to
18:20
Speaker 3: try to absorb the additional costs from these tariffs for
18:24
Speaker 3: the time being, but others out there saying that they
18:27
Speaker 3: would like Target came out and said that their produce
18:30
Speaker 3: that they're going to be increasing prices very quickly. There's
18:34
Speaker 3: not enough avocados sourced here in the United States to
18:37
Speaker 3: cover the amount of demand, particularly in the winter. Very
18:39
Speaker 3: difficult to grow, and this applies for all sorts of
18:41
Speaker 3: different produce items. A lot that are sourced from Mexico.
18:46
Speaker 3: What's a coffee? We have some domestic production.
18:49
Speaker 2: But very little.
18:50
Speaker 3: Yeah.
18:51
Speaker 2: Also breaking news, I don't know who reported it originally,
18:54
Speaker 2: but it's a chiron on Bloomberg right now that Canada,
18:58
Speaker 2: according to an official, will not lift their retaliatory tariffs
19:03
Speaker 2: unless all US tariffs are lifted. So we'll see if
19:06
Speaker 2: that throws a wrench in any of the plans this
19:09
Speaker 2: afternoon for potential tariff relief. I don't know if it will.
19:14
Speaker 3: Was it all US tariffs blanket through or just for
19:17
Speaker 3: toward Canada?
19:18
Speaker 2: Towards Canada. So it seems like there is a call
19:21
Speaker 2: schedule between President Trump and President Trudeau. Was a president
19:26
Speaker 2: Prime minister Prime Minister Trudeau, Yes, in sometime this morning.
19:30
Speaker 2: We'll see what comes of it. Quick break, Wall Street
19:32
Speaker 2: Watch and ask Todd our next.
19:40
Speaker 1: Like us on Facebook and follow us on Twitter at
19:43
Speaker 1: TFE show. Breaking business news is always first right here
19:47
Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
19:52
Speaker 1: Street Watch. A complete look at what's moving market so
19:55
Speaker 1: far today right here on the Financial Exchange Radio Network three.
20:00
Speaker 4: Yesterday's wild ride Marcus. Today are mostly quiet and mixed territories.
20:04
Speaker 4: Investors wait more developments on the terraffront after Commerce Secretary
20:08
Speaker 4: Howard Lutnik said he expected an announcement on an agreement
20:11
Speaker 4: with Canada in Mexico. Wall Street's also assessing a weaker
20:15
Speaker 4: than expected ADP private payrolls report ahead of Friday's all
20:19
Speaker 4: important jobs report.
20:21
Speaker 3: At the moment, the Dow is up.
20:23
Speaker 4: By one hundred and eleven points about a quarter percent,
20:26
Speaker 4: SMP five hundred is completely flat, and the Nasdaq is
20:30
Speaker 4: down merely seven points. Russell two thousand edging three points higher.
20:34
Speaker 4: Ten year treasure Reealed is up by two basis points
20:37
Speaker 4: at four point two to three percent, and crude oil
20:42
Speaker 4: is down by three percent so far today, trading just
20:45
Speaker 4: above sixty six dollars a barrel after its seven percent
20:49
Speaker 4: seven percent tumble this week as a result of concerns
20:52
Speaker 4: about further export restrictions, and video shares are flat today.
20:56
Speaker 4: Auto stocks are also seeing more attention in reaction to
21:00
Speaker 4: the tariffs and are bouncing back on the hope set
21:02
Speaker 4: that twenty five percent tariffs on Mexico and Canada won't
21:05
Speaker 4: last long. Forward up by three percent, GM up by
21:09
Speaker 4: four percent, as Stilantis shares up by six percent. Meanwhile,
21:13
Speaker 4: CrowdStrike down by ten percent after the cybersecurity company swung
21:17
Speaker 4: to a quarterly loss due to higher expenses, even as
21:21
Speaker 4: sales jumped elsewhere. FanDuel parent company Flutter Entertainment, posted fourth
21:26
Speaker 4: quarter results at beat expectations, sending shares in the sports
21:30
Speaker 4: betting and gambling operator up modestly, boxed down by five
21:34
Speaker 4: percent after the cloud company's top line guidance fell short
21:38
Speaker 4: of estimates, while it's fourth quarter revenue narrowly beat street forecasts,
21:42
Speaker 4: and Nova Nordiz said this morning it will offer its
21:45
Speaker 4: weight loss drug we Govy for less than half of
21:47
Speaker 4: its usual price per month through a new direct to
21:51
Speaker 4: consumer online pharmacy. That stock is up by four percent.
