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Inflation Hits a Three Year High as Fed Pressure Builds · The Financial Exchange Show

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Speaker 1: donation today. This is the Financial Exchange with Chuck Zada,
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Speaker 1: and Mark Fandetti.
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Speaker 2: It's Shuck, Mark and Tucker with you here and as
1:19
Speaker 2: we kick things off today, top story is this morning's
1:24
Speaker 2: CPI report. The Consumer Price Index data for the month
1:27
Speaker 2: of May came in at eight thirty am Eastern Time,
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Speaker 2: and what we saw was the headline inflation rate moved
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Speaker 2: up at a point five percent clip four of the
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Speaker 2: month annually, moving up now at a four point two
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Speaker 2: percent rate, getting a little spicy there first time, back
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Speaker 2: over four percent in a few years. It's never a
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Speaker 2: number that you want to see when we talk about
1:51
Speaker 2: inflation in the United States, and on the core side,
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Speaker 2: more muted as the strips out food and fuel, which
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Speaker 2: are rising faster than the overall UH than other parts
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Speaker 2: of the inflation picture. And so you've got core inflation
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Speaker 2: moving up just point two percent for the month, below
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Speaker 2: expectations of point three UH. Even though I did see
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Speaker 2: a bunch of the Wall Street banks, we're in that
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Speaker 2: like point twenty five ranges. I think the average estimate
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Speaker 2: was around like point twenty seven. Core inflation though continuing
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Speaker 2: to move up as well, from two point eight percent
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Speaker 2: annually up to two point nine. So as we sit
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Speaker 2: here today, headlines at four to two cores at two nine,
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Speaker 2: and you're most likely going to see that headline number
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Speaker 2: give a little bit back in the next month, just
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Speaker 2: because gas prices have cooled from the highs that we've seen,
2:41
Speaker 2: so you probably see that four to two if we're
2:43
Speaker 2: still here in the next week. You know, the next
2:45
Speaker 2: week is when they actually go out and collect the
2:47
Speaker 2: gas price data for June, you probably see that four
2:51
Speaker 2: to two come back to somewhere around four percent. So
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Speaker 2: you know that would be a brief, short term improvement.
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Speaker 2: But I think the place that I continue to landmark
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Speaker 2: is FED funds rate right now is at three and
3:02
Speaker 2: a half to three point seventy five percent. Core inflation
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Speaker 2: does seem to be on an upward trajectory that probably
3:08
Speaker 2: ends up somewhere in the three one to three three
3:11
Speaker 2: range by year end if we continue on this path,
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Speaker 2: and so it's kind of tough for the Fed to
3:19
Speaker 2: be talking about cutting if core inflation is getting into
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Speaker 2: that range. With the Fed funds rate where it is,
3:26
Speaker 2: it's not necessarily like a twelve alarm fire that they
3:30
Speaker 2: need to be hiking rapidly right now. But the problem
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Speaker 2: is that they are within sniffing distance of Hey, if
3:38
Speaker 2: oil prices do move you further up, and that starts
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Speaker 2: bleeding into core at a higher rate. Then you've got
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Speaker 2: a real problem where the Fed's next move has to
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Speaker 2: be a hike, not a cut.
3:49
Speaker 3: Cutting would be lunacy. It turns on its head every
3:52
Speaker 3: sensible monetary policy role. That would be like a doctor
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Speaker 3: telling you to eat more McDonald's in response to a
3:59
Speaker 3: high cholesterol reading. I'm and I'm barely I mean yes,
4:03
Speaker 3: I'm sorry, Chuck, I meant to talk to you about this.
4:06
Speaker 3: I'm barely exaggerating. It makes no sense. The only justification
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Speaker 3: is that your political pay masters want you to do it.
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Speaker 3: And this is why the income that chair Warsh has
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Speaker 3: a credibility problem. He's going to prove that he can
4:19
Speaker 3: buck the president.
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Speaker 1: Uh.
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Speaker 3: Inflation is at twice the Fed's goal four percent is
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Speaker 3: not inherently bad. We've talked about this. Sure Fed could
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Speaker 3: pick any inflation rate that it wanted and still stabilize unemployment.
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Speaker 3: That's possible. But people don't seem to like mid single
4:34
Speaker 3: digit inflation, and that's why the FED landed on two
4:37
Speaker 3: where at twice that headline core is a little less.
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Speaker 3: As you pointed out, there are other measures of the
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Speaker 3: trend in inflation which aren't yet flashing red warning signs,
4:46
Speaker 3: but those get updated with a lag. The trend, by
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Speaker 3: definition moves slowly so the FED. I don't mean to
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Speaker 3: sound too critical of Warsh, it's not his way.
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Speaker 2: Well, he hasn't done anything yet, but he.
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Speaker 3: Says, he says. He said very stupid things though about
4:59
Speaker 3: cut rates in advance of a productivity boon, which would
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Speaker 3: normally merit higher rates, just like economically. Kind of illiterate, frankly,
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Speaker 3: but anyway, let's suppose he gets his act together and
5:09
Speaker 3: he turns out to be a good, credible, independent FED chair,
5:12
Speaker 3: then we should be okay. But if they're behind the curve,
5:15
Speaker 3: like they fall farther behind every day, they don't do something,
5:18
Speaker 3: including right now today, because real rates nominal the stated
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Speaker 3: rate minus inflation are coming down, and that will push
5:25
Speaker 3: the economy in excess of whatever its speed limit is.
