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Why the Fed being independent is a good thing · 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 Vandetti, Chuck.
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Speaker 2: Mark and Sucker with you today. And we've got just
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Speaker 2: a monster day set up as far as activity that
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Speaker 2: we're going to be seeing.
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Speaker 3: Uh.
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Speaker 2: It kicks off at two pm this afternoon where the
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Speaker 2: Federal Reserve is going to announce their latest policy decision.
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Speaker 2: Jay Powell, you think he's got the purple tie on already? Market?
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Speaker 2: Does he put it on, like, I don't know, an
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Speaker 2: hour or so before.
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Speaker 4: See, you always wear a purple.
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Speaker 2: Tie, always royalty, and after all, J. Powell is nothing
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Speaker 2: if not royalty. And yeah, J Powell's got you know,
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Speaker 2: quite a few purple ties. Actually it's not always the
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Speaker 2: same one, but he's got you know, variations on a
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Speaker 2: theme that he works with. And so the expectations, quite honestly,
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Speaker 2: are pretty boring for the actual meeting. Right now, the
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Speaker 2: Fed Fund's futures market is pricing in a ninety nine
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Speaker 2: point five percent chance that the Fed does nothing, and
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Speaker 2: that's probably under selling it by about point four percent.
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Speaker 2: I'd say it's probably closer to ninety nine point nine
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Speaker 2: in my opinion. But we're just splitting hairs here. The
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Speaker 2: after word, the after period, the whatever, after the announcement, J.
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Speaker 2: Powl is gonna have a press conference at two thirty,
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Speaker 2: and I think that once again, like ninety nine point
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Speaker 2: nine percent of that press conference is gonna be completely
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Speaker 2: useless because here, here's what every question is gonna be.
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Speaker 5: Mark.
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Speaker 2: I'm gonna be someone asking a question. I want you
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Speaker 2: to play J. Powell here. Okay, Yeah, you're gonna be
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Speaker 2: J Powell. Okay, I'll give you a minute to get
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Speaker 2: into a character. Okay, here we go. Uh guess in
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Speaker 2: the front. Uh, Jay, I've got a question. The Trump
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Speaker 2: administration is now proposing, you know, tariffs on various different countries.
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Speaker 2: How does this affect your ability to conduct monetary policy?
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Speaker 2: And do you expect any changes as a result of this?
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Speaker 6: I don't know.
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Speaker 4: What do you think is can dance? I'm sorry, I'm
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Speaker 4: not good at role play, but I have no idea
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Speaker 4: what he pucker.
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Speaker 2: I want you to ask my question along those lines.
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Speaker 2: I'll be Jay.
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Speaker 7: Hey, Jay, do you what do is your take on
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Speaker 7: these terrorists that are looming? Do you think it's going
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Speaker 7: to impact your monetary policy?
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Speaker 2: We don't like to speculate on policy, and we'll have
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Speaker 2: to see what's actually implemented by the executive branch and
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Speaker 2: by the legislature, and we will respond as appropriate.
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Speaker 4: Okay, we're gonna get that.
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Speaker 2: Forty two times in a row, because that's all. It's everyone,
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Speaker 2: and then it interspersed with we're gonna get five variations
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Speaker 2: on Jay, has the President asked you to step down yet?
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Speaker 2: And if so, if asked, would you step down? And
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Speaker 2: Jay's response will be what I'd love to see.
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Speaker 4: I don't think anybody in the room really understands monetary
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Speaker 4: policy or could define a tariff correctly. I'd like to
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Speaker 4: see a reversion since we can speculate. I personally think
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Speaker 4: it would benefit the citizenry, myself included, and I would
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Speaker 4: weave this into Q and A and other areas too.
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Speaker 4: If we could get back to basics in this country
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Speaker 4: and start talking about what is the FED, what is
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Speaker 4: monetary policy? And then as a consequence of those, once
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Speaker 4: you establish those fundamental things, then you can get into
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Speaker 4: how should they respond to this or that. I don't
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Speaker 4: think the FED does enough educating in these press conferences
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Speaker 4: and journalists looking for their quick hits certainly don't help matters.
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Speaker 4: And that's part of the reason why where in the
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Speaker 4: we got into the mess we did over inflation, and
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Speaker 4: we're about to wade into another mess with a president
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Speaker 4: who is obviously going to interfere with monetary policy very soon,
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Speaker 4: probably starting at about two thirty one pm Eastern today.
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Speaker 2: When you say you think that he's going to inter
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Speaker 2: in monetary policy, what is.
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Speaker 4: That job owning you? Specifically? So it probably looks a
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Speaker 4: lot like his. We already know the blueprint short degree,
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Speaker 4: but he's clear unbridled. Now he's on a rampage. Some
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Speaker 4: of you love it, some of you think it's dangerous.
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Speaker 4: With respect to monetary policy, it will unquestionably be dangerous.
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Speaker 4: FED independence is vitally important to economic stability. Anyone who's
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Speaker 4: ever looked at the issue has come to that conclusion.
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Speaker 4: Of anything, I'm understating it. We take economic stability the
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Speaker 4: environment in which we transact by and sell stocks, make
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Speaker 4: future plans. We take it for granted because we're spoiled.
