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How markets typically react to government shutdowns · The Financial Exchange Show

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Speaker 1: a donation today. This is the Financial Exchange with Chuck
1:05
Speaker 1: Zada and Mark Fandetti.
1:15
Speaker 2: Chuck, Mark and Chucker with you today and us not
1:19
Speaker 2: being government employees, we are working regular hours and chugging along,
1:25
Speaker 2: just as I'm sure most of you are. But as
1:27
Speaker 2: of twelve oh one am Eastern time, federal government is
1:34
Speaker 2: shut down. Now, does this mean that your dollars are
1:39
Speaker 2: no good anywhere? No, it doesn't mean that. Does it
1:42
Speaker 2: mean that we have to use the metric system instead
1:45
Speaker 2: of the imperial system, No, it doesn't mean that either.
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Speaker 2: What it does mean is that for about seven hundred
1:52
Speaker 2: and fifty thousand government employees, they are furloughed and not
1:57
Speaker 2: getting paid while the shutdown goes on, and the work
2:00
Speaker 2: that they do deemed non essential is not being done
2:04
Speaker 2: during that time as well. Generally, most of these things,
2:09
Speaker 2: to the vast majority of people, are not overly disruptive.
2:13
Speaker 2: But some of the stuff can be disruptive to small constituencies,
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Speaker 2: and we can get into that. But the big things,
2:19
Speaker 2: so security continues to operate as it previously has, Medicare
2:23
Speaker 2: continues to operate as it previously as, Medicaid continues to operate,
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Speaker 2: So any of those big programs are generally up and running.
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Speaker 2: The US Treasury is not allowed to disperse payments to
2:33
Speaker 2: the agencies, but any money that they've given to agencies
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Speaker 2: can be used by them, So you generally what you
2:39
Speaker 2: have is money is dispersed in advance to allow for
2:43
Speaker 2: agencies to continue as normal operations as they can. But
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Speaker 2: as it relates to our show and the financial world
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Speaker 2: as a whole, one of the disruptions that we will
2:55
Speaker 2: see is the lack of government data releases, the biggest
2:59
Speaker 2: one being the jobs report that is expected to come
3:02
Speaker 2: out on Friday. If we are still shut down as
3:06
Speaker 2: of Friday, there will be no non farm payroll report
3:09
Speaker 2: that we receive for the month of September.
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Speaker 3: Your thoughts, Mark, Yeah, it's natural to wonder any market
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Speaker 3: impact historically, and we can talk about the economic impact obviously.
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Speaker 2: I have the market impact data if you'd like to.
3:24
Speaker 1: Oh, yeah, go ahead.
3:25
Speaker 3: We have our own internal version.
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Speaker 2: But yeah, I have the external version. Yeah, I guess
3:31
Speaker 2: the internal version is not shared.
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Speaker 3: My internal I mean mine, so yours has probably been vetted.
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Speaker 2: So you didn't even share this with me, madam. Just disappointed.
3:39
Speaker 2: Here's what I have. So if you look at us
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Speaker 2: government shutdowns and the day that I have here is
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Speaker 2: going back to nineteen seventy six. There have been twenty
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Speaker 2: since then. The average length of a government shutdown is
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Speaker 2: eight days, though if you will be the last four,
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Speaker 2: which happened in ninety five, twenty thirteen, and twice in
3:57
Speaker 2: twenty eighteen, three of those four went over fifteen days,
4:01
Speaker 2: so you can make a case for hey. In recent years,
4:04
Speaker 2: the last thirty they have tended to be on the
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Speaker 2: longer side, whereas from nineteen eighty one through nineteen early
4:10
Speaker 2: ninety five there was not a single one over five
4:13
Speaker 2: days in length, and there was only one over fifteen
4:18
Speaker 2: days in length prior to that, which was in nineteen
4:20
Speaker 2: seventy eight. If you look at the S and P
4:22
Speaker 2: five hundred return during the prior week, so the week
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Speaker 2: heading up to the shutdown, it returned negative point one
4:32
Speaker 2: percent during that on average. Now, the range varies greatly.
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Speaker 2: In twenty eighteen we had the worst performance heading into
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Speaker 2: a shutdown down seven point one percent. In nineteen eighty
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Speaker 2: seven we had the best up five point nine. So
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Speaker 2: there's a pretty wide range that you see there, and
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Speaker 2: again twenty's a pretty small sample size, especially when the
4:51
Speaker 2: average shutdown is eight days. It's like, what would I
4:53
Speaker 2: even do with this is that a business days? No,
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Speaker 2: it's actually you know, eight day days SP five hundred
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Speaker 2: return during shutdowns the best that we've ever seen. Well
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Speaker 2: in twenty eighteen, remember it was really bad before the shutdown,
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Speaker 2: SMP returned ten point three percent during the thirty four
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Speaker 2: percent thirty four day shutdown, the worst.
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Speaker 3: Way different than what I got. I'm glad you used yours.
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Speaker 2: This is data from Truest that they put this together. Okay,
5:21
Speaker 2: you have different days.
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Speaker 3: Well, price change for the eighteen nineteen event which lasted
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Speaker 3: the twenty one days using the rule that I used
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Speaker 3: to calculate these, I just looked at the modern era,
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Speaker 3: I have a total price change in the S and
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Speaker 3: P for that twenty one day period of twelve point
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Speaker 3: four percent.
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Speaker 2: This is ten point three okay, maybe during I don't
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Speaker 2: know if.
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Speaker 3: Any different definition they.
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Speaker 2: Might have done, like the day that it ended is
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Speaker 2: not included in it, or is like it's all kind.