21:57
Speaker 4: I'm Tucker Silvan, that's Wall Street Watch.
22:00
Speaker 1: This is Ask Todd on the Financial Exchange Radio Network.
22:04
Speaker 1: If you have an existing estate plan or in the
22:06
Speaker 1: market for one, Todd Lutsky is here to answer your
22:09
Speaker 1: questions and help you plan for a later life. Ask
22:11
Speaker 1: Todd is presented by Cushing and Dolan, serving Massachusetts and
22:15
Speaker 1: New England for more than thirty five years, helping families
22:18
Speaker 1: with a state and tax planning, medicaid planning, and probate law.
22:22
Speaker 1: Visit Cushingdolan dot com. Now here's Todd Lutsky.
22:27
Speaker 2: As promised, we're joined by the one and only Todd
22:31
Speaker 2: Lutsky from the law firm of Cushing and Dolan. We
22:34
Speaker 2: call the segment Ask Todd because you get to ask
22:37
Speaker 2: Todd your questions about your estate plan We got the
22:41
Speaker 2: phone lines open at eight eight eight two zero five
22:45
Speaker 2: two two sixty three. Remember we usually only get through
22:48
Speaker 2: two to three of your calls, so to ask a
22:52
Speaker 2: question of Todd, get callin early again. That number is
22:56
Speaker 2: eight eight eight two zero five two two six three,
22:59
Speaker 2: And this is your chance to ask Todd your estate
23:02
Speaker 2: planning questions. Again. That number is eight eight eight two
23:05
Speaker 2: zero five two two six three. Mister Lutsky, how are
23:10
Speaker 2: you doing today?
23:12
Speaker 5: I am doing well. How about yourself?
23:14
Speaker 3: Pretty good?
23:14
Speaker 4: Yeah.
23:15
Speaker 2: I gotta tell you I used to be against organ transplants. Yeah,
23:19
Speaker 2: I had a change of heart.
23:22
Speaker 5: That's good.
23:22
Speaker 1: Yeah, I like that.
23:23
Speaker 5: Yeah.
23:24
Speaker 2: Let's talk a little bit about life estates. What is
23:28
Speaker 2: a life estate?
23:29
Speaker 5: Well, it's it's actually a property ownership. It's a property right,
23:36
Speaker 5: is what it is. And people people oftentimes get confused
23:40
Speaker 5: by that. It's it's a nugget of ownership in your
23:43
Speaker 5: let's say your home, for example, and that's really the
23:46
Speaker 5: one that you want to talk about. You want to
23:47
Speaker 5: do life estates primarily for your home or if you
23:50
Speaker 5: have like a multi family that's okay, and you're living
23:52
Speaker 5: in it, of course, And basically it equals X. I
23:57
Speaker 5: hate to do it X plus Y. So let's say
23:59
Speaker 5: you've got a million dollar piece of property. X plus
24:02
Speaker 5: Y equals you know, a million dollars. And so when
24:06
Speaker 5: you have a life estate, you have this right to
24:08
Speaker 5: live there and the right to collect income and the
24:13
Speaker 5: right to pay bills. That would be X. The why
24:17
Speaker 5: part is the remainder interest that you gave away to somebody.
24:21
Speaker 5: And that's the key in a life of state in
24:23
Speaker 5: terms of how to calculate it, right, it's whatever piece
24:27
Speaker 5: you give to someone else. Could be kids, could be
24:30
Speaker 5: nieces and nephews, could be an irrevocable medicaid trust, which
24:34
Speaker 5: I certainly like a lot better. So two ways to
24:37
Speaker 5: create it, one putting the remainder interest in the hands
24:41
Speaker 5: of the kids, two putting the remainder interest in the
24:47
Speaker 5: hands of an irrevocable trust. So that's the two ways
24:52
Speaker 5: to create it, and both have an X and a Y.