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Speaker 4: We may be about to find out what happens when
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Speaker 4: the monetary component of economics stability is pulled out from
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Speaker 4: underneath us. I'm not suggesting there's much we can do
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Speaker 4: about that, but a little bit of education as to
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Speaker 4: why the FED independence is important, Why when it was
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Speaker 4: less independent, the economy was more volatile. If those two
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Speaker 4: things are probably not coincidences.
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Speaker 2: Let me ask you this. We've seen past presidents Trump
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Speaker 2: included and non Trump presidents included, sure, that have engaged
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Speaker 2: in plenty of job owning with the FED. Even during
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Speaker 2: Trump's first term, we saw plenty of it. Do you
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Speaker 2: think that actually impacted how the FED conducted policy during
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Speaker 2: that term? And are there differences in how you view
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Speaker 2: it potentially impacting it this term compared to the first,
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Speaker 2: Just because there are probably a lot of people listening
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Speaker 2: who look at the first term and say, well, Trump
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Speaker 2: did all that stuff during the first term.
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Speaker 4: He publicly has berated the FED the way Trump did
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Speaker 4: in his first setur lb Privately, It's been well documented LBJ.
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Speaker 4: Nixon was buddies with Arthur Burns, the FED chairman that
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Speaker 4: he that he appointed, and he privately pressured him. Certainly
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Speaker 4: not public or like Arthur Burnt, am I wrong, not
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Speaker 4: until and even the Reagan administration put a little bit
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Speaker 4: of private pressure on role bulk or not much one
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Speaker 4: or two documented instances. What Trump did in his first
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Speaker 4: term was unprecedented in the modern era. If you are
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Speaker 4: a Supreme Court Officionado. It would be like the president,
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Speaker 4: and some have it would be like the president telling
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Speaker 4: the court how they should decide under penalty of being replaced.
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Speaker 4: And that's not unprecedented either, after they are threatened to
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Speaker 4: add to pack the court. The most recent Democrat administration
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Speaker 4: toyed with the idea. But that's the most that's the
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Speaker 4: closest analogy I can come up with. How financial markets
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Speaker 4: will react is an open question. I guess to more
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Speaker 4: aggressive browbeating from Trump, but I suspect we are going
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Speaker 4: to find out, if not starting today, then very soon.
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Speaker 4: And as you could tell, I'm I'm genuinely worried about that.
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Speaker 2: So let this. I want to dig into this topic
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Speaker 2: because you know a lot about it, and I think
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Speaker 2: it's a useful conversation, a fun topic. Why is central
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Speaker 2: bank independence so important?
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Speaker 6: Like J.
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Speaker 2: Pwll is not going to answer that question today because
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Speaker 2: he's probably not. I wish someone would put it to him, though,
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Speaker 2: But why is it so important? I have my answer,
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Speaker 2: I'm interested to hear yours and then I'll give mine.
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Speaker 4: Yeah, you don't want politicians controlling the money supply because
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Speaker 4: they're going to print money to pay for their spending priorities,
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Speaker 4: they'll never rain money into constrain inflation, and you end
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Speaker 4: up with out of control inflation or worse, something called
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Speaker 4: hyper inflation. That's the short answer.
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Speaker 2: And basically what it boils down to is how I
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Speaker 2: tend to try to view the levers of government, which is, hey,
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Speaker 2: if you're okay with your guy doing X, Y or Z,
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Speaker 2: what if not your guy gets into the same office
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Speaker 2: and as actually the same power. Do you want to
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Speaker 2: enable them to do this? So I think that's that's
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Speaker 2: part of it. The second pieces, Look, there's always danger
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Speaker 2: in any one particular person having too much power. I
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Speaker 2: have a buddy of mine who he works for a
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Speaker 2: real estate development firm, and a few years back, they
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Speaker 2: were trying to do an international deal and it was
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Speaker 2: in a relatively small country with an autocratic sovereign, and
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Speaker 2: they got, you know, fairly decently into it. You know,
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Speaker 2: they were exploring it for a few months and eventually
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Speaker 2: got to a point where they said, look like, we're
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Speaker 2: almost there, but there's this certain tax that is a
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Speaker 2: hold up to us doing the deal. And the country
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Speaker 2: was small enough and the project was big enough that
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Speaker 2: they were able to get their CEO a meeting with
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Speaker 2: the sovereign. CEO goes into the meeting, outlines his thoughts
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Speaker 2: for you know, ten to fifteen minutes, says, hey, like,
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Speaker 2: you know, this is the problem. There's this tax, Like
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Speaker 2: this is what's preventing us from investing the money. Blah
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Speaker 2: blah blah. Sovereign listens into the end of the meeting
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Speaker 2: just says, I'll get rid of the tax. Quite literally
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Speaker 2: snaps his fingers and gets rid of it. Now you
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Speaker 2: might say, okay, great, like they moved ahead with they
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Speaker 2: decided to not move ahead with the deal, and the
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Speaker 2: reason why that they decided to do this was ultimately
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Speaker 2: ease of transacting. If ease of changing government regulation can
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Speaker 2: also represent a risk in that, hey, if it can
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Speaker 2: be changed that easily to benefit you, it can also
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Speaker 2: be changed that easily to hurt you if a new
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Speaker 2: leader comes into power who shares different views, or even
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Speaker 2: if the old guy just wakes up on the wrong
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Speaker 2: side of the bed one day and is like, hey,
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Speaker 2: you know what, that deal didn't work. Screw You'm gonna
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Speaker 2: I'm gonna, you know, reinstate the tax just on your project.