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Speaker 3: Is not really an intuitive response. No, we're never freaked
5:53
Speaker 3: out by shutdowns in the modern era because they know
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Speaker 3: they're going to end.
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Speaker 2: Nineteen seventy nine, which was an eleven day shutdown, had
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Speaker 2: the worst performance during a shot down with the SMP
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Speaker 2: down four point four percent.
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Speaker 3: Who knows what else was going on in nineteen seventy.
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Speaker 2: Nine, correct, no idea. You know, there could have been
6:07
Speaker 2: you know, haircuts and mustaches and all kinds of stuff
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Speaker 2: going on back then. Don't know if that stuff affects
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Speaker 2: the market, but whatever. And in the week after a
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Speaker 2: government shutdown was resolved, the best performance that we've seen
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Speaker 2: in the S and P five hundred was in the
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Speaker 2: first shutdown of nineteen eighty two. There were two of them.
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Speaker 2: They lasted accumulative four days, but during the first one,
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Speaker 2: the SP five hundred returned seven percent for a single day,
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Speaker 2: which is kind of well, again, like, who knows what
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Speaker 2: was going on? Then, the worst performance that we've seen
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Speaker 2: the week after I'm sorry, no, that was the week after.
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Speaker 2: The worst performance for the week after a government shutdown
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Speaker 2: was in nineteen ninety where the S and P returned
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Speaker 2: three point seven percent in that week. Ultimately, you will
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Speaker 2: get all this, and the historical data says government shutdowns
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Speaker 2: are any either positive nor negative for the S and
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Speaker 2: P five hundred. They tend to have no meaningful impact.
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Speaker 3: Yeah.
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Speaker 2: The good piece that I do think we have to
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Speaker 2: pay attention to is the length of the shutdown, just
7:12
Speaker 2: because I do think hey, longer once potentially can have
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Speaker 2: more of an economic impact, which, given some of where
7:19
Speaker 2: we are economically, could be you know, the straw that
7:22
Speaker 2: breaks the camel's back. Do I think that's likely? Not? Really?
7:26
Speaker 2: Based on some of the labor market data that we've
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Speaker 2: been getting the last week or so, obviously not the
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Speaker 2: government jobs report, it is clear to me that the
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Speaker 2: labor market is cracking, but it might be doing so
7:37
Speaker 2: at income levels that are so low that they don't
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Speaker 2: matter to the broader economic statistics because so much of
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Speaker 2: the US population has effectively been priced out of mattering
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Speaker 2: to the broad economy, which is kind of a like,
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Speaker 2: really bad way to think about it, but it might
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Speaker 2: be true.
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Speaker 3: Also, yeah, yeah, I've heard that possibility raised a lot
8:00
Speaker 3: spending being driven by higher income cohorts and unemployment being
8:06
Speaker 3: affected by similar dynamics underlying labor force dynamics. I don't know.
8:15
Speaker 3: The federalize on the FED. The policymaking of the Federal Reserve,
8:19
Speaker 3: which controls the money supply, which in turn dictates short
8:23
Speaker 3: term interest rates, relies on many of the same economics.
8:27
Speaker 3: Series that we do. Is investment, folks, and as many
8:31
Speaker 3: in the private sector do so to an extent, they'll
8:33
Speaker 3: be flying blind as well.
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Speaker 2: They do have you know, they will look at other
8:38
Speaker 2: you know, pure data plenty. But and this I think
8:42
Speaker 2: is something that is important to talk about when it
8:43
Speaker 2: comes to the like why do we care about the
8:50
Speaker 2: BLS Jobs Report as opposed to what we get from ADP.
8:54
Speaker 2: And there are a couple of reasons. The first is
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Speaker 2: the overall scope of what you get from government data
9:01
Speaker 2: tends to be broader. And the best example I've seen
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Speaker 2: of this is if you talk about, you know, changes
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Speaker 2: in things like rent growth. Just as an example, your
9:13
Speaker 2: big you know, you know apartments dot apartment list, dot
9:16
Speaker 2: com and whatever that put out these rent growth numbers.
9:19
Speaker 2: Oftentimes they are capturing large landlords that are listing on them,
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Speaker 2: and that's how they get their data. The federal government,
9:29
Speaker 2: through its surveys, may survey smaller landlords that don't you know,
9:33
Speaker 2: use you know, payment systems that are you know, networked
9:36
Speaker 2: in and this and that that you know, they might
9:37
Speaker 2: still pay their renters, might still pay by check instead
9:41
Speaker 2: of you know, having everything flowing through a bank. And
9:44
Speaker 2: so because of that, you can get access to parts
9:49
Speaker 2: of the economic data that you don't necessarily get through
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Speaker 2: private surveys and things like that. This morning we got
9:55
Speaker 2: ADP payroll data, and if you look at you know
9:59
Speaker 2: who ad serves, it's a certain subset of businesses. It's
10:04
Speaker 2: not capturing the data from businesses that aren't using their services.
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Speaker 2: And where could those businesses possibly reside? You know, what
10:13
Speaker 2: types of industries do those influence? So this is why
10:16
Speaker 2: when we talk about, hey, can you make this up
10:19
Speaker 2: with the private data that's out there, you can get
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Speaker 2: a lot of it, and generally, if it's all moving directionally,
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Speaker 2: you know, in the same fashion, you can still get
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Speaker 2: a pretty good picture, but it's not as robust and
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Speaker 2: as complete, simply because these private sources all have limitations
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Speaker 2: that while the government data does have limitations as well,
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Speaker 2: the scope that it captures tends to be broader than
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Speaker 2: any of these private sources, simply because they are private
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Speaker 2: in nature, they're smaller, they don't get everywhere in the economy.