24:55
Speaker 5: The X is always your life, your your nugget of
24:57
Speaker 5: ownership that you have, which is great. It allows you
25:01
Speaker 5: to live in your property, it allows you to keep
25:02
Speaker 5: your mortgages, et cetera.
25:04
Speaker 2: Talking with Todd Lotsky from the law firm of Cushing
25:06
Speaker 2: and Dolan to ask Todd a question live on air
25:08
Speaker 2: right now called eight eight eight to zero five two
25:12
Speaker 2: two six three. Still a little bit of room on
25:15
Speaker 2: the phone lines again, eight eight eight to zero five
25:18
Speaker 2: two two sixty three. That is the number to call
25:21
Speaker 2: to speak to Todd Lotsky about your estate planning questions.
25:25
Speaker 2: Let's go to a quick break here, but when we
25:27
Speaker 2: come back, it's going to be right to your questions
25:29
Speaker 2: with Todd again. That number is eight eight eight to
25:32
Speaker 2: zero five two two sixty three.
25:36
Speaker 1: Ask Todd with Todd Lutsky every Wednesday at ten thirty
25:39
Speaker 1: only here on the Financial Exchange Radio Network. You're listening
25:45
Speaker 1: to Ask Todd with Todd Lutsky on the Financial Exchange
25:49
Speaker 1: Radio Network.
26:02
Speaker 2: Still got room on the phone lines at eight eight
26:04
Speaker 2: eight to zero five two two sixty three. So if
26:07
Speaker 2: you got to state planning questions for Todd, that number
26:10
Speaker 2: is eight eight eight to zero five two two sixty three.
26:14
Speaker 2: One more time eight eight eight to zero five two
26:18
Speaker 2: two sixty three. Let's go to Jimmy from Provincetown. Jimmy,
26:21
Speaker 2: you are on with Todd Ltski.
26:23
Speaker 1: What's your question?
26:25
Speaker 6: Hi Todd, this is Jimmy.
26:27
Speaker 5: Hi Jim.
26:27
Speaker 6: We're calling in regards to the irrevocable trust that you
26:31
Speaker 6: set up for my family back in two sixteen.
26:34
Speaker 5: Okay.
26:35
Speaker 6: We have the Cape property that is going to be
26:38
Speaker 6: sold probably this year.
26:39
Speaker 7: Okay, And I was.
26:40
Speaker 6: Reading stuff about step up basis. The property is sold
26:44
Speaker 6: from irrevocable trust.
26:46
Speaker 5: Yes, I can tell you one that that whatever you're
26:49
Speaker 5: reading has to be incorrect. The only way, and this
26:52
Speaker 5: is a great question for everybody, by the way, Jim,
26:55
Speaker 5: the only way somebody gets a step up in basis
26:59
Speaker 5: in party is to die owning it period. Okay. So
27:06
Speaker 5: if I have a piece of property that I bought
27:09
Speaker 5: for one hundred thousand dollars and today it's worth five
27:11
Speaker 5: hundred thousand dollars, the gain is four hundred thousand dollars,
27:15
Speaker 5: which is the difference between the cost basis and the
27:19
Speaker 5: fair market value. If I sell that property while I
27:23
Speaker 5: am alive, that four hundred thousand dollars remains a four
27:27
Speaker 5: hundred thousand dollars gain. Okay, if, on the other hand,
27:31
Speaker 5: I decide never to sell this property and I ultimately
27:34
Speaker 5: pass away and my children or anybody, it doesn't have
27:39
Speaker 5: to be a child, but somebody inherits the property as
27:44
Speaker 5: a result of my passing. Then, and let's say on
27:49
Speaker 5: the date of my death, the value of that property
27:51
Speaker 5: is five hundred thousand dollars, then it's as if the
27:55
Speaker 5: basis in the hands of the person who inherit it
28:01
Speaker 5: is five hundred thousand dollars, so they can sell it
28:03
Speaker 5: and the gain is zero. But that is the only
28:06
Speaker 5: way to get a step up. So when you put
28:09
Speaker 5: your house in the irrevocable trust, thankfully you haven't died yet,
28:14
Speaker 5: so you gave the irrevocable Trust your cost basis, so
28:19
Speaker 5: it's the same as if you were selling it not
28:21
Speaker 5: inside the trust. The gain will be exactly the same.