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Speaker 2: And so this is when we talk about like the
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Speaker 2: potential risk of the intervention in monetary policy by any president,
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Speaker 2: whether it's President Trump or anyone else. It's the question of, hey,
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Speaker 2: do you want to give whoever is in that position
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Speaker 2: the ability to control interest rates to benefit their own agenda.
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Speaker 2: And you might say, yeah, I'm cool with anyone doing that,
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Speaker 2: But more likely than not, you're like not. Like if
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Speaker 2: you're sitting there, and if you're a fan of Trump,
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Speaker 2: you're saying no, if Bernie Sanders became president, I don't
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Speaker 2: want him being able to control interest rates.
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Speaker 4: People are thinking that.
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Speaker 2: And likewise, if you're not, you're like, no, I prefer
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Speaker 2: that Trump not be able to. So you want to
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Speaker 2: have things distributed amongst different people, because the risk and
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Speaker 2: too much consolidation of power is that someone comes in
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Speaker 2: who might not share your interests and says whack, like oh.
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Speaker 1: Yeah, I mean.
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Speaker 4: But with monetary policy, the concern is very specific. The
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Speaker 4: FED does with respect to monetary policy. One thing it
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Speaker 4: controls the money supply. We talk about the Fed controlling
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Speaker 4: interest rates, they don't, and they even they only barely
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Speaker 4: exert heavy influence over a particular very short term interesstrate
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Speaker 4: the FED funds rate. But their job is to keep
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Speaker 4: the money supply growing at a rate that more or
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Speaker 4: less keeps the rate of demand in the economy growing
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Speaker 4: at about the same rate as the economy's ability to
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Speaker 4: supply that demand. And the danger, as you said, and
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Speaker 4: I'm repeating myself, I think a little bit here is
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Speaker 4: that any politician, but we're talking about the president right now,
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Speaker 4: is the only one proposing this. And when I say proposing,
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Speaker 4: I mean it's something he talked about during the campaign.
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Speaker 4: Any politician will be motivated to goose the economy to
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Speaker 4: improve their own.
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Speaker 2: The Biden administration certainly.
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Speaker 4: Did, sure, but they did it through fiscal They did.
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Speaker 2: It through the fiscal side of things with how they
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Speaker 2: managed the treasury. Like again, this is why you look
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Speaker 2: at and you say, do I want anyone to have
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Speaker 2: that much power and control over both fiscal and monetary?
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Speaker 2: What once you have both, It's it's kind of like
12:25
Speaker 2: the Avengers getting all the Infinity Stones. It's like, you know,
12:29
Speaker 2: it's it's Captain Planet when their powers combine. Look what
12:34
Speaker 2: they I'm just trying to throw a bunch of different stuff.
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Speaker 4: Captain Planet, Tucker.
12:37
Speaker 2: You know Captain Planet.
12:38
Speaker 7: I grew up on Captain Planet, kid. Thank you, Okay,
12:41
Speaker 7: I've never heard win fire, not the band, never heard water?
12:47
Speaker 2: What are the powers air? I said that whatever when?
12:51
Speaker 2: But you know this and this earthwind Moreland. No, that
12:54
Speaker 2: was the cornerback for the New England Patriots for about
12:57
Speaker 2: a year and a half.
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Speaker 4: It took us fifty years to this beast up which
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Speaker 4: somewhere far away fed the the the both the.
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Speaker 2: Inflation separations, oh okay, gotcha.
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Speaker 4: And the meddling of politicians in the area of monitors.
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Speaker 4: It didn't come easy. It was very hard fought here
13:14
Speaker 4: and around the world. The idea that we'd squander it
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Speaker 4: on the whims of one person should be revolting. I
13:21
Speaker 4: know it's so arcane though monetary policy that people aren't
13:24
Speaker 4: gonna notice until it's really badly conducted, as they did
13:27
Speaker 4: with the inflation outburst of twenty twenty through twenty twenty three.
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Speaker 7: Let's take quick break Heart Heart the band. No, also
13:36
Speaker 7: not that it's a fifth one. I couldn't remember.
13:38
Speaker 2: Okay, so earth Wind, Fire and heart, Water and heart
13:40
Speaker 2: but not the bands? Correct, got it? Take a quick
13:44
Speaker 2: break here when we come back. I think that's enough
13:46
Speaker 2: fed talk for right now. Let's let's actually let's talk
13:50
Speaker 2: just a little bit about interest rates and where well,
13:55
Speaker 2: we don't think that we don't know where they're going
13:57
Speaker 2: if we're being honest, but what the market might be
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Speaker 2: sniffing out here. We'll talk about that when we return.
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Speaker 2: All right, there is a nice piece of panic in
15:12
Speaker 2: barons today. It's titled high interest rates are hammering investors?