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Speaker 2: Let's take a quick break on this when we return,
10:56
Speaker 2: why don't we talk a little bit about the FED
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Speaker 2: and kind of where they are now and what we're
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Speaker 2: seeing based on the data that we've gotten to this
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Speaker 2: point and you know, kind of previewing their meeting that
11:09
Speaker 2: will be I think it's at the end of this month.
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Speaker 2: I believe it's the twenty ninth is when it's held.
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Speaker 2: We'll talk a little bit about that when we return.
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12:20
Speaker 2: Mark, We've got a FED meeting that happens four weeks
12:22
Speaker 2: from today, on October twenty ninth, and as of right now,
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Speaker 2: the market is pricing in a one hundred percent probability
12:29
Speaker 2: of a rate cut, with a ninety nine percent chance
12:32
Speaker 2: of an additional quarter percent cut, And as of today,
12:35
Speaker 2: for the first time, we are seeing a one percent
12:37
Speaker 2: chance priced in of a half percent cut. Good luck
12:41
Speaker 2: to that person out there. So I think when we
12:45
Speaker 2: look at this, my question is is pretty simple. If
12:51
Speaker 2: we have a if this government shutdown turns out to
12:55
Speaker 2: be very short in nature, which most of them are,
12:58
Speaker 2: if we're sitting here a week from today and federal
13:02
Speaker 2: government is reopened, I think it's business as usual for
13:07
Speaker 2: the FED. Yes, they might not have that September jobs report,
13:10
Speaker 2: but I think they can make do without it given
13:13
Speaker 2: the other data that they'll be getting. The question is,
13:17
Speaker 2: what if this is a repeat of the second shutdown
13:21
Speaker 2: that we saw in twenty eighteen, where it lasted thirty
13:24
Speaker 2: four days. What if we're sitting here and it's November fifth,
13:29
Speaker 2: and we're sitting here on the twenty ninth, and we
13:33
Speaker 2: haven't gotten a job report, We're not getting weekly jobless claims,
13:37
Speaker 2: we're not getting CPI data, we're not getting the retail
13:41
Speaker 2: sales data. How does the FED go about making a
13:45
Speaker 2: decision during that meeting. If they haven't gotten a lot
13:49
Speaker 2: of the key inputs that they normally put into it,
13:52
Speaker 2: you know, they will not have gotten PPI data, housing starts,
13:56
Speaker 2: and building permits. They will not have gotten and you know,
14:00
Speaker 2: how do they go about figuring this.
14:02
Speaker 3: Out if they try to, well, they could estimate those
14:07
Speaker 3: missing data points and then plug the estimates into their
14:10
Speaker 3: model and adjust, and that will spit out values for
14:14
Speaker 3: what Fed funds should be, etc. It just increases the
14:17
Speaker 3: uncertainty associated with the right federal funds rate, the so
14:22
Speaker 3: called neutral federal funds rate, which I guess they want
14:25
Speaker 3: to get to. They believe rates are currently restrictive, more
14:29
Speaker 3: likely to hold back economic activity, that is, then hold
14:32
Speaker 3: back than suppress inflation, so they could estimate them. Chuck,
14:38
Speaker 3: I'm not sure if that's well. There are economists there
14:41
Speaker 3: who need to do something, so they will be doing
14:43
Speaker 3: those estimates. They will be running their models. The models
14:45
Speaker 3: will just have a greater band of uncertainty associated with them.
14:50
Speaker 3: The other option is just to go with the current trajectory.
14:53
Speaker 2: If you believe the.
14:54
Speaker 3: Trend in employment is down, and as you suggested in
14:58
Speaker 3: the last segment, there are plenty of signs of weakness
15:03
Speaker 3: in the labor market, none of them suggesting any great
15:06
Speaker 3: catastrophe is imminent. And maybe it's just a normalization following
15:10
Speaker 3: the frantic expansion in joures that we saw in the
15:15
Speaker 3: few years following the COVID recession. I don't know, but
15:19
Speaker 3: if you assume that's the trajectory whereon, it's unlikely one
15:23
Speaker 3: month would change your opinion of that short term trend.
15:26
Speaker 3: So if they wanted to ease last week, to continue
15:29
Speaker 3: to ease, that is, if the Fed wanted to continue
15:31
Speaker 3: to lower short term interest rates, they're probably going to
15:33
Speaker 3: be similarly inclined in.
15:34
Speaker 2: A few weeks.
15:36
Speaker 5: Now.
15:37
Speaker 3: You could say, well, what if it's a huge employment
15:39
Speaker 3: swing one way or the other, wouldn't that influence them?
15:43
Speaker 3: It might, it might not, depending on how strongly they
15:46
Speaker 3: feel about the trend.
15:47
Speaker 2: And in terms of might or might not, I think
15:50
Speaker 2: what you're getting at there is, Look, it's still ultimately
15:52
Speaker 2: would be you know, single data points that are subject
15:55
Speaker 2: to you know, meaningful revisions, and as such, Hey, do
15:59
Speaker 2: you want to necess necessarily put all your eggs in
16:01
Speaker 2: that basket? Is that kind of what you're getting out?
16:03
Speaker 3: Yeah, I'm sorry, I was very very vague. If you
16:05
Speaker 3: believe you're in the camp, and I'm not, but I
16:07
Speaker 3: get it. If you're in the camp that the labor
16:10
Speaker 3: market is sucking wind and that portends broader economic problems.