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Speaker 2: Arguably, when we talk about Worsh again, we're now to next.
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Speaker 2: Wednesday is Worsh's first FED meeting as chair, and I
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Speaker 2: can't remember if it was earlier this week or late
5:41
Speaker 2: last week, but I kind of laid out, hey, if
5:45
Speaker 2: I were Kevin Worsh which I'm not here, would be
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Speaker 2: my approach at my first couple of meetings, specifically, like
5:52
Speaker 2: the first meeting next week, I would go in and
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Speaker 2: I would say and again like both you know, privately
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Speaker 2: in the and then publicly in the press conference after,
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Speaker 2: I would say, you know what, I do think that
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Speaker 2: there might be, you know, a productivity boom that's in
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Speaker 2: the offing, but it's clear right now that inflation is
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Speaker 2: a problem that we need to make sure doesn't get
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Speaker 2: out of hand. As such, we're not hiking right now,
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Speaker 2: but we'll be on the lookout for if we need to,
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Speaker 2: and we'll maintain the FED funds right where it is,
6:26
Speaker 2: and if the inflation picture starts to show signs of
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Speaker 2: worstening or signs that it's becoming more entrenched, we're going
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Speaker 2: to be prepared to act if we need to. He
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Speaker 2: doesn't need to actually do anything right now, because Powell
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Speaker 2: wasn't necessarily doing anything either, but I think just being
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Speaker 2: able to build credibility within the committee such that he
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Speaker 2: is saying the right things to them and then at
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Speaker 2: a point in the future can go to them and say, hey,
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Speaker 2: now's the time where we need to cut if the data,
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Speaker 2: you know, suggests it's okay. But you know, I know
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Speaker 2: that he came in saying, oh, we want to have
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Speaker 2: you know, these family fights. You know, when inflation's running
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Speaker 2: four point two percent, that's not the time to have
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Speaker 2: the fight at the FED about how much inflation you
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Speaker 2: want to allow.
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Speaker 3: Go back to Vulgar, Bulker would say things like, inflation's
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Speaker 3: too high. And I'm paraphrasing here because some of these
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Speaker 3: I was going to say, We've got the tools to
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Speaker 3: deal with it. That's a powellism, it's an anachronism. Bulger
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Speaker 3: didn't talk. Nobody talked in those terms in those days,
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Speaker 3: but he made it clear that the fed's number one
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Speaker 3: priority was to squash and place.
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Speaker 2: I mean, what do you mean Vulgar didn't talk in
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Speaker 2: those terms.
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Speaker 3: What did I'm saying. He wouldn't have used the phrase
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Speaker 3: we have the tools.
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Speaker 2: What would he's saying. I'm just curious, just because I
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Speaker 2: wasn't alive during the Vulgar days.
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Speaker 3: Yeah, yeah, I was. I was probably playing with Star
7:45
Speaker 3: Wars action figures, so he would have said things like,
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Speaker 3: inflation is monetary. We control the money set. They talked
7:54
Speaker 3: in terms of money supply, not interest rates in those days. Sure,
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Speaker 3: they didn't have a FED fund's target. Fed funds followed
7:58
Speaker 3: changes in the money supply.
8:00
Speaker 4: But he was.
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Speaker 3: Stern, and he was resolute, and he was clear laser
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Speaker 3: focused on inflation. If warsh adopts that sort of persona,
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Speaker 3: and he was tutored a little bit by Vulgar, so
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Speaker 3: maybe he'll try to channel that. If the phrase productivity
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Speaker 3: boom leaves his lips, he's failed already because it's telling
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Speaker 3: you he's looking for a reason to cut rates. That
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Speaker 3: is prospective, that is speculative. Nobody should be talking about
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Speaker 3: a productivity boom that may or may not happen in one,
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Speaker 3: three or five years. That's crazy. Talk about inflation where
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Speaker 3: it is today, it's too high. We've got the tools
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Speaker 3: to deal with it. It's more or less what you said.
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Speaker 3: But don't deviate from that would be my advice, because
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Speaker 3: it's about forming our expectations right now. That's what all
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Speaker 3: the gibber jabber is about. He's talking to you and
8:45
Speaker 3: me and anybody listening. Sure, we've got to believe that
8:48
Speaker 3: inflation is paramount for him.
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Speaker 2: So I think that ultimately this CPI report the best
8:57
Speaker 2: thing that you can take from it. Hey, it's not
8:58
Speaker 2: as bad as it could have been in that we
9:01
Speaker 2: knew the headline inflation number. You can probably again you
9:03
Speaker 2: can pull the show from you know, a month ago
9:06
Speaker 2: where I said, hey, based on you know, where gas
9:09
Speaker 2: prices are, you're probably heading towards like a four to
9:11
Speaker 2: two print on the headline number. The good news about
9:14
Speaker 2: this report, Hey, the core number didn't show further seepage
9:19
Speaker 2: into it from higher gas prices at this point. Could
9:24
Speaker 2: it show more that that comes over the course of
9:26
Speaker 2: the summer, potentially, but hey, it's you're not seeing you know,
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Speaker 2: more seepage into core at this point, and I think
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Speaker 2: that's about the only positive that you can take away
9:39
Speaker 2: from it. Whether that continues or not is an open question,
9:43
Speaker 2: but but that's where we are at this particular point
9:45
Speaker 2: in time. The interesting thing to me is that the
9:48
Speaker 2: bond market is pretty much telling you the same thing.