15:17
Speaker 2: What lies ahead could be worse? And it basically talks about, Okay,
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Speaker 2: you know what happens if you know ten year yields,
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Speaker 2: long term treasury yields end up climbing up to six percent,
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Speaker 2: which would be about a one and a half percent
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Speaker 2: jump from where they are today. And I guess the
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Speaker 2: question that I ask first and foremost is, Okay, what's
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Speaker 2: the likelihood that you get rates, you know, the long
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Speaker 2: term rates moving up to six percent? And beyond that,
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Speaker 2: what's the chance that they stay there for any extended
15:49
Speaker 2: period of time? And I think there's a reasonable chance,
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Speaker 2: and by reasonable, I don't know ten to fifteen percent
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Speaker 2: chance that you get, you know, a six percent ten
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Speaker 2: year rate by the end of this year. I'm not
16:03
Speaker 2: gonna poop poo it and say it could never happen,
16:05
Speaker 2: because there's a realistic world in which it does. But
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Speaker 2: it's also something where look, if if the tenure treasury
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Speaker 2: climbs to six, mortgage rates are probably going somewhere between
16:15
Speaker 2: eight and a half and nine percent, and that slows
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Speaker 2: the US economy so much that the tenure probably doesn't
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Speaker 2: spend much time there and immediately ends up pulling back
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Speaker 2: because it throws the US into some kind of gut
16:25
Speaker 2: wrenching recession, and so it doesn't stay there very long.
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Speaker 4: Your thoughts, uh, yeah, everything you just articulate. It sounds
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Speaker 4: reasonable and logical. The rink one wrinkle could be a
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Speaker 4: stagflationary environment. A recession that causes federal expenditures to go
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Speaker 4: up puts pressure on interest rates are determined by supply
16:46
Speaker 4: and demand for loanable funds. It's the FED does not
16:49
Speaker 4: determine longer term interest rates. They can influence them, and
16:53
Speaker 4: they can at times try to peg them, but for
16:56
Speaker 4: all intents and purposes, they don't. They don't even really
16:59
Speaker 4: determine your termatry.
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Speaker 1: We just talked about this.
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Speaker 4: So it will depend on the macroeconomic backdrop. And I
17:05
Speaker 4: wonder what would happen if the economy did slow. It's
17:07
Speaker 4: going to eventually, it's been running it relative to potential.
17:10
Speaker 4: It's been running at breakneck pace for the past couple
17:12
Speaker 4: of years. When it slows, that will put pressure on
17:15
Speaker 4: the budget deficit. Because automatic stabilizers kick in benefit.
17:19
Speaker 2: An appoyment, insurance things only automatic.
17:21
Speaker 4: I think Congress doesn't even have to legislate those. Budget
17:23
Speaker 4: deficits always expand during recessions. What we're already at six
17:28
Speaker 4: or so percent six of gross domestic product. If you
17:31
Speaker 4: look at the budget deficit as a fraction of economic output,
17:35
Speaker 4: what happens if it explodes higher? Well, that offset some
17:40
Speaker 4: of the some of the natural tendency of interest rates
17:45
Speaker 4: to fall during an economic contraction because the demand for
17:48
Speaker 4: loanable funds falls in the private sector. At the same
17:52
Speaker 4: time government will be demanding more. I don't know the answer, Chuck,
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Speaker 4: You could get more complicated, is my little point.
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Speaker 2: The interesting thing is you mentioned that, Look, ultimately, interest
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Speaker 2: rates are determined on a supply and demand basis for
18:05
Speaker 2: all of your life and basically all of anyone's life listening,
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Speaker 2: the primary limiting factor has been the demand side there
18:16
Speaker 2: in terms of how high can rates go, and that
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Speaker 2: there hasn't been like a bond over supply problem in
18:22
Speaker 2: the US in our lifetimes.
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Speaker 4: Uh, yeah, it's hard to think of it. Just thinking
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Speaker 4: of the US treasury issue you're.
18:30
Speaker 2: Talking, you're talking like a fiscal crisis effectively. Then we
18:34
Speaker 2: have not seen that, and that's good. Like that, That's
18:38
Speaker 2: basically what I'm what the UK went through during their
18:40
Speaker 2: budget tantrum a couple of years ago. We've never seen
18:44
Speaker 2: that in our lifetimes, like you like, it just hasn't happened.
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Speaker 4: Market's always been able to absorb with the treasury issued.
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Speaker 2: Rates have moved based on hey, projected growth of the US,
18:55
Speaker 2: projected inflation, like all those things. But it's never been Hey,
18:59
Speaker 2: we've we've got too many bonds to sell and we
19:02
Speaker 2: can't sell them, true like that, that has not been
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Speaker 2: the driving factor. The question that I think you're you're
19:09
Speaker 2: getting at here is, look, with overall debt to GDP,
19:13
Speaker 2: you know, north of one hundred and twenty percent right now,
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Speaker 2: and with the potential for annual deficits topping ten percent
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Speaker 2: in the event of a recession, does supply become something
19:23
Speaker 2: that drives interest rates rather than just demand? Right, Let's
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Speaker 2: take a quick break. When we return, we got Wall
19:30
Speaker 2: Street Watch and Todd Weltsky joins us for Ask Todd.
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20:00
Speaker 7: It's FED meeting day and markets are in mixed territory.
20:04
Speaker 7: No surprises are anticipated at the conclusion of the Central
20:07
Speaker 7: Banks meeting at two o'clock, with rates expected to remain steady.