16:18
Speaker 3: We haven't really seen it show up and spending yet,
16:20
Speaker 3: but as you said earlier today, internally it will if
16:23
Speaker 3: indeed that is what's happening. If you believe that a
16:27
Speaker 3: couple of weeks ago, it would probably take a big
16:31
Speaker 3: jobs gain just to oversimplify here, to move you off
16:34
Speaker 3: that view.
16:35
Speaker 2: And even then you might still say, well, that's one
16:37
Speaker 2: positive job prop port. I need to see another one
16:39
Speaker 2: to confirm this wasn't a one off.
16:41
Speaker 1: Yeah.
16:41
Speaker 3: Yeah, I think we all get committed to views that
16:43
Speaker 3: we hold, and we look for evidence that confirms them,
16:45
Speaker 3: and people who are in the we need more ease
16:47
Speaker 3: in camp. FED funds is restrictive. I don't buy that necessarily,
16:50
Speaker 3: but there are plenty of good, honest arguments in favor
16:52
Speaker 3: of that point of view. They're unlikely to be moved
16:55
Speaker 3: off that position, or to want to be moved off
16:57
Speaker 3: that position by, as you said, just a couple of
16:59
Speaker 3: a couple of reports.
17:01
Speaker 2: When we look at the broader data. Talking about consumer spending,
17:05
Speaker 2: to my knowledge, the recessions that we have had since
17:08
Speaker 2: World War Two, there has not been a single one
17:10
Speaker 2: that has been caused by a drop in consumer spending
17:13
Speaker 2: in advance of said recession. Correct.
17:17
Speaker 3: Well, it's part of GDP, so it would be considered
17:20
Speaker 3: you'd see it fall coincident.
17:21
Speaker 2: With correct but you never see it before. So like
17:24
Speaker 2: you can never if you're looking for consumer spending to
17:27
Speaker 2: crack and then be like, oh, now we're in recession.
17:30
Speaker 2: It's like, Okay, well it's kind of too late at this.
17:32
Speaker 3: Way, But it's really because of the way we define recessions,
17:35
Speaker 3: and the FED has been the proximate cause of every
17:39
Speaker 3: recession with the accept with a few big exceptions in
17:41
Speaker 3: the post war period. And the FED works on the
17:44
Speaker 3: economy by cooling it by slowing overall demand, thus i e.
17:51
Speaker 3: Slowing spending.
17:52
Speaker 2: So I think that the question here is labor tends
17:55
Speaker 2: to be somewhat of a lagging indicator simply because consumption
17:59
Speaker 2: leads investment in labor. If you don't have sales, you say, okay,
18:04
Speaker 2: now it's time for me to lay people off. If
18:06
Speaker 2: sales are growing rapidly, you say Okay, now it's time
18:09
Speaker 2: for me to hire. So that's why you have that
18:11
Speaker 2: mechanism where labor's a lagging indicator. So I think the
18:14
Speaker 2: question that you get at is one where if you
18:17
Speaker 2: look at kind of this broad range of labor data,
18:21
Speaker 2: not government based, you can look at ADP paychecks and indeed,
18:24
Speaker 2: and I think you get a pretty good sense of
18:26
Speaker 2: what's going on in the labor market. ADP came out
18:28
Speaker 2: this morning and said, hey, you lost thirty two thousand
18:31
Speaker 2: jobs for the month of September. That continues, you know,
18:33
Speaker 2: a downward trend that you're on in that data set.
18:37
Speaker 2: If you look at paychecks, they have a small business
18:39
Speaker 2: hiring index that printed a minus point three to one
18:43
Speaker 2: percent for September. Corresponds to what you're seeing on the
18:47
Speaker 2: ADP data. If you look at INDEED and job openings,
18:51
Speaker 2: you're seeing a very you know, consistent trend down in
18:55
Speaker 2: the number of job openings. That also, by the way,
18:57
Speaker 2: correlates really well with the JOLT data. And so I
19:00
Speaker 2: think in a pinch, you can use that INDEED job
19:02
Speaker 2: openings index as a proxy for what you'll get on jolts.
19:08
Speaker 2: And so ultimately I think you get to a position,
19:11
Speaker 2: and this is kind of where I've gotten back to
19:13
Speaker 2: over the last month or two. Yeah, the labor market
19:17
Speaker 2: is worstening at a clip that, in my opinion, is
19:20
Speaker 2: faster than how badly the inflation situation's worstening. And I
19:24
Speaker 2: think you're completely justified in cutting given that overall prognosis.
19:30
Speaker 2: Quick break here. When we come back, We're joined by
19:32
Speaker 2: Todd Lutsky for Ask Todd. We've also got Wall Street
19:34
Speaker 2: Watch right after this.
19:40
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20:00
Speaker 4: Government shut down is officially underway, and markets are dipping
20:03
Speaker 4: slightly into negative territory at the moment. Right now, the
20:07
Speaker 4: Dow is mostly flat, dipping by seventeen points S and
20:10
Speaker 4: P five hundred, down a tenth of one percent or
20:13
Speaker 4: seven points lower. RUSS excuse me, Nasdaq is down a
20:16
Speaker 4: tenth of a percent as well, or twenty points lower.