9:50
Speaker 2: Tenure treasury is pretty much flat today. It's moved one
9:53
Speaker 2: basis point to the downside. So the tenure is not
9:55
Speaker 2: looking at this being like, yes, we can, we can
9:58
Speaker 2: buy bonds now, everything's safe the ten years saying okay,
10:03
Speaker 2: like that's fine, we can't really get excited about it,
10:05
Speaker 2: but we you know, it's it's it's, it's okay. The
10:09
Speaker 2: thing that you are seeing that is interesting to me
10:13
Speaker 2: is that when you look at tips Treasuries index for inflation,
10:17
Speaker 2: you are seeing a healthier bid there, which obviously is
10:21
Speaker 2: indicative of, hey, okay, we're fine not selling our you know,
10:26
Speaker 2: ten year treasuries, but we might want to own a
10:28
Speaker 2: little bit more, you know, in the line of inflation protection,
10:32
Speaker 2: if we want to be treasury buyers right now, That
10:34
Speaker 2: to me is a little bit interesting, and I think
10:37
Speaker 2: we'll have to see where things go. But overall, CPI
10:41
Speaker 2: again continuing to heat up, as we're now north of
10:44
Speaker 2: four percent inflation. This is the first time that headline
10:49
Speaker 2: CPI is north of four percent inflation. You've got to
10:54
Speaker 2: go back to let me pull it here. May have
10:57
Speaker 2: twenty three, so it's been three years since the last
11:00
Speaker 2: time we add a four handle on this. It's not
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Speaker 2: what you want to see, and we're just gonna have
11:08
Speaker 2: to see where things go over the course of the
11:10
Speaker 2: summer with gas prices, because they are entirely in the
11:12
Speaker 2: driver's seat as it relates to this, that pun is
11:16
Speaker 2: intended by the way, take a quick break and when
11:21
Speaker 2: we return, we'll talk a little bit about what is
11:24
Speaker 2: going on in oil markets.
11:26
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12:10
Speaker 2: Unless you've been living under a rock, what the heck
12:16
Speaker 2: was that?
12:18
Speaker 1: That was the rock?
12:19
Speaker 3: Like that'd be me?
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Speaker 2: Which, look, let's be honest, though there aren't many people
12:23
Speaker 2: that live under rocks these days, you know, it's just
12:26
Speaker 2: it's it's not a popular form of housing. But if
12:29
Speaker 2: you've been living under a rock, then you likely did
12:32
Speaker 2: miss the fact that the Philadelphia Semiconductor Index more than
12:36
Speaker 2: doubled from late March through early June. Uh Subsequently, there's
12:42
Speaker 2: been all kinds of volatility there, including a ten percent
12:46
Speaker 2: down day last Friday for that index, a massive swing
12:51
Speaker 2: yesterday where we saw like a not like a twelve
12:56
Speaker 2: percent range I think it was on that index over
13:00
Speaker 2: the course of the day, with just huge movement intra
13:04
Speaker 2: a day, and even today you've got like a two
13:07
Speaker 2: percent swing that we've seen in the first, you know,
13:09
Speaker 2: forty five minutes or so of trading. So here, here's
13:14
Speaker 2: the thing. We talked about this a few times. Semiconductor
13:17
Speaker 2: stocks as a whole are not going to double every
13:20
Speaker 2: two months for the rest of your life. They're just not.
13:24
Speaker 2: There are a few certainties in this world. That is
13:27
Speaker 2: one of them is that semiconductor stocks aren't going to
13:30
Speaker 2: double every two months. It's great when they do, it
13:33
Speaker 2: can be exciting. But the other thing that we often
13:35
Speaker 2: talk about with semiconductor stocks is that, hey, once the
13:38
Speaker 2: party's over, it's really over there. They have these large
13:42
Speaker 2: draw downs that are often two to three x what
13:44
Speaker 2: we see in the drawdown of broader indices. So the
13:48
Speaker 2: Wall Street journalized this piece here titled the Corners of
13:50
Speaker 2: the Market where investors are riding out turbulence in chip stocks,
13:56
Speaker 2: and this does get at an idea that has been
14:00
Speaker 2: this market for the last year or so, which is
14:03
Speaker 2: investors are so hesitant to get out of the market
14:06
Speaker 2: because they believe and the data from the market over
14:10
Speaker 2: the last year has influenced them to this effect that
14:13
Speaker 2: President Trump is doing everything in his power to try
14:16
Speaker 2: to keep markets moving forward. No one wants to leave,
14:19
Speaker 2: and so rather than leaving the market, if a portion
14:22
Speaker 2: of it starts struggling, you see investors rotating to other
14:25
Speaker 2: parts of it that they think are safer or might
14:29
Speaker 2: offer additional upside at this particular point in time. And
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Speaker 2: what I will say this piece is this is a
14:39
Speaker 2: classic I don't even know that we have a term
14:43
Speaker 2: for what's the term that we Is there a term
14:46
Speaker 2: mark for Hey, we see a bunch of numbers on
14:50
Speaker 2: a screen and then we use them to make up
14:52
Speaker 2: stories that may or may not actually be happening.
14:55
Speaker 3: Journalism, Oh sing.