20:12
Speaker 7: FED Chairman Jerome Pole will hold a press conference soon
20:15
Speaker 7: after at two thirty. Right now, the Dow is up
20:18
Speaker 7: by fifty eight points about a tenth of a percent,
20:21
Speaker 7: SMP five hundred is off by about a quarter percent
20:24
Speaker 7: or thirteen points in the Nasdaq down by about half
20:27
Speaker 7: a percent. Ten year Treasureel down by two basis points
20:31
Speaker 7: at four point five to two percent, and crude oil
20:34
Speaker 7: down about three quarters of a percent, training just above
20:38
Speaker 7: seventy three dollars a barrel. Shares in ASML up by
20:42
Speaker 7: five percent after the company saw its quarterly orders top estimates.
20:46
Speaker 7: As companies scrambled to get their hands on machinery to
20:49
Speaker 7: make increasingly sophisticated semiconductors after a volatile stretch on the
20:54
Speaker 7: heels of a deep seek driven tech route, and video
20:57
Speaker 7: shares down by about four percent to day. Meanwhile, T
21:01
Speaker 7: Mobile b quarterly revenue and profit expectations as it continued
21:05
Speaker 7: to add more wireless phone customers than its competitors. The
21:09
Speaker 7: company also issued an upbeat full year guidance that stock
21:13
Speaker 7: up by eight percent. Elsewhere, Starbucks shares up by five
21:17
Speaker 7: percent after the coffee giant saw its quarterly profit fall. However,
21:21
Speaker 7: executives hailed progress and making cafes more welcoming and less hectic.
21:26
Speaker 7: The company did see its same store sales decline four percent,
21:30
Speaker 7: marking the fourth straight quarter of a slump in that category,
21:34
Speaker 7: and after today's closing bell, all eyes will turn to
21:37
Speaker 7: big tech earnings from Tesla, Meta, Microsoft, and IBM. I'm
21:42
Speaker 7: Tucker Silva and that's Wall Street Watch.
21:45
Speaker 1: This is Ask Todd on the Financial Exchange Radio Network.
21:49
Speaker 1: If you have an existing estate plan or in the
21:51
Speaker 1: market for one, Todd Letskey is here to answer your
21:54
Speaker 1: questions and help you plan for a later life. Ask
21:57
Speaker 1: Todd is presented by Cushing and Dolan, serving message It's
22:00
Speaker 1: in New England for more than thirty five years, helping
22:03
Speaker 1: families with a state and tax planning, Medicaid planning and
22:06
Speaker 1: probate law. Visit Cushingdolan dot com. Now Here's Todd Lutsky.
22:12
Speaker 2: As promised, we now joined by Todd Lutsky from the
22:15
Speaker 2: law firm of Cushing and Dolan. Call the segment asked
22:20
Speaker 2: talk because it's your chance to ask Todd your estate
22:22
Speaker 2: planning question. So we got the phone lines open eight
22:25
Speaker 2: eight eight to zero five two two sixty three. That
22:29
Speaker 2: number again is eight eight eight to zero five two
22:33
Speaker 2: two six three. Remember we only get to maybe two
22:36
Speaker 2: to three calls each week, so get calling early if
22:39
Speaker 2: you want to make sure that we get to your call.
22:41
Speaker 2: That number again is eight eight eight to zero five
22:45
Speaker 2: two two six three. Mister Lutsky, how are you today?
22:48
Speaker 5: I am never better. How are you doing?
22:50
Speaker 6: Uh?
22:50
Speaker 2: I'm good. I competed in a neck decorating contest over
22:54
Speaker 2: the weekend neck decorating. Yeah, yeah, it was a tie.
22:58
Speaker 1: That's good.
22:59
Speaker 5: I was gonna ask you who one?
23:00
Speaker 2: Yeah, t So, I want to talk to you a
23:02
Speaker 2: little bit about a hypothetical situation. Let's say that someone
23:07
Speaker 2: comes to you and says, Todd, I haven't done any
23:10
Speaker 2: kind of a state planning to this point. Uh huh,
23:13
Speaker 2: but my spouse is starting to show, you know, some
23:16
Speaker 2: signs of struggling, and we might be approaching a long
23:19
Speaker 2: term care situation. Nothing imminent, but maybe it's six to
23:22
Speaker 2: twelve months away. Oh wow, How would you approach that
23:27
Speaker 2: type of situation in terms of the type of plan
23:30
Speaker 2: that you drop up, given that it's within the five
23:32
Speaker 2: year look back window, but not imminent happening tomorrow.
23:37
Speaker 5: So it's funny you use the word imminent, and imminent
23:40
Speaker 5: means so many different things to so many different people. Right, So,
23:44
Speaker 5: you know, six to twelve months doesn't seem like it's imminent,
23:49
Speaker 5: but when you compare it to the costs of long
23:52
Speaker 5: term care, when you compare it to the rules associated
23:55
Speaker 5: with long term care, it takes, as you said, Chuck,
23:58
Speaker 5: five years to protect the assets from the cost of
24:01
Speaker 5: long term care. So to me, that's almost imminent. So
24:05
Speaker 5: to me, when I hear six to twelve months, to me,
24:07
Speaker 5: that's imminent versus five years. Right, So would I tell
24:12
Speaker 5: them to absolutely set up a plan knowing we're not
24:16
Speaker 5: going to make it the five years, Well, it would
24:20
Speaker 5: really depend on what kind of assets they have and
24:23
Speaker 5: what we're trying to do. So if we're a married couple,
24:25
Speaker 5: we have kids, and you know, let's say we're worth
24:27
Speaker 5: a couple million, maybe two three million, and we're trying
24:30
Speaker 5: to do an estate plan, Well, you might as well
24:32
Speaker 5: set up the plan right, because with one spouse, you know,
24:36
Speaker 5: being sick, it doesn't mean they're going to go into
24:38
Speaker 5: a nursing home. Their illness could take their life, right,
24:41
Speaker 5: so you would set up the estate plan and probably
24:45
Speaker 5: if the goal is to protect the assets from the
24:47
Speaker 5: nursing home for both husband and wife, that we might
24:53
Speaker 5: as well go ahead and do the irrevocable trust. And
24:55
Speaker 5: you might be thinking, well, they're never going to make
24:57
Speaker 5: the five years. Well, one, we don't know for sure,
25:00
Speaker 5: and two having that clock running is never going to hurt.