28:26
Speaker 5: So hopefully that's helpful for you. And that's for everybody,
28:31
Speaker 5: by the way, folks, So no problem. And by the way, Jim,
28:33
Speaker 5: you absolutely can sell it. You can buy another house.
28:36
Speaker 5: The trust is that flexible. You can move. Give the
28:39
Speaker 5: office a call though, if you want to be some
28:42
Speaker 5: representation on the sale, just to make sure you don't
28:44
Speaker 5: mess up the five year waiting period if you decide
28:47
Speaker 5: to buy and sell, folks. I hope that helps. Let
28:51
Speaker 5: me tell you, though, that's important to understand because that
28:54
Speaker 5: also can be impacted with a calculate. The guide we're
28:57
Speaker 5: giving away is calculating the constant sequences of a life estate.
29:03
Speaker 5: What that means is many people in this case Jim
29:06
Speaker 5: didn't do that. He didn't put his house in a
29:08
Speaker 5: life estate, which I like. I'd much rather put it
29:10
Speaker 5: in the irrevocable trust. But people give away houses to
29:15
Speaker 5: children retain the right to live there. You need to
29:18
Speaker 5: understand the gift tax consequences that go with that, the
29:22
Speaker 5: estate tax consequences that go with that, the potential income
29:27
Speaker 5: tax consequences when you go to sell it or try
29:29
Speaker 5: to sell it. We talked about selling it for Jim
29:32
Speaker 5: from the trust, but can you sell it once it's
29:34
Speaker 5: in one of these life estates?
29:36
Speaker 1: Right?
29:36
Speaker 5: How much control you give up over it? What are
29:39
Speaker 5: the credit or implications to the children who become owners
29:42
Speaker 5: on the day you make the gift or set up
29:43
Speaker 5: the life estate. They're pros and cons Folks. Get the guide.
29:48
Speaker 5: If you've done a life estate. Get it so you
29:50
Speaker 5: can understand exactly what you've done and maybe you want
29:52
Speaker 5: to get out of it. Or two, if you're thinking
29:54
Speaker 5: about doing it, call and get the guide before you
29:57
Speaker 5: do it. Eight six six eight four eight five six
30:01
Speaker 5: nine nine or Legal Exchange Show dot com again eight
30:04
Speaker 5: six six eight four eight five six nine nine or
30:08
Speaker 5: Legal Exchange Show dot com.
30:11
Speaker 2: Todd, I got another one queued up for you here.
30:13
Speaker 2: Let's go to Rick in Chatham. Rick, what's your question
30:15
Speaker 2: for Tom Lutsky?
30:18
Speaker 7: Hey, Tod. If you have irrevocable trust and you have
30:22
Speaker 7: your house in it, and you have a life of space,
30:24
Speaker 7: they can stay there. The question is if you sell
30:27
Speaker 7: the house and down downsize, does that life of state
30:29
Speaker 7: go with it or do you have to read balance
30:33
Speaker 7: it or whatever?
30:34
Speaker 5: Yeah, so great idea. So this is your primary residence.
30:37
Speaker 5: You're saying that's in the in the trust we're talking about, correct, Okay, super,
30:43
Speaker 5: how long ago did you set up that irrevocable trust
30:46
Speaker 5: and put the house.
30:46
Speaker 7: In We're just for about four years. We haven't met
30:50
Speaker 7: it all the way yet.
30:51
Speaker 5: Oh, but that's good, right, So four years is a
30:54
Speaker 5: good a good stretch. So that's in then, and you
30:56
Speaker 5: say we, So I'm assuming that you're that you're married, correct, Okay,
31:00
Speaker 5: super Bowl. So so here's the story. If you take
31:06
Speaker 5: that how if you want us and you heard Jim,
31:08
Speaker 5: can you sell it? Yes, yes you can. So in
31:10
Speaker 5: your case, you're asking me again if you sell it,
31:12
Speaker 5: right and you want to downsize. So here's what would happened. Out,
31:16
Speaker 5: would go the property in, would come money? But how
31:22
Speaker 5: much money? Right? And this is the issue with a
31:25
Speaker 5: life estate. Instead of putting the entire property in the
31:28
Speaker 5: trust in this case, in your case, you put what
31:32
Speaker 5: is known as the remainder interest in the trust and
31:36
Speaker 5: kept a nugget of ownership called the right to live there. Okay,
31:40
Speaker 5: that's the life of state. So let's call that X
31:43
Speaker 5: plus Why the remainder interest equals the value of the property. Okay,
31:47
Speaker 5: So how much is the house worth?