15:01
Speaker 2: Okay, let's go with that. Well, here's the thing. This
15:05
Speaker 2: is what CNBC and Bloomberg and all those guys do
15:07
Speaker 2: all the time. It's hey, the market moved this way,
15:11
Speaker 2: here's why it did. And we're talking off a lot
15:14
Speaker 2: like there isn't normally like one approximate cause. And likewise,
15:18
Speaker 2: it's not like investors as a whole are sitting there
15:21
Speaker 2: going hey, semiconductor stocks are going down, let's all go
15:25
Speaker 2: this way. It's a bunch of individual decisions that get
15:28
Speaker 2: made and then someone tries to say, oh, this is
15:32
Speaker 2: why investors did this. It's after the fact they're rationalizing it.
15:37
Speaker 2: And I think that when you look at you know,
15:42
Speaker 2: what's going on here, it's something where hey, investors who
15:48
Speaker 2: are reticent to get out of the market entirely well
15:52
Speaker 2: in this environment right now, where the US economy remains
15:56
Speaker 2: pretty strong and nominal terms, yeah, there's an incentive to
15:59
Speaker 2: try to buy in a place that is still showing
16:01
Speaker 2: strong growth. So you've got you know, transportation stocks that
16:05
Speaker 2: have been doing well this year, but not because of
16:09
Speaker 2: it's not because of anything relating to you know, any
16:14
Speaker 2: anything in the Middle East do this and matter you know, semiconductors. It's, Hey,
16:18
Speaker 2: there's a crackdown that's going on in basically drivers that
16:24
Speaker 2: are not unlicensed but just don't have you know, all
16:26
Speaker 2: the full qualifications that they should in the trucking sector,
16:29
Speaker 2: and so trucking rates are exploding higher because there's a
16:32
Speaker 2: shortage of qualified drivers in order to you know, take
16:36
Speaker 2: stuff from point A to point B. So trucking companies
16:38
Speaker 2: are seeing their rates boom right now. And other things
16:42
Speaker 2: that you have, you know, that are going on as well.
16:46
Speaker 2: You've got you know, all kinds of construction activity from
16:49
Speaker 2: data center buildouts and so that's you know, feeding into
16:51
Speaker 2: some industrial areas and things like that. I don't think
16:55
Speaker 2: this is necessarily investors saying, oh, these like these semiconductor
16:59
Speaker 2: stocks are are bad. We need to rotate somewhere else.
17:02
Speaker 2: These things have been occurring alongside each other, and now
17:04
Speaker 2: it's just okay, the semiconductor boom can't go you know,
17:08
Speaker 2: can't go on going up fifty percent a month forever.
17:11
Speaker 2: The other stuff is not as extended, and so that's
17:14
Speaker 2: kind of continuing right now. I don't know, like, I
17:18
Speaker 2: don't think investors are just like, oh, you know, semiconductors
17:22
Speaker 2: are down, let's let's do this. It's no, like you can't.
17:25
Speaker 2: You just can't go up one hundred percent every two
17:28
Speaker 2: months forever, like that's the story to write. Not well,
17:32
Speaker 2: investors are trying to ride this out. I don't know,
17:35
Speaker 2: like it's I think it's implying causation where it's just correlation.
17:41
Speaker 3: Quite honestly, Yeah, these are disparate decisions made by millions
17:45
Speaker 3: of individuals who aren't coordinating, aren't forming a consensus. It
17:51
Speaker 3: just looks like they are because all we see are
17:53
Speaker 3: the the properties that emerge. It's like watching birds in flight.
17:57
Speaker 3: They're like a flock. Yeah, there are lots of the
18:00
Speaker 3: behavioral people have done all kinds of work on this,
18:02
Speaker 3: so I see what you're getting at from earlier. Now,
18:06
Speaker 3: there might be a little bit of hurting, there might
18:08
Speaker 3: be a little bit of ooh, text looking really frothy.
18:11
Speaker 3: Let's look at the sectors that comprise value in disease,
18:14
Speaker 3: which tend to be heavy in financials and relatively heavy
18:18
Speaker 3: in financials and healthcare industrials and well anything that the
18:23
Speaker 3: S and B is no longer heavy and sorry virtue
18:25
Speaker 3: of the fact that tech has become so distended. So no,
18:29
Speaker 3: I was gonna say, there's not like some conspiracy or
18:31
Speaker 3: any kind of coordination. It's more like coincidence, not coordination,
18:35
Speaker 3: though the decisions of some people undoubtedly influence others.
18:39
Speaker 2: Now, the other thing that I will say that I've
18:41
Speaker 2: said repeatedly over the last couple of years. Every time
18:47
Speaker 2: something other than tech has tried to lead the way
18:50
Speaker 2: since twenty twenty three, we have fallen flat on our
18:54
Speaker 2: face shortly afterwards. It happened in the summer of twenty four,
18:58
Speaker 2: it happened in the spring of twenty five, it happened
19:03
Speaker 2: in the winter of twenty six, every time. It's not
19:07
Speaker 2: like an instant thing. It builds over, you know, a
19:09
Speaker 2: period of like four or five months. But every time
19:12
Speaker 2: we've started to see other parts of the market outperformed tech,
19:16
Speaker 2: it hasn't gone well recently. I'm not saying that that's
19:20
Speaker 2: gonna be the case here, but anytime I see tech
19:22
Speaker 2: start to lag in this market, I start to go eh,
19:25
Speaker 2: because everything else really strong enough to pull, you know,
19:28
Speaker 2: that weight. Quick break here Wall Street Watch and ask
19:31
Speaker 2: Todd our next.
