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Why interest rates aren't the most important 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 Paul.
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Speaker 2: Lane, Chuck, Paul, and Tucker with you here on a
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Speaker 2: FED day. The Federal Reserve Open Market Committee has been
1:21
Speaker 2: meeting since yesterday. They don't actually just like meet at
1:25
Speaker 2: two pm and vote quickly. We get the results of
1:29
Speaker 2: what they decided to do at two pm. But Jay
1:33
Speaker 2: Powell and the gang have been meeting. Lisa Cook is there,
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Speaker 2: Stephen Moran is there. So it's one of the most
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Speaker 2: not to get like all Bachelor on you, but it's
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Speaker 2: the most dramatic season of the FED ever, Paul, and
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Speaker 2: that's what we have as we enter today's FED meeting.
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Speaker 2: It's wide. We expected that the Federal Reserve is going
1:59
Speaker 2: to cut interest rates by a quarter percent. Outside chance
2:02
Speaker 2: that they cut by half a percent, but I would
2:05
Speaker 2: say that would be very surprising if if they move
2:09
Speaker 2: forward in that direction. Also very likely that you have
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Speaker 2: at least a couple of descents to the fifty basis
2:16
Speaker 2: point side of things. The open question, I think is
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Speaker 2: do you get one or two descents to the other side,
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Speaker 2: maybe saying, hey, keep rates steady because we're concerned about inflation.
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Speaker 2: I don't know if we're going to see that, but
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Speaker 2: we might other things that are going to be very interesting.
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Speaker 2: We get a summary of economic projections today. The step
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Speaker 2: which is also referred to as the dot plot basically
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Speaker 2: where do FED officials think unemployment, GDP, growth, interest rates,
2:46
Speaker 2: and inflation are going to be by the end of
2:49
Speaker 2: this year, the end of next year, and in the
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Speaker 2: long run, and so it all adds up to the
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Speaker 2: most dramatic season in FED history. Your thoughts fall.
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Speaker 3: The meeting today, The biggest focus is going to be
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Speaker 3: more on the drama like you would see on The
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Speaker 3: Bachelor or other reality shows out there, and less road
3:14
Speaker 3: less than what is actually going to what are the
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Speaker 3: results going to be from the meeting, because we know
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Speaker 3: it's very telegraphed, or rather telegraph that we're going to
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Speaker 3: see that quarter of a percent cut, But a lot
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Speaker 3: more of the discussion points are going to be around
3:29
Speaker 3: the descents or the quarterly economic productions, and what do
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Speaker 3: these new appointees in Steven Miriam's case, perhaps you know,
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Speaker 3: what what feedback do we are we able to parse
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Speaker 3: out from from his appointment, as well as any of
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Speaker 3: the quarterly economic projections that deviate from perhaps consensus. And
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Speaker 3: then you know, as you alluded to, the dissenting piece
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Speaker 3: that really is going to be the major focus with
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Speaker 3: those quarterly economic projections because we are so close to
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Speaker 3: the end of the year. Any sort of projections as
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Speaker 3: to where interest rates are gonna end this year by
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Speaker 3: the FED members is going to be really heavily considered
4:10
Speaker 3: because there's only a couple of months left in the year.
4:12
Speaker 3: So you're gonna we're gonna have a really good sense
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Speaker 3: for what the FED feels like they need to do
4:17
Speaker 3: over the course of the next couple of meetings. Of course,
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Speaker 3: those projections are always subject to change, but right now
4:23
Speaker 3: we have it where it's it's three rate cuts that
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Speaker 3: they're projected by the end of the year, right.
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Speaker 2: So that's what the that's what the Chicago mark No
4:32
Speaker 2: Exchange has right now. So I think this step is
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Speaker 2: going to be the most interesting part of this because
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Speaker 2: quite honestly, like all of the noise about like, oh,
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Speaker 2: how many descents are they're gonna be in this, Like
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Speaker 2: I don't care, like the drama stuff I'm talking about,
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Speaker 2: Yeah exactly. So you know, look, do I think it
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Speaker 2: would be great if we actually had you know, a
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Speaker 2: FED big brother, you know, for like I would stick
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Speaker 2: them all in a house for two days and like
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Speaker 2: have camp on the whole time and see what happens. Yes,
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Speaker 2: like here, have a few beers. J Powell like do
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Speaker 2: your thing. Oh like here, you know, Steve, you're new
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Speaker 2: to the house. Like here's your little hat with the
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Speaker 2: propeller on it, like like, yes, I'd love to see
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Speaker 2: these things. But ultimately it's not what matters to the economy.
5:16
Speaker 2: What actually matters is what the FED guides at, what
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Speaker 2: the Fed says they're going to do, and how they
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Speaker 2: guide they're going to in the future. And so Tucker,
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Speaker 2: can you get the time machine queued up for us?