20:18
Speaker 4: RUSS two thousand dipping as well, mostly flat. Tenure Treasury
20:22
Speaker 4: yeld down four basis points at four point one zero
20:25
Speaker 4: eight percent, and crude oil down nearly nine tenths of
20:29
Speaker 4: one percent, trading at sixty one dollars in eighty four
20:31
Speaker 4: cents a barrel. Nike stock climbing over four percent higher
20:35
Speaker 4: after the athletic retailer posted a surprise sales increase for
20:39
Speaker 4: the previous quarter, but raised its tariff cost forecast to
20:42
Speaker 4: one and a half billion dollars this fiscal year. Nike
20:46
Speaker 4: he also warned that sales could slide this holiday season. Meanwhile,
20:50
Speaker 4: shares in Lithium America's soaring twenty one percent after the
20:54
Speaker 4: Department of Energy said it would take a five percent
20:57
Speaker 4: stake in both the Canadian company and its Nevada mining project.
21:01
Speaker 4: Elsewhere As shares surging nearly fourteen percent after The Financial
21:05
Speaker 4: Times reported that Blackrock owned Global Infrastructure Partners is in
21:09
Speaker 4: late stage talks to acquire the renewable and thermal power producer.
21:14
Speaker 4: According to The Wall Street Journal, Warren Buffett's Berkshire Hathaway
21:17
Speaker 4: is in talks to buy Occidental Petroleums petrochemical business for
21:21
Speaker 4: around ten billion dollars. Sun run up by eight percent
21:25
Speaker 4: after Jeffreys upgraded the solar panel maker to buy from
21:28
Speaker 4: hold Site in the company's strong cast cash generation. Ford
21:32
Speaker 4: saw sales of its evs and large SUVs climb eight
21:36
Speaker 4: point two percent in the previous quarter. Forward up by
21:39
Speaker 4: one percent, and Peloton announced it's revamping its product assortment,
21:44
Speaker 4: launching a new commercial equipment line and raising prices for
21:47
Speaker 4: both subscriptions and hardware ahead of the holiday season. Peloton
21:51
Speaker 4: down by seven percent. I'm Tucker Silva and that is
21:55
Speaker 4: Wall Street Watch.
21:57
Speaker 1: This is Askedd on the Financial Exchange Radio Network. If
22:01
Speaker 1: you have an existing estate planning or in the market
22:03
Speaker 1: for one, Todd Letsky is here to answer your questions
22:06
Speaker 1: and help you plan for a later life. Ask Todd
22:09
Speaker 1: is presented by Cushing and Dolan, serving Massachusetts and New
22:12
Speaker 1: England for more than thirty five years, helping families with
22:15
Speaker 1: estate and tax planning, medicaid planning, and probate law. Visit
22:19
Speaker 1: Cushingdolan dot com. Now here's Todd Lutsky and.
22:24
Speaker 2: We've got Todd Lutsky joining us now for Ask Todd.
22:27
Speaker 2: It's your opportunity to ask Todd your estate planning questions.
22:32
Speaker 2: Phone lines are wide open at eight eight eight to
22:36
Speaker 2: zero five two two sixty three, so get calling early
22:38
Speaker 2: and often. We can usually get through two to three
22:41
Speaker 2: questions with Todd. So make sure that you get in
22:44
Speaker 2: line again. That phone number is eight eight eight to
22:48
Speaker 2: zero five two two six three. One more time, it
22:52
Speaker 2: is eight eight eight to zero five two two six three.
22:56
Speaker 2: That's the number to call to ask Todd your estate
22:58
Speaker 2: planning questions, live on air right now, mister Lutsky, How
23:03
Speaker 2: are you doing today?
23:04
Speaker 6: I am never better?
23:07
Speaker 2: How's that? Is that good?
23:09
Speaker 5: Right?
23:09
Speaker 2: It's good. I'm struggling atle bit fell for a scam
23:14
Speaker 2: at the florist the other day.
23:16
Speaker 6: At the florist.
23:17
Speaker 2: Yeah, it was a pansy scheme. Oh yeah, well yeah,
23:20
Speaker 2: it just totally took me for a ride. But hey,
23:22
Speaker 2: you live and learn and you move on. Todd. I
23:24
Speaker 2: want to talk a little bit about gifting, if you
23:26
Speaker 2: don't mind, because we're rapidly approaching the holiday season, and
23:30
Speaker 2: Tims the season to talk about gifting. Yes, when we
23:34
Speaker 2: look at the annual gifting limits that are in place
23:38
Speaker 2: for twenty twenty five, what is that threshold?
23:41
Speaker 6: So there's two different thresholds really to think about. One
23:46
Speaker 6: would be what we call a present interest gift exclusion.
23:52
Speaker 6: And this is what I like to call the freebie.
23:54
Speaker 6: It's complete freebie, meaning you can do it, make the transfer,
23:58
Speaker 6: make the gift, and there is no filing requirement for
24:03
Speaker 6: a gift tax return, and no reporting whatsoever. Freebe how
24:09
Speaker 6: much nineteen thousand per person per year. So it's if
24:17
Speaker 6: you are married and you want to give to your child,
24:23
Speaker 6: you and your spouse can give nineteen each to that child.
24:29
Speaker 6: So it'sbout thirty eight thousand. So that's a good a
24:32
Speaker 6: good amount, and you can do it for every single kid,
24:36
Speaker 6: every grandkid. And remember it's also not limited to family.
24:41
Speaker 6: So in case you want to send Chuck some money,
24:43
Speaker 6: you can just nineteen thousand, no reporting, So excellent way
24:48
Speaker 6: of gifting. And it's just an outright freebee. Now what
24:54
Speaker 6: happens if you go one dollar over that? Like, what
24:56
Speaker 6: happens if I write a check?
24:58
Speaker 2: Just like I'm like, hey, look at me, I'm doing
25:01
Speaker 2: nineteen thousand and one dollars dollars? What do I do
25:03
Speaker 2: with that? What happens because of that extra dollar?