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19:58
Speaker 5: Markets trading slightly lower after yesterday's volatile ride, where investors
20:02
Speaker 5: are reacting to the consumer price index, which climbed half
20:05
Speaker 5: a percent in May, in line with estimates. With that,
20:08
Speaker 5: the annual rate of inflation now sits at four point
20:11
Speaker 5: two percent, the highest level in three years. Right now,
20:15
Speaker 5: the Dow is down about half a percent, SMP five hundred,
20:19
Speaker 5: down only two points. Nasdaq actually just turned positive, up
20:23
Speaker 5: only seven points. RUSS two thousand is up about one
20:27
Speaker 5: percent ten your treasure reeled is flat at four point
20:30
Speaker 5: five to two percent, in oil jumping one and a
20:33
Speaker 5: half percent higher, trading at eighty nine dollars a barrel.
20:36
Speaker 5: Super Microcomputers tumbling thirteen percent after the company announced plans
20:41
Speaker 5: to raise seven billion dollars in equity related deals to
20:44
Speaker 5: help cover the cost of hardware component purchases. Meanwhile, shares
20:49
Speaker 5: a Cracker barrel rallying twenty five percent after the restaurant
20:53
Speaker 5: chain posted a surprise quarterly profit and lifted its outlook
20:56
Speaker 5: for the year, signaling its turnaround effort is showing progress. Elsewhere,
21:01
Speaker 5: RBC downgraded Nike two sector perform from outperform, saying Nike's
21:05
Speaker 5: turnaround is slower and narrower than they were anticipating. Nike
21:09
Speaker 5: stock is down about half or percent, and more tech
21:13
Speaker 5: earnings are on the way this afternoon where Oracle will
21:18
Speaker 5: report after the closing bell. I'm Tucker Silvan. That is
21:22
Speaker 5: Wall Street Watch.
21:24
Speaker 1: This is Ask Todd on the Financial Exchange Radio Network.
21:28
Speaker 1: If you have an existing estate plan or in the
21:30
Speaker 1: market for one, Todd Lutsky is here to answer your
21:33
Speaker 1: questions and help you plan for a later life. Ask
21:35
Speaker 1: Todd is presented by Cushing and Dolan, serving Massachusetts and
21:39
Speaker 1: New England for more than thirty five years, helping families
21:42
Speaker 1: with a state and tax planning, medicaid planning, and probate law.
21:45
Speaker 1: Visit Cushingdolan dot com. Now here's Todd Lutsky.
21:52
Speaker 2: As promised, Mister Todd Lutsky from Cushing and Dolan joins
21:56
Speaker 2: us live on air right now, and he's got one
22:01
Speaker 2: job at least right now. The job is to answer
22:05
Speaker 2: your estate planning questions live on air. We got phone
22:09
Speaker 2: lines open at eight eight eight two zero five two
22:12
Speaker 2: two six three. That is the number to call to
22:14
Speaker 2: ask Todd your estate planning questions live right now. We
22:18
Speaker 2: can usually get through two maybe three of these questions,
22:22
Speaker 2: so get calling early and often to make sure Todd
22:26
Speaker 2: has a chance speak with you about your state planning questions.
22:29
Speaker 2: That phone number is eight eight eight two zero five
22:32
Speaker 2: two two six three. Again it is eight eight eight
22:37
Speaker 2: two zero five two two six three, And you get
22:41
Speaker 2: to talk to Todd right now about whatever is on your
22:43
Speaker 2: mind a state planning related only please again eight eight
22:47
Speaker 2: eight to zero five two two six three, mister Lutsky
22:50
Speaker 2: how are you today?
22:51
Speaker 4: I am doing doing really well. Good.
22:54
Speaker 2: Uh, I'm great. Did you hear that? Do you hear
22:58
Speaker 2: about the British history that found William Shakespeare's chewing pencil?
23:04
Speaker 4: First of all, I didn't know that he had a
23:06
Speaker 4: chewing pencil, but he did.
23:07
Speaker 2: Well, we didn't know either, But apparently the pencil is
23:10
Speaker 2: so chewed they can't tell if it's to be or
23:14
Speaker 2: not to be.
23:16
Speaker 4: A pencil.
23:17
Speaker 2: They don't know. Yeah, they don't know.
23:20
Speaker 4: That's great.
23:20
Speaker 2: Yeah, I hope they figured that out me too. Todd's
23:23
Speaker 2: because two B is a type of pencil. It's been
23:26
Speaker 2: a while since you've used a pencil.
23:28
Speaker 6: Huh ah. I don't use a two B pencil.
23:33
Speaker 4: Yeah.
23:33
Speaker 2: Todd always writes in penn.
23:35
Speaker 4: In penn, yeah, which is what I have right here.
23:37
Speaker 2: That's why. Okay, I'm glad that we did that, Todd.
23:41
Speaker 2: Let's talk a little bit about irrevocable trusts. What are
23:46
Speaker 2: the biggest misconceptions you find people have about irrevocable trusts?
23:53
Speaker 6: So, I think I think the biggest misconception is, well,
23:57
Speaker 6: first of all, there's many kinds right of vocable trusts.