25:03
Speaker 5: It'll give options later. So if this person makes it
25:07
Speaker 5: four years and they were wrong, well, well great now
25:11
Speaker 5: we might only have to private pay one year to
25:13
Speaker 5: protect everything we put in the trust, and we might
25:15
Speaker 5: want to do that. That might make sense if it
25:18
Speaker 5: happens sooner, if they've just passed away. The estate plan
25:21
Speaker 5: works fine. It still avoids probate, it reduces taxes, it
25:24
Speaker 5: provides the bloodline plan. It worked perfectly right, and it
25:28
Speaker 5: didn't have to reset the clock for the other spouse
25:31
Speaker 5: that's surviving. So there's still lots of things and lots
25:34
Speaker 5: of reasons to do the planning even though you might
25:37
Speaker 5: be in light of this potential sickness or illness that
25:41
Speaker 5: this client has. So that said, I would probably still
25:45
Speaker 5: go ahead with the year of vocal And finally, if
25:47
Speaker 5: they don't make it and they went to the nursing home,
25:50
Speaker 5: there are last minute things you can do to protect
25:53
Speaker 5: the assets for the healthy spouse. And then meanwhile, after
25:57
Speaker 5: the eligibility for medicaid occurs, you can still use the
26:01
Speaker 5: trust that you created, just refund it by the healthy spouse,
26:05
Speaker 5: so it would never be a waste of money. So
26:08
Speaker 5: so yeah, I would probably still do some planning.
26:10
Speaker 2: Talking with Todd Lutsky from the law firm of Cushing
26:12
Speaker 2: and Dolan. Again, this is a segment for you to
26:14
Speaker 2: ask your questions. Phone lines are open it eight eight
26:18
Speaker 2: eight to zero five two two sixty three. So you
26:21
Speaker 2: got in a state planning question. This is your chance
26:24
Speaker 2: to ask Todd your question. Eight eight eight to zero
26:28
Speaker 2: five two two sixty three. We're gonna take a quick
26:31
Speaker 2: break here, but when we come back, it's going to
26:34
Speaker 2: be right to your questions with Todd. Still have some
26:36
Speaker 2: room on the phone lines. So again that number is
26:39
Speaker 2: eight eight eight two zero five two two sixty three.
26:44
Speaker 1: Ask Todd with Todd Lutsky every Wednesday at ten thirty
26:48
Speaker 1: only here on the Financial Exchange Radio Network. You're listening
26:53
Speaker 1: to Ask Todd with Todd Lutsky on the Financial Exchange
26:57
Speaker 1: Radio Network.
27:09
Speaker 2: Talking with Toolotski from the law firm of Kushinggan Dolan.
27:11
Speaker 2: Still have opening for another person. If you have a
27:14
Speaker 2: question for Todd about your estate plan, studio line is
27:19
Speaker 2: eight eight eight to zero five two two sixty three. Again,
27:23
Speaker 2: if you've got in a state planning question, this is
27:25
Speaker 2: your chance to ask Todd eight eight eight to zero
27:29
Speaker 2: five two two sixty three. Let's go to John in Waterbury. John,
27:33
Speaker 2: what is your question for Todd?
27:36
Speaker 3: All right? The uh, the the you know, the gift
27:41
Speaker 3: where where anyone can give another person a gift? Yeah,
27:44
Speaker 3: I think I think it's like I don't know what
27:47
Speaker 3: the limit is now.
27:48
Speaker 5: It's like today, it's what is it now?
27:50
Speaker 2: Today?
27:51
Speaker 5: I think in twenty twenty five it's up to nineteen thousand.
27:57
Speaker 5: I believe nineteen thousand per person her year?
28:01
Speaker 3: Would that would that escape the five year countdown?
28:05
Speaker 4: Now a.
28:07
Speaker 3: Specific case in point octagenarian woman lives in an apartment
28:12
Speaker 3: but obviously is about to enter a convalescent home. Could
28:16
Speaker 3: she give like that nineteen thousand to her daughter?
28:21
Speaker 1: Yeah?