25:05
Speaker 6: So and again, whether it's an extra dollar, which is
25:08
Speaker 6: your example, or an extra million dollars, same event, you
25:13
Speaker 6: now technically have a taxable gift, Okay, a taxable gift
25:18
Speaker 6: taxable to whom I know, I know it's it's crazy,
25:21
Speaker 6: but I'd like to always say that no good deed
25:23
Speaker 6: goes unpunished. Right, Guess who pays the gift tax? The giver, well,
25:29
Speaker 6: not the recipient, say it, it's so not the recipient,
25:32
Speaker 6: it's the giver. And it makes sense in the grand
25:34
Speaker 6: scheme of things, right, because if you have an estate tax,
25:36
Speaker 6: and you could say, hey, right before I die, I'll
25:38
Speaker 6: just give everything away to avoid the estate tax, and
25:41
Speaker 6: you didn't have a gift tax, then the estate tax
25:42
Speaker 6: would have no teeth.
25:44
Speaker 2: So I get why.
25:45
Speaker 6: They do it, but it does sound funny that the
25:47
Speaker 6: giver has to pay the tax.
25:49
Speaker 2: So the giver pays tax.
25:50
Speaker 6: Last exemption fifteen million come January one, twenty twenty six.
25:57
Speaker 6: Right now it's thirteen nine. It's gonna be fifteen million
26:00
Speaker 6: in as your federal estate tax exemption. It's also your
26:05
Speaker 6: gift tax exemption. So if you start making taxable gifts
26:10
Speaker 6: and going over this nineteen grand. So like, for example,
26:13
Speaker 6: if I file a million dollar, let's just make it
26:15
Speaker 6: easy numbers. I file a million, I pay, I make
26:17
Speaker 6: a gift of a million dollars, and let's say I
26:19
Speaker 6: could shelter the first twenty as a freebe that would
26:22
Speaker 6: make eight eight one hundred thousand dollars taxable.
26:27
Speaker 5: Right.
26:27
Speaker 6: No, I'm sorry more than that. Right, If you twenty
26:29
Speaker 6: thousand would be a milli, it would be it would
26:31
Speaker 6: be a nine eighty thousand dollars taxable sure, because you
26:35
Speaker 6: can only shelter the first twenty or nineteen in this case. Right,
26:38
Speaker 6: So you have a nine hundred and eighty thousand dollars
26:41
Speaker 6: gift taxable gift, need to file a Form seven h
26:45
Speaker 6: nine gift tax return to report the amount over the
26:50
Speaker 6: nineteen thousand. That's the piece, that's the taxable gift. You
26:53
Speaker 6: get to back out the nineteen file the gift tax return.
26:57
Speaker 6: The only good news here is when I say this
26:59
Speaker 6: is an exemption, you then eat into your million dollar
27:02
Speaker 6: exemption by the taxable gift amount and you end up
27:06
Speaker 6: paying no tax.
27:07
Speaker 2: But you got a file talking with Todd Lutsky from
27:10
Speaker 2: the law firm of Cushing and Dolan. You got questions
27:12
Speaker 2: for Todd. He's got answers eight eight eight to zero
27:16
Speaker 2: five two two sixty three is the phone number, so
27:19
Speaker 2: you can ask Todd your estate planning questions live on
27:22
Speaker 2: air right now. That number is eight eight eight to
27:26
Speaker 2: zero five two two six three. We're gonna take a
27:30
Speaker 2: quick break here, but when we return, we're gonna get
27:34
Speaker 2: to your questions with Todd right after the break. Again,
27:36
Speaker 2: it's eight eight eight to zero five two two six three.
27:41
Speaker 1: One.
27:41
Speaker 2: Last time, that number is eight eight eight to zero
27:44
Speaker 2: five two two sixty three.
27:47
Speaker 1: Ask Todd with Todd Lutsky every Wednesday at ten thirty
27:51
Speaker 1: only here on the Financial Exchange Radio Network. You're listening
27:57
Speaker 1: to Ask Todd with Todd Lutsky on the Financial She'll
28:00
Speaker 1: Exchange Radio Network.
28:16
Speaker 2: If you've got a question for Todd, Lutsky's still room
28:18
Speaker 2: on the phone lines at eight eight eight to zero
28:21
Speaker 2: five two two sixty three. That is eight eight eight
28:25
Speaker 2: to zero five two two sixty three. Let's go to
28:29
Speaker 2: Mic from Boston. Michael, you are on with Tom Lutsky.
28:34
Speaker 5: Good morning. I had a question about the cost of
28:38
Speaker 5: an irrevocable trust. Uh. There never seems to be any
28:43
Speaker 5: uh talk or referral to what that cost is. Sure,
28:48
Speaker 5: hear a lot about it. I've done some research myself.
28:53
Speaker 5: I've read a few. I guess she'd call them relatively simple. Uh.
28:58
Speaker 5: But in nineteen teen, twenty pages roughly eighteen pages is
29:06
Speaker 5: legal jargon. They were the same from trust to trust.
29:11
Speaker 5: The only thing that changed was the names of the trustees,
29:16
Speaker 5: the beneficiary, how he would receive his money or her money,
29:21
Speaker 5: and any little other stipulations in there additional which took
29:26
Speaker 5: about a page and a half or two What does
29:30
Speaker 5: it cost to what I considered to be relatively simple,
29:35
Speaker 5: the same from trust to trust. As far as the
29:38
Speaker 5: work you put in the terminology seems to be the
29:42
Speaker 5: same from trust to trust.