24:03
Speaker 6: That's a real big confusion in and of itself, that
24:06
Speaker 6: the irrevocable trust just because you hear the word irrevocable,
24:10
Speaker 6: and it doesn't always mean it's as irrevocable as you
24:13
Speaker 6: think it is. And it doesn't mean that you give
24:16
Speaker 6: up as much control as you might in your head
24:18
Speaker 6: think you do just because you hear the word irrevocable.
24:21
Speaker 6: Let's face it, if you don't know, you hear the
24:23
Speaker 6: word and you think, oh my gosh, I've given up
24:25
Speaker 6: a lot of control. Well, that's probably the two biggest misconceptions.
24:30
Speaker 6: One when I set up an irrevocable let's say, medicate
24:35
Speaker 6: irrevocable trust, right, that kind of trust is one in
24:39
Speaker 6: which you're going to keep a lot of control. The
24:43
Speaker 6: transfer of your assets to it is an incomplete gift.
24:49
Speaker 6: For gift tax purposes, you don't have to worry about
24:51
Speaker 6: filing any gift tax returns. And when you pass away,
24:55
Speaker 6: it's going to be included in your estate for a
24:57
Speaker 6: state tax purposes, and it's a grand tour trust. So
25:03
Speaker 6: for income tax purposes, you pay all the taxes at
25:05
Speaker 6: your own rate. So all these ideas that I pay
25:08
Speaker 6: more in taxes, I make a completed gift, that tax
25:10
Speaker 6: rates are higher at the trust level you know not true,
25:14
Speaker 6: and probably you're going to be in control of your asset.
25:17
Speaker 6: Live in your house, sell your house, buy another house,
25:20
Speaker 6: move a lot of control for you, and even the
25:24
Speaker 6: ability to change this irreticable trust as to who the
25:27
Speaker 6: beneficiaries are versus. I'll just throw this one out there.
25:31
Speaker 6: An irrevocable life insurance trust which many people have heard
25:35
Speaker 6: about that they think can only own life insurance, but
25:37
Speaker 6: it can own other things.
25:39
Speaker 4: Well, that one's a little different. That is a completed gift.
25:41
Speaker 6: I have completely given away the asset and it's not
25:45
Speaker 6: going to be included in my estate for state tax purposes.
25:49
Speaker 6: It's not going to get a step up in basis
25:52
Speaker 6: on the assets when I die, but that's okay.
25:55
Speaker 4: The goal there was to reduce.
25:57
Speaker 6: My estate first date tax purpose, and you keep very
26:02
Speaker 6: little control over that asset. You might throw your spouse
26:06
Speaker 6: on as trustee if you want to set it up
26:08
Speaker 6: and you're the don or, and you might retain the
26:11
Speaker 6: right to remove and replace that trustee, but it would
26:13
Speaker 6: have to be with somebody that is not related or subordinate.
26:17
Speaker 6: Where you could start out with a spouse, but you
26:19
Speaker 6: can't start playing around sure with the trustee after that
26:23
Speaker 6: and moving and replacing without being someone not related or
26:26
Speaker 6: subborting it. The whole goal there is not to retain
26:29
Speaker 6: too much control as to cause the assets in that
26:32
Speaker 6: estate in that trust to be included in your state,
26:35
Speaker 6: because that wasn't the goal. So lots of differences.
26:38
Speaker 2: Talking with Todd Lensky from the law firm of Cushing
26:41
Speaker 2: and Dolan, we still have room on the phone lines
26:44
Speaker 2: at eight eight eight to zero five two two sixty three.
26:47
Speaker 2: That's the number to call to ask Todd your estate
26:50
Speaker 2: planning questions live on air right now again eight eight
26:55
Speaker 2: eight to zero five two two sixty three. We're going
26:59
Speaker 2: to take a quick break here, but when we return,
27:02
Speaker 2: we're gonna get right to those questions with Todd again.
27:06
Speaker 2: Eight eight eight two zero five two two sixty three
27:10
Speaker 2: is the number of your questions with Todd? Are next?
27:12
Speaker 1: Ask Todd with Todd Lutsky every Wednesday at ten thirty
27:16
Speaker 1: only here on the Financial Exchange Radio Network. You're listening
27:21
Speaker 1: to Ask Todd with Todd Lutsky on the Financial Exchange
27:25
Speaker 1: Radio Network.
27:42
Speaker 2: All right, let's get right to those questions with Todd.
27:45
Speaker 2: First in the queue, we got Dan and Peabody, Dan
27:50
Speaker 2: what's your question for.
27:50
Speaker 7: Todd who I have a revocable trust and the trust
27:56
Speaker 7: is in my name? Does that give me any protection
28:00
Speaker 7: if I was to be sued?
28:02
Speaker 6: So a revocable trust does not ever provide creditor protection. Right,
28:09
Speaker 6: you're the you're the donor, you're the trustee. Correct, Yes,
28:13
Speaker 6: which is, by the way, how it's supposed to be.
28:15
Speaker 6: So I don't want you to feel like you've done
28:18
Speaker 6: something wrong. I mean, are you married.
28:22
Speaker 8: No, she passed away.
28:24
Speaker 4: So your widow and and do you have children?
28:29
Speaker 7: Yes? Three?
28:31
Speaker 6: Was there planning done before your spouse passed away? Yes,
28:37
Speaker 6: it was, and there was a trust for her was
28:39
Speaker 6: and she had assets in the.