28:21
Speaker 5: So, great question, and the answer emphatically is no. So
28:27
Speaker 5: but it's an often asked question and it's confusing for
28:30
Speaker 5: for many folks. So how it works is in the
28:33
Speaker 5: gift tax world, the IRS world. So we have IRS
28:37
Speaker 5: rules and we have Medicaid rules. As you indicated, the
28:43
Speaker 5: Medicaid rules say there's a five year waiting period when
28:47
Speaker 5: you make a gift. When you make a gift of
28:50
Speaker 5: and they don't really call it a gift, they call
28:51
Speaker 5: it a disqualifying transfer. So whenever you take an asset,
28:57
Speaker 5: put it somewhere where the nursing home can't get it anymore,
29:02
Speaker 5: and don't take back fair market value for what you
29:06
Speaker 5: gave away, that's a disqualifying transfer. So in your case,
29:10
Speaker 5: if you make it, if this octagenarian makes a gift
29:14
Speaker 5: to a daughter and takes nothing back, then that is
29:19
Speaker 5: going to create a five year waiting period for Medicaid eligibility.
29:22
Speaker 5: So no, can't give it away right away even though
29:26
Speaker 5: the amount of that gift is nineteen thousand dollars or less,
29:31
Speaker 5: right it it the IRS rules and the Medicaid rules
29:35
Speaker 5: are mutually exclusive. So what I mean by that is, yes,
29:40
Speaker 5: you made a nineteen thousand dollars gift, and because it's
29:43
Speaker 5: under this present interest exclusion amount, you, the giver, the
29:48
Speaker 5: octagenarian in this case, does not have to file a
29:52
Speaker 5: seven h nine gift tax return. In fact, does not
29:55
Speaker 5: have to report a darn thing to the IRS, and
29:59
Speaker 5: it is not taxable. It still creates a five year
30:04
Speaker 5: waiting period for Medicaid eligibility. So no, you can't do that,
30:06
Speaker 5: But what I will leave you with and everybody else,
30:09
Speaker 5: you can still do something last minute, very likely for
30:14
Speaker 5: this person who's entering a nursing home to either protect
30:19
Speaker 5: what she still has last minute or actually slow the
30:26
Speaker 5: bleeding of the financial assets to the nursing home and
30:30
Speaker 5: still get on Medicaid. So that's my answer, And folks,
30:35
Speaker 5: that's exactly what this long term, long term care planning
30:39
Speaker 5: for Procrastinator's guide is all about. Right, this is exactly
30:45
Speaker 5: the case. You've got a situation where somebody's going into
30:47
Speaker 5: a nursing home and we're not sure what to do,
30:51
Speaker 5: and this guide says, don't write the check, call and
30:54
Speaker 5: learn how you can take certain assets and convert them
30:58
Speaker 5: from countable to non countable. How's a house treated? How's
31:02
Speaker 5: rental property treated? What about life insurance? What about you know,
31:06
Speaker 5: investment assets? How are they treated?
31:08
Speaker 4: There?
31:08
Speaker 5: Their different assets have different treatment and different treatment for
31:12
Speaker 5: married versus single people. Both are explained in the guide.
31:17
Speaker 5: Please get it, don't write the check to the Nursing
31:20
Speaker 5: Home eight six six eight four eight five six nine
31:24
Speaker 5: nine or Legal Exchange Show dot com. Long Term Care
31:28
Speaker 5: Planning for Procrastinators eight six six eight four eight five
31:32
Speaker 5: six nine nine or Legal Exchange Show dot com.
31:36
Speaker 2: Todd, We've got another caller for you here. Let's go
31:39
Speaker 2: to Rick in Chatham. Rick, what's your question for Todd Lutsky?
31:44
Speaker 6: Yes, good afternoon, Thank you. If you have an irrevocable
31:47
Speaker 6: trust with your primary residence, and let's say you're able
31:50
Speaker 6: to sell it and move into let's say downsize essentially,
31:55
Speaker 6: and let's see the new Well Well Long Story show.
31:58
Speaker 6: You have an access of cash, does that stay in
32:00
Speaker 6: the revocable trust? How does that work? Irrevocable?
32:04
Speaker 2: So couple of things.
32:05
Speaker 5: I don't know, but I'll answer the question as if
32:09
Speaker 5: I drafted the trust, as is Cushing and Dolan drafted
32:13
Speaker 5: the trust. Okay, I'm going to assume that the trust
32:16
Speaker 5: we have then is a grand or trust for income
32:19
Speaker 5: tax purposes, which is very important in answering your question.
32:23
Speaker 5: So what that means is that the donor of the trust,
32:26
Speaker 5: the creator of the trust, will be treated as the
32:28
Speaker 5: owner for income tax purposes. Right now, Why is that important?
32:34
Speaker 5: First of all, can you sell it?
32:36
Speaker 2: Yes?
32:37
Speaker 5: So out would go the house from the irrevocable trust,
32:40
Speaker 5: let's say for eight hundred thousand dollars. Incomes the eight
32:45
Speaker 5: hundred thousand dollars. To your point, we're going to downsize,
32:49
Speaker 5: which is very common. Most people call me during after
32:53
Speaker 5: we've done the planning and want.
32:54
Speaker 1: To do this.
32:55
Speaker 5: Okay, out goes five hundred thousand dollars, incomes new house,
33:01
Speaker 5: and there's three hundred thousand dollars left in the trust.
33:05
Speaker 5: Of course, I've ignored income taxes for the moment. There's
33:08
Speaker 5: three hundred thousand dollars left in the trust. Perfectly, Okay.
33:13
Speaker 5: That transaction is done every day, and it does not
33:18
Speaker 5: restart the five year waiting period, which is very important.