29:44
Speaker 6: Well, I'm going to beg to differ with you tremendously
29:47
Speaker 6: on that front, because, first of all, there's many kinds
29:50
Speaker 6: of irrevocable trusts out there. There's qualified personal residence trusts
29:54
Speaker 6: that are irrevocable, their spousal lifetime access trust for high
29:57
Speaker 6: net worth clients that are irrevocable when you give him away.
30:00
Speaker 6: There are Medicaid income only trust the kind we talk
30:03
Speaker 6: about a lot on the show when you give those away.
30:05
Speaker 6: So you know, you know, there's there's gifting trust, there's
30:09
Speaker 6: irrevocable life insurance trust. So when you say they're the same,
30:12
Speaker 6: I'm not sure what you've read that makes you think
30:15
Speaker 6: that one irrevocable trust should have the same language as
30:18
Speaker 6: the other. And secondly that our trusts anyway, are but
30:23
Speaker 6: they're not nineteen twenty pages. They're sixty or fifty, you know.
30:27
Speaker 6: But that isn't what we don't charge based on the page.
30:30
Speaker 6: That isn't. That isn't how you do it. It's it's
30:33
Speaker 6: like someone thinks it's simple. But then so I have this.
30:36
Speaker 6: It's a great question because I have a real life
30:38
Speaker 6: story on it where I had the client come in
30:40
Speaker 6: and say, well, I need to set up this irrevocable
30:42
Speaker 6: trust and and I'm going to be giving assets away
30:46
Speaker 6: to my to my family and and so how does
30:48
Speaker 6: this work? And then I started asking them, well, do
30:50
Speaker 6: you want it to be a completed gift for gift
30:52
Speaker 6: tax purposes?
30:53
Speaker 2: Yes or no?
30:54
Speaker 6: Do you want it do you want to retain control
30:56
Speaker 6: over it? Yes or no? Well what about for income
30:58
Speaker 6: tax purposes? Do I want to make it a grand
31:00
Speaker 6: tor trust for income tax purposes? Which means that while
31:03
Speaker 6: I don't own it and it's out of my estate
31:05
Speaker 6: for a state tax purposes, which is great, I don't
31:08
Speaker 6: want to pay income tax on what's in there growing
31:11
Speaker 6: at a much higher rate because remember taxation at the
31:15
Speaker 6: trust level. After about fourteen thousand dollars is taxable at
31:23
Speaker 6: the top rate, whereas humans we have a much bigger,
31:26
Speaker 6: you know, rate structure, so we don't have to pay
31:28
Speaker 6: tax like that. So the answer is you got to
31:30
Speaker 6: make it a grand tour trust for income tax purposes.
31:34
Speaker 6: So even though it's an irrevocable trust and out of
31:37
Speaker 6: your estate, it can still be taxed in your estate
31:39
Speaker 6: for income tax purposes.
31:41
Speaker 2: You know.
31:41
Speaker 6: Then you have to think about, well, do I want
31:44
Speaker 6: it to be a gift so that it's protected from
31:46
Speaker 6: perhaps like the nursing home and creditors. But I want
31:49
Speaker 6: to keep control over it. I want to be able
31:51
Speaker 6: to enjoy it. I want to be able to control it,
31:53
Speaker 6: maybe get the income. Well that's important because if I
31:56
Speaker 6: do that, then I'm including it in my estate and
31:58
Speaker 6: I'm going to get a step up in basis for
32:01
Speaker 6: capital gains tax purposes on the item that's in there,
32:03
Speaker 6: say my home that might be worth a lot of money,
32:06
Speaker 6: or a rental property that I put in there. Oh,
32:09
Speaker 6: I certainly want to get to step up in basis
32:11
Speaker 6: when I die so that I don't have capital gains
32:13
Speaker 6: tax for my beneficiaries to pay when they get it.
32:16
Speaker 6: But I also want to reduce my estate taxes, and
32:19
Speaker 6: then you have to run those numbers and see what works.
32:21
Speaker 6: So in terms of this simply being a simple thing
32:26
Speaker 6: that somebody does is absolutely incorrect. And so there's a
32:30
Speaker 6: lot to think about that goes in there, and the
32:32
Speaker 6: way we draft it changes based on that. Now it
32:36
Speaker 6: is true that there are some people, some attorneys that
32:39
Speaker 6: go out and just buy a package off the internet
32:43
Speaker 6: somewhere and then sell it. We don't do that. We've
32:46
Speaker 6: drafted our document. So our intellectual property. Like when I
32:49
Speaker 6: started our trust was twenty five pages long, it's now
32:53
Speaker 6: fifty Why because we add to it. We put our
32:55
Speaker 6: own intellectual property into it. As laws change, as revenue
32:59
Speaker 6: ruling come out, as issues we see with clients in
33:03
Speaker 6: terms of how they get it come out, how you
33:05
Speaker 6: leave the assets to the children to prevent fighting. So
33:08
Speaker 6: I think there's an awful lot involved in there and
33:11
Speaker 6: when you're doing this, and so I think you need
33:13
Speaker 6: to figure out all of that when you're trying to
33:15
Speaker 6: come up with what the cost is. And that cost
33:18
Speaker 6: is unfortunately going to vary. It's a flat fee at
33:21
Speaker 6: least at our firm, but it's going to vary based
33:24
Speaker 6: on what kind of trust you're doing. What you know,
33:27
Speaker 6: whether it's a qu pert, whether it's an irrevocable life
33:30
Speaker 6: insurance trust or a medicaid trust. So I think that's
33:33
Speaker 6: the safest and from everybody listening, you should get a
33:36
Speaker 6: flat fee from your attorney before you would go forward.