28:41
Speaker 8: Trust, separate trust because it was the second marriage.
28:45
Speaker 4: Okay, good.
28:46
Speaker 6: And so those assets are now held in that trust
28:49
Speaker 6: either four year benefit and then ultimately for maybe her
28:53
Speaker 6: kids when you when she when you.
28:54
Speaker 4: Passed, correct, my kids, not hers, or for your kids. Okay.
28:59
Speaker 4: So she didn't have children from a prior marriage.
29:04
Speaker 8: He did, but for she had a separate trust for
29:08
Speaker 8: her kids, and they got her house and so you
29:12
Speaker 8: know we kept separate finances, right.
29:15
Speaker 6: Okay, So that's fine. So that's all night that the
29:18
Speaker 6: good news is there that's sheltered. First eight tax purposes.
29:22
Speaker 7: How old are you now, I'm seventy six.
29:27
Speaker 6: And would you say the size of your estate is
29:29
Speaker 6: more or less than the two million dollar Massachusetts exemption.
29:34
Speaker 4: More more than four.
29:38
Speaker 7: Right around there, So.
29:40
Speaker 6: The question becomes of that, I'm sure there might be
29:42
Speaker 6: a house involved. The only thing I can tell you
29:45
Speaker 6: is that the direct answer to your question is no,
29:47
Speaker 6: it's not providing you any credit or protection, nor was
29:51
Speaker 6: it ever designed to do that. It's probably just simply
29:54
Speaker 6: avoiding probate for you at this point and providing for
29:57
Speaker 6: a bloodline plan to your family the manner in which
30:00
Speaker 6: you want it to happen, by the way, all of
30:02
Speaker 6: which are good things to have, and it sounds like
30:05
Speaker 6: it's doing its job. If once and I tell people
30:10
Speaker 6: that as you get older you might want to review
30:12
Speaker 6: your plan, the only thing you might want to consider
30:15
Speaker 6: now is do you want to change that to an
30:19
Speaker 6: irrevocable trust to provide not necessarily well to provide the
30:23
Speaker 6: credit of protection you're looking for, but also protecting the assets,
30:27
Speaker 6: are some of them from the cost of long term care.
30:30
Speaker 6: If that's the case, then you should probably seek out
30:32
Speaker 6: your lawyer and say I want to review and maybe
30:37
Speaker 6: discuss the concern that you have about protecting assets from
30:40
Speaker 6: the nursing home, and they can explain to you how
30:43
Speaker 6: the irrevocable trust will work. So that's probably the best
30:47
Speaker 6: advice I can give at this point. But you know what, folks,
30:51
Speaker 6: in this trust, this guide we're giving away this month,
30:55
Speaker 6: there are not just his revocable trust, not just Dan's
31:00
Speaker 6: vocable trust that we just talked about, but there are
31:03
Speaker 6: seven others. From irrevocable Medicaid trust, which is the one
31:06
Speaker 6: I just recommended for him, to irrevocable life insurance trusts,
31:11
Speaker 6: and how they are very different to Nominee realty trusts,
31:16
Speaker 6: to sole benefit trust if you happen to have a
31:18
Speaker 6: disabled child. You know one it talks about pool trusts
31:23
Speaker 6: for nursing home. Last minute planning, folks, there's a Nominee
31:28
Speaker 6: realty trusts, which are not really trusts at all.
31:31
Speaker 4: But folks, this guy.
31:33
Speaker 6: Doesn't just explain, I mean, doesn't just list the documents.
31:37
Speaker 6: It really explains the purpose, the funding, the protections. It
31:41
Speaker 6: provides how the taxes are saved, not just a big list.
31:45
Speaker 6: If you haven't done your planning, call figure out which
31:49
Speaker 6: one is right. For you and kick off your estate
31:52
Speaker 6: planning eight six six eight four eight five six nine
31:57
Speaker 6: nine or Legal Exchange Show dot com again eight six
32:01
Speaker 6: six eight four eight five six nine nine or Legal
32:05
Speaker 6: Exchange Show dot com. And you can always go to
32:07
Speaker 6: Cushing dolean PC our Instagram page for more information.
32:11
Speaker 2: Todd got another one in UH all set up for
32:14
Speaker 2: you here. Let's go to UH Dave in the car Dave,
32:17
Speaker 2: You're on with Todd Lutsky.
32:19
Speaker 9: Yes, good morning, gentlemen. I have a question regarding your trust, Todd.
32:25
Speaker 9: The irrevocable trust is will I lose the stepped up
32:30
Speaker 9: value of the real estate once the beneficiary comes into
32:37
Speaker 9: the money.
32:38
Speaker 6: So so let me ask you this question. You I
32:40
Speaker 6: didn't hear that. Maybe you did say it. Is this
32:42
Speaker 6: a trust that I did for you? Or is this
32:45
Speaker 6: a trust you're contemplating having done.
32:48
Speaker 9: No, this is one that you did.
32:49
Speaker 4: Okay, good, because.
32:50
Speaker 6: That makes all the difference in the world knowing that
32:53
Speaker 6: and able to answer the question, because I'm not always
32:56
Speaker 6: sure how everybody else drafts their documents. So in your case,
33:01
Speaker 6: this trust is and it was designed to protect the
33:04
Speaker 6: assets from the nursing home, right, correct? Okay, So now
33:09
Speaker 6: I know that once you put the asset in the trust.