31:50
Speaker 7: About nine hundred zout?
31:51
Speaker 5: Okay, so let's just call it nine hundred. Okay, So
31:54
Speaker 5: X plus y equals nine hundred. How old are you guys?
32:00
Speaker 7: Sixty five?
32:01
Speaker 5: So let's just go with seventy for now. So what's
32:05
Speaker 5: gonna happen is you're gonna you're gonna be able to
32:07
Speaker 5: sell it first and foremost, I don't know if your
32:09
Speaker 5: trust is a grand tour trust or not. Let's assume
32:11
Speaker 5: it is for income tax purposes, which simply means there
32:15
Speaker 5: won't be any adverse income tax consequences from the sale
32:20
Speaker 5: if it's a grand tour trust. So if that's the case,
32:24
Speaker 5: you will go to an let's say you're selling it
32:26
Speaker 5: this month, you will go to an IRS interest rate
32:29
Speaker 5: table called the applicable Federal rate, which is seventy five
32:32
Speaker 5: to twenty of the code, and they'll give you a rate.
32:34
Speaker 5: I don't know what it is today. And then you
32:37
Speaker 5: take that percentage rate and you go find table s
32:40
Speaker 5: of the IRS code, simple enough to pull up on
32:42
Speaker 5: the webs on the Google, and you will look up
32:47
Speaker 5: your age seventy year old, Go down the column till
32:50
Speaker 5: you find seventy, go across, and they will give you
32:54
Speaker 5: a percentage. So what is the percentage ownership interest in
32:59
Speaker 5: a life state for someone seventy years old? It's given
33:02
Speaker 5: right there. I'm going to just go on a limb
33:05
Speaker 5: here and say it's probably thirty percent. Thirty five percent. Okay,
33:10
Speaker 5: let's say thirty five percent. So what that means is
33:13
Speaker 5: sixty five percent represents the remainder interest which is in
33:18
Speaker 5: the trust. So when you go to sell it out
33:23
Speaker 5: will go the real estate to the buyer, and the
33:28
Speaker 5: buyer's attorney will cut two checks, one check for sixty
33:32
Speaker 5: five percent of the proceeds approximately Again I'm guessing on
33:36
Speaker 5: what that number is, and that will be deposited in
33:39
Speaker 5: the trust bank account that you will have to open
33:42
Speaker 5: up when when this is sold under an ID number
33:46
Speaker 5: that you get from the IRS regarding that trust, then
33:51
Speaker 5: there'll be another check from the buyer's attorney. Thirty five
33:54
Speaker 5: percent of the proceeds will go to you and your
33:58
Speaker 5: wife directly. Why because you're the life tenant, so you
34:01
Speaker 5: do have that nugget of ownership. Represents a percentage of
34:05
Speaker 5: the proceeds, and you put that in your pocket. Now,
34:09
Speaker 5: the good news is from an income tax standpoint, assuming
34:13
Speaker 5: this is a grand tour trust and you're married, you
34:16
Speaker 5: would get to retain your five hundred thousand dollars capital
34:22
Speaker 5: gains exclusion associated with the sale of your primary residence.
34:28
Speaker 5: So in English, that means the first five hundred thousand
34:31
Speaker 5: dollars of gain is not taxed to you, guys, okay,
34:36
Speaker 5: And that wouldn't matter because even though a portion went
34:39
Speaker 5: to the trust and a portion went to you. If
34:43
Speaker 5: it's a grand tour trust, the entire gain ends up
34:47
Speaker 5: getting reported on your personal income tax return. It's a
34:52
Speaker 5: flow through from the trust to your personal return. So
34:58
Speaker 5: the gain that went to the trust goes to your return,
35:00
Speaker 5: and the gain that went to you as life tenants
35:03
Speaker 5: get picked up on your personal return, so no adverse
35:07
Speaker 5: tax consequence. Allocate the gain between the two. Of course.