33:39
Speaker 6: I think flat fees are the way to go. That
33:40
Speaker 6: way you know exactly what you're getting into before you
33:44
Speaker 6: would you would actually, you know, do this kind of trust.
33:49
Speaker 6: So I hope that helps a little. But folks, the
33:52
Speaker 6: newest guide that's out there that we're doing for this month,
33:56
Speaker 6: which is not just about estate planning, it's more about gifting,
33:59
Speaker 6: which is exactly what some of the issues we were
34:01
Speaker 6: talking about with this caller, and that is that when
34:05
Speaker 6: you're gifting assets, you know, do I want to gift it?
34:08
Speaker 6: Do I want to make something a gift one way
34:10
Speaker 6: or another? Do I want to give it outright to
34:12
Speaker 6: my kids? Do I want to hold it in espousal
34:15
Speaker 6: lifetime access trust so that I can enjoy what I
34:17
Speaker 6: gave away? Remember I said, you got to figure out
34:19
Speaker 6: how can I enjoy what I gave away and keep
34:22
Speaker 6: it outside my estate first date taxes. So that's where
34:25
Speaker 6: spousal lifetime access trust comes in. You always got to
34:28
Speaker 6: think about what kind of asset you're giving away, high
34:31
Speaker 6: basis assets versus low basis assets. Think about it from
34:35
Speaker 6: a medicaid nursing home perspective. You know, if I own
34:38
Speaker 6: an account jointly with a non spouse, is it half
34:40
Speaker 6: protected already? Is it not half protected? If I own
34:43
Speaker 6: my house with somebody that's a non spouse, is it
34:46
Speaker 6: half protected? Is it not half protected? So you got
34:48
Speaker 6: to think about it from every angle when you're gifting folks.
34:51
Speaker 6: The guide Getting the most out of Gifting assets is
34:55
Speaker 6: eight six six eight four eight five six nine to
34:59
Speaker 6: nine or Legal Exchange Show dot com New Guide for
35:02
Speaker 6: the Month eight six six eight four eight five six
35:06
Speaker 6: nine nine or Legal Exchange Show dot com.
35:11
Speaker 2: Todd talking more about the gifting side of things there,
35:15
Speaker 2: how does one make the decision on what are the
35:18
Speaker 2: kind of good assets to gift versus poor ones?
35:22
Speaker 1: Like?
35:22
Speaker 2: How do you decide when it makes sense to gift
35:25
Speaker 2: versus not? Yeah, and that's uh.
35:27
Speaker 6: And again I know with our caller, I gave a
35:29
Speaker 6: lot of information really fast, but this would be break
35:32
Speaker 6: it down. One of the things I was trying to
35:33
Speaker 6: explain to the caller, was you know, okay, I do
35:36
Speaker 6: want to make an irrevocable trust. Now I want to
35:39
Speaker 6: know if that irrevocable trust is going to be a
35:41
Speaker 6: completed gift or not a completed gift. And then once
35:45
Speaker 6: we determined from your question, Chuck, that it is going
35:47
Speaker 6: to be a completed gift, now we have to determine
35:50
Speaker 6: what asset should we gift? Easy, easiest one.
35:54
Speaker 2: Cash.
35:55
Speaker 6: Cash is always good. Why because there's no basis problem
35:59
Speaker 6: with cash. Cash is cash. There is no built in
36:04
Speaker 6: gain that I need to worry about. Whereas, Oh, I've
36:07
Speaker 6: got this rental property that I bought thirty years ago
36:10
Speaker 6: and fully depreciated it over time, meaning my basis in
36:14
Speaker 6: the property is now a zero because I've rented it
36:18
Speaker 6: for more than twenty seven and a half years. If
36:21
Speaker 6: I give that away, let's say it's a million dollar
36:23
Speaker 6: property and my basis is zero, now I've trapped for
36:27
Speaker 6: my family twenty eight point eight percent capital gain on
36:30
Speaker 6: a million dollars. Not just twenty eight point eight percent,
36:33
Speaker 6: but the depreciation piece of the gain is taxed at
36:39
Speaker 6: ordinary income, So the rate is not just capital gain,
36:43
Speaker 6: but the appreciation portion of the gain is taxed as
36:48
Speaker 6: ordinary income. I mean it's tax as capital gain. So
36:50
Speaker 6: then you have to figure out that the rate we're
36:52
Speaker 6: trapping is actually higher than that. So great question, Chuck.
36:56
Speaker 6: I think that's just the beginning the tip of the
36:58
Speaker 6: gifting Iceberg, if you will well as to what you
37:01
Speaker 6: need to think about before you make a gift.
37:04
Speaker 2: Mister Lutski, thank you so much for joining us today.
37:06
Speaker 6: Are always a pleasure.
37:08
Speaker 1: This has been asked Todd on the Financial Exchange Radio network.
37:12
Speaker 1: Ask Todd with Todd Lutsky has been presented by Cushing
37:14
Speaker 1: and Dolan, serving Massachusetts and New England for more than
37:17
Speaker 1: thirty years, helping families with the state and tax planning,
37:20
Speaker 1: Medicaid planning, and probate law. Call eight hundred three nine
37:23
Speaker 1: three four thousand and one or visit Cushingdolan dot com.
37:27
Speaker 1: The views expressed in this segment are solely those of
37:29
Speaker 1: Cushing and Dolan. Armstrong Advisory does not provide any legal
37:31
Speaker 1: or tax advice. Please consult with your legal or tax
37:33
Speaker 1: advisor on such matters. Cushing and Armstrong do not endorse
37:36
Speaker 1: each other and are not affiliated