33:13
Speaker 6: For everybody listening, it was an incomplete gift for gift
33:16
Speaker 6: tax purposes, which is great. You didn't have to file
33:19
Speaker 6: any gift tax returns when you set it up. It's
33:22
Speaker 6: a grand tour trust for income tax purposes, which means
33:25
Speaker 6: you're the owner for income tax purposes.
33:27
Speaker 4: And is it going to get to step up?
33:29
Speaker 6: The answer is yes, But let me explain why because
33:33
Speaker 6: many people, Again, different kinds of irrevocable trusts have different results.
33:40
Speaker 6: So the purpose here was to transfer an asset to
33:44
Speaker 6: a trust like you did, Dave, but retain in the document,
33:49
Speaker 6: you'll see the language I retain the right to the
33:53
Speaker 6: income from that transfer. So that paragraph, that retention of
34:00
Speaker 6: the right to income does a few things for you.
34:04
Speaker 6: It allows you not only the right to live there
34:06
Speaker 6: the rest of your life, which of course you want,
34:09
Speaker 6: but it also allow it also causes the asset to
34:14
Speaker 6: be included in your estate when you give it away.
34:17
Speaker 6: So let me help people understand. There's a code section
34:20
Speaker 6: that says, if you give something away during life and
34:25
Speaker 6: retain the right to the income or retain the right
34:31
Speaker 6: to control the beneficial enjoyment of the property, that you
34:35
Speaker 6: gave away. Then the government says you did not effectively
34:39
Speaker 6: give that away, and therefore they keep like a string
34:44
Speaker 6: on it, and they pull that back into your estate
34:48
Speaker 6: for a state tax purposes, not probate, but for estate
34:51
Speaker 6: tax purposes. Even though you don't own it, they treat
34:54
Speaker 6: it as if you own it, and therefore triggering the
34:58
Speaker 6: ten fourteen a step up in basis. So long winded answer,
35:03
Speaker 6: but sometimes people need to understand why you get it.
35:06
Speaker 4: You will get it not.
35:07
Speaker 6: Just on that property, on any property that's in there,
35:11
Speaker 6: and any stock portfolio that you might have put in
35:14
Speaker 6: there that might have grown over time. Now I say
35:19
Speaker 6: this because I want to compare it now and contrast
35:22
Speaker 6: it to other irrevocable trusts. Another irrevocable trust you might
35:28
Speaker 6: have is, like we talked earlier, Chuck, the life insurance
35:33
Speaker 6: trust SURE or a gifting trust you. So for someone
35:38
Speaker 6: who might have larger assets that want to get assets
35:42
Speaker 6: out of their estate for estate tax purposes. And it's
35:45
Speaker 6: important we talk about this because there was a revenue
35:47
Speaker 6: ruling that came out in twenty twenty three that confused
35:50
Speaker 6: everybody on this very issue, and I got so many
35:53
Speaker 6: calls saying Oh my gosh, my Medicaid trust isn't going
35:56
Speaker 6: to provide protection, isn't going to give me a step
35:58
Speaker 6: up in basis anymore. That is absolutely wrong. Here's the reason.
36:03
Speaker 6: When you talk about an irrevocable grant or gifting trust,
36:08
Speaker 6: it is a grant to or trust for income tax purposes,
36:10
Speaker 6: much like the one I just mentioned on the medicaid side.
36:14
Speaker 6: But the difference is it's a completed gift. The Medicaid
36:18
Speaker 6: trust is not. When when you give something to the
36:21
Speaker 6: irrevocable life insurance trust, you don't retain the right to
36:24
Speaker 6: the income, you don't retain the right to control the
36:28
Speaker 6: beneficial enjoyment. You're not going to be the trustee of
36:31
Speaker 6: that trust, and therefore you're not violating this twenty thirty
36:35
Speaker 6: six rule of giving something away and retaining that right
36:39
Speaker 6: you know, to control or enjoy it. So it prevents
36:42
Speaker 6: it from being included in your estate. So you save
36:46
Speaker 6: the estate tax by getting it out of your estate.
36:49
Speaker 6: But you trade off a carryover basis and you give
36:53
Speaker 6: up the step up in basis.
36:55
Speaker 4: It's just a trade off, that's all.
36:57
Speaker 2: So there you go, mister Letski, thank you so much,
37:00
Speaker 2: so much for joining us. We appreciate your time, always
37:03
Speaker 2: a pleasure.
37:03
Speaker 4: Thank you.
37:04
Speaker 1: This has been Ask Todd on the Financial Exchange Radio network.
37:08
Speaker 1: Ask Todd with Todd. Lutsky has been presented by Cushing
37:11
Speaker 1: and Dolan, serving Massachusetts and New England for more than
37:13
Speaker 1: thirty years, helping families with the state and tax planning,
37:16
Speaker 1: Medicaid planning, and probate law. Call eight hundred three nine
37:19
Speaker 1: three four thousand and one or visit Cushingdolan dot com.
37:23
Speaker 1: The views expressed in this segment are solely those of
37:25
Speaker 1: Cushing and Dolan. Armstrong Advisory does not provide any legal
37:27
Speaker 1: or tax advice. Please consult with your illegal or tax
37:30
Speaker 1: advisor on such matters. Cushing and Armstrong do not endorse
37:32
Speaker 1: each other and are not affiliated.