35:11
Speaker 5: Now your next question would be I have no house
35:15
Speaker 5: because I sold it, so I guess I'm technically homeless. Well,
35:18
Speaker 5: I'm going to buy another house. You can do that.
35:22
Speaker 5: Out would go the money again, the trustee would sign
35:24
Speaker 5: all the paperwork distributing the money out to a seller,
35:29
Speaker 5: and the seller's attorney would prepare a deed putting the
35:33
Speaker 5: property back in the trust. Now, if you do it
35:35
Speaker 5: that way, there'll be no more life estate. So they
35:38
Speaker 5: think that's really your question, right, what's going to happen? Well,
35:40
Speaker 5: if I buy, if I use just the money in
35:42
Speaker 5: the trust to buy the new house, the new house
35:46
Speaker 5: is not going to have a life estate, not that
35:48
Speaker 5: it needs it. It doesn't. You still have all the
35:51
Speaker 5: benefits of living there, paying the bills, et cetera, and
35:55
Speaker 5: it would remain protected from the cost of long term care.
35:58
Speaker 5: Not yet, you still have one year to go. Oh,
36:00
Speaker 5: but the four year clock is not disrupted from this transaction.
36:06
Speaker 5: I think that's very important for you to note. So
36:08
Speaker 5: that four year clock remains four years. So one more
36:11
Speaker 5: year and the new house will be as protected as
36:15
Speaker 5: the old house would have been. What's the downside of
36:18
Speaker 5: a life estate in this arrangement. The thirty five percent
36:23
Speaker 5: of the proceeds that went to you are now included
36:28
Speaker 5: in your bank account and at risk all over again
36:32
Speaker 5: for the cost of nursing home care. That might not
36:35
Speaker 5: be a problem. You want the money, spend it, have
36:37
Speaker 5: a good time with it.
36:38
Speaker 1: Up to you.
36:39
Speaker 5: If lastly, you don't have enough money in the trust
36:44
Speaker 5: because thirty five percent didn't hit the trust account, you
36:47
Speaker 5: can contribute the money to the trust, start a new
36:51
Speaker 5: five year waiting period only on the contributed money, and
36:54
Speaker 5: then you add that to the money to buy the
36:57
Speaker 5: new property. Long winded answer, but I hope it covers everything.
37:02
Speaker 2: Mister Lutsky, Thank you so much for joining us today.
37:05
Speaker 5: Always a pleasure. Thank you.
37:07
Speaker 1: This has been asked odd on the Financial Exchange Radio
37:10
Speaker 1: Network askedd with Todd Lutsky has been presented by Cushing
37:13
Speaker 1: and Dolan, serving Massachusetts and New England for more than
37:16
Speaker 1: thirty years, helping families with the state and tax planning,
37:19
Speaker 1: Medicaid planning, and probate law. Call eight hundred and three
37:22
Speaker 1: nine three, four thousand and one or visit Cushingdolan dot com.
37:26
Speaker 1: The views expressed in this segment are solely those of
37:28
Speaker 1: Cushing and Dolan Armstrong Advisory. He does not provide any
37:30
Speaker 1: legal or tax advice. Please consult with your legal or
37:32
Speaker 1: tax advisor on such matters. Cushing and Armstrong do not
37:34
Speaker 1: endorse each other and are not affiliated.
37:37
Speaker 2: Still a lot more coming in the second hour of
37:39
Speaker 2: the Financial Exchange. We'll talk a little bit about the
37:41
Speaker 2: state of play between the US and China. Very different
37:44
Speaker 2: situation than what we're seeing in terms of possible tariff
37:47
Speaker 2: negotiations between the US, Canada and Mexico. Also, there's a
37:53
Speaker 2: two headed monster stalking the economy and it has a name.
37:59
Speaker 2: We'll tell you what the name is in our two
38:00
Speaker 2: on the Financial Exchange quick Break. See you in a bit.
38:06
Speaker 3: Mm hmm.