33:23
Speaker 5: Especially you know, let's say you're you're eighty and you're downsizing, Well,
33:27
Speaker 5: you don't want to have to reset that five year
33:29
Speaker 5: waiting period, And the reason it doesn't reset the waiting
33:32
Speaker 5: period is because nothing new went in right. All we did,
33:37
Speaker 5: in essence is convert one asset to another, reinvest what's
33:43
Speaker 5: already in the trust. So good news on that front. Yes,
33:47
Speaker 5: you can do it. No, it doesn't reset the clock.
33:50
Speaker 5: Now to the tax question. When you sell your primary residence,
33:55
Speaker 5: since it's a grand tour trust and you're treated as
33:58
Speaker 5: the owner for income tax per pose, they still get
34:02
Speaker 5: there if they're single a two hundred and fifty thousand
34:06
Speaker 5: dollars capital gains exclusion associated with the sale, or five
34:11
Speaker 5: hundred thousand if you're married. So that means the first
34:15
Speaker 5: two point fifty or the first five hundred thousand dollars
34:19
Speaker 5: of gain not proceeds gain, is exempt from tax. So
34:27
Speaker 5: that means in English that there is no adverse income
34:31
Speaker 5: tax consequence associated with selling the house from a trust
34:36
Speaker 5: versus selling the house if they left it in their
34:39
Speaker 5: own name, So income tax neutral. So that that's good.
34:44
Speaker 5: And I think lastly your question is well that's great, Todd,
34:48
Speaker 5: but there's now three hundred thousand dollars sitting in the trust. Yes,
34:53
Speaker 5: it does stay in the trust. Yes, it is used
34:57
Speaker 5: by the trust. What can you what can you do
35:01
Speaker 5: with it? I suppose would be the next question. Well,
35:04
Speaker 5: it gets invested, right, it's going to get invested any
35:07
Speaker 5: any way. You might want to invest the assets, so, uh,
35:10
Speaker 5: like if it was sitting in their own name, the
35:13
Speaker 5: donor's name, the donor might say, you know, I want
35:16
Speaker 5: to I want to buy stocks, I want to buy bonds,
35:18
Speaker 5: I want to put it in a CD perfectly, okay, right,
35:22
Speaker 5: you're allowed allowed to do that, and then once it's invested,
35:27
Speaker 5: it's gonna hopefully generate you know, interest and dividends. Okay.
35:31
Speaker 5: Well's because again, if you're the donors, it's is it
35:34
Speaker 5: my money? Is it still my money?
35:35
Speaker 4: Well?
35:35
Speaker 5: Yeah, you're doing all these things. Well, the trust generally
35:38
Speaker 5: would say all the income that is generated by the
35:42
Speaker 5: trust belongs to the donor. So now the donor, the
35:47
Speaker 5: person who created the trust, is entitled to that money.
35:51
Speaker 5: It simply can come right out every month. In other words,
35:55
Speaker 5: you don't even need to bother the trustee. You could
35:58
Speaker 5: just simply set the count up as an automatic transfer
36:03
Speaker 5: so that every month the interest and dividends flow out
36:06
Speaker 5: into this person's personal bank account and they go spend
36:09
Speaker 5: it anyway they want, just like they would if they
36:11
Speaker 5: owned it. I know. Now there's an income tax question. Well,
36:14
Speaker 5: at the end of the year, this thing is going
36:16
Speaker 5: to generate income, right, who's paying the income tax on
36:19
Speaker 5: all that income? Well, not to trust. Again, very important
36:25
Speaker 5: that the trust is a grant or trust for income
36:27
Speaker 5: tax purposes, so that the income that it generates every
36:31
Speaker 5: year is picked up on the personal income tax return
36:35
Speaker 5: of the donor, whether they take the money or not.
36:40
Speaker 5: So again income tax neutral to the individual. So now
36:46
Speaker 5: we have every year that this thing is generating income,
36:50
Speaker 5: does not have to file a separate income tax return.
36:53
Speaker 5: I mean it files, but it doesn't. It doesn't have
36:55
Speaker 5: to pay files a ten forty one, but doesn't pay. Hopefully, folks,
37:01
Speaker 5: that answers a lot of questions that you might have
37:03
Speaker 5: had about irrevocable trust and their flexibility.
37:06
Speaker 2: Mister Lutski, thanks for joining us today.
37:08
Speaker 5: Always a pleasure.
37:10
Speaker 1: This has been asked Odd on the Financial Exchange Radio
37:13
Speaker 1: Network Aske Todd with Todd Ludsky has been presented by
37:16
Speaker 1: Cushing and Dolan, serving Massachusetts and New England for more
37:19
Speaker 1: than thirty years, helping families with the state and tax
37:21
Speaker 1: planning Medicaid Planning and Probate Law call eight hundred three
37:25
Speaker 1: nine three four thousand one or visit Cushingdolan dot com.
37:28
Speaker 1: The views expressed in this segment are solely those of
37:30
Speaker 1: Cushing and Dolan. Armstrong Advisory does not provide any legal
37:33
Speaker 1: or tax advice. Please consult with your illegal or tax
37:35
Speaker 1: advisor on such matters. Cushing and Armstrong do not endorse
37:38
Speaker 1: each other and are not affiliated