5:27
Speaker 2: We don't have to go back too far, so you
5:28
Speaker 2: don't need to, you know, get the thing, you know
5:30
Speaker 2: too jacked up. But there we go.
5:35
Speaker 4: All right, we're.
5:36
Speaker 2: Going back to June of twenty twenty five. It's kind
5:39
Speaker 2: of warm, but it's also been a really rainy spring
5:42
Speaker 2: and so no one really likes it around here very much.
5:44
Speaker 3: All these weekends are ruined.
5:46
Speaker 2: Every weekend's been ruined for thirteen weekends straight, and people
5:49
Speaker 2: are just hoping that it's really dry the rest of
5:52
Speaker 2: the summer, which it is. Here's what we had in
5:57
Speaker 2: the March step from the Fed. They thought ge this
6:00
Speaker 2: year will be one point seven percent. They then downgraded
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Speaker 2: it in the June one to one point four slower growth.
6:06
Speaker 2: They also thought the PCE inflation in March was gonna
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Speaker 2: come into two seven with core at two eight. They
6:11
Speaker 2: upgraded those to three zero three one, respectively. So basically
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Speaker 2: what the Fed told us was, Hey, we're gonna have
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Speaker 2: slower growth this year and more inflation. But the FED
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Speaker 2: funds rate projection for year end was three point nine
6:26
Speaker 2: percent unchanged. The Fed basically saying we are willing to
6:30
Speaker 2: accept for this year slower growth and higher inflation. We're
6:34
Speaker 2: not gonna cut rates into that. That's what they told us.
6:38
Speaker 2: So what's gonna be interesting for me is the guidance
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Speaker 2: to the end of this year. I'm kind of interested in,
6:46
Speaker 2: but look, it's three months away and it's not gonna
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Speaker 2: make a huge difference either way. I think, Look, if
6:52
Speaker 2: we're gonna be completely honest about this, the difference between
6:56
Speaker 2: a quarter percent and a half percent rate cut is nothing.
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Speaker 2: When we talk about like Feds that make mistakes like
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Speaker 2: the nineteen seventies, or even you want to talk about
7:05
Speaker 2: like early twenty twenty two, it's the ones that are
7:08
Speaker 2: off by like two or three percent in the wrong direction,
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Speaker 2: and you're like, guys, what are we doing here? You're
7:15
Speaker 2: raising rates a quarter percent when inflation's at nine Come on,
7:20
Speaker 2: pick up the pace here, like Jay, Arthur, what are
7:24
Speaker 2: we doing here?
7:24
Speaker 4: Guys?
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Speaker 2: Like this is the problem. So if the FED is
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Speaker 2: directionally wrong by an extra quarter percent, it doesn't matter. Like,
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Speaker 2: I'm not gonna ever criticize the FED for going like
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Speaker 2: a quarter percent too far because it doesn't matter to
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Speaker 2: the real economy, meaning in a meaningful enough way.
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Speaker 3: No, the only reason that it would be something that's
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Speaker 3: noteworthy is that, jeez, does the FED know something that
7:48
Speaker 3: we don't? Is the labor market even worse than we
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Speaker 3: anticipated if they were, for example, to go half percent today.
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Speaker 2: And this is why I think that the twenty twenty
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Speaker 2: six guidance which they do give is gonna be really interesting.
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Speaker 2: Here's what they guided in September. This is for next
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Speaker 2: year twenty twenty six. They thought real GDP was gonna
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Speaker 2: come in at one point six percent, unemployment rate four
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Speaker 2: point five PCEE, inflation two four core PCE two four,
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Speaker 2: So basically saying, hey, GDP is gonna accelerate a little
8:19
Speaker 2: bit from twenty twenty five, inflation's gonna cool and we
8:24
Speaker 2: think because inflation's cooling and GDP still isn't where we
8:27
Speaker 2: want it to be, fed FUNDRA at the end of
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Speaker 2: next year three point six percent. So the interesting piece
8:35
Speaker 2: here is going to be what they tell us about
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Speaker 2: their path next year and where they think they're gonna
8:41
Speaker 2: because honestly, if they're off by like a quarter percent
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Speaker 2: by the end of this year, doesn't matter. If they
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Speaker 2: tell us, hey, we think unemployment is gonna be four
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Speaker 2: six or four seven, and GDP growth is gonna be
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Speaker 2: one two and PCE is gonna be two three. Now
9:02
Speaker 2: they're telling you, yeah, we think there's a problem in
9:05
Speaker 2: the economy that's gonna materialize, and we got a cut
9:07
Speaker 2: in order to get in front of it. The interesting
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Speaker 2: one to me, given all the talk about the labor market,
9:14
Speaker 2: and not just labor demand but labor supply. We've talked
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Speaker 2: about this a ton the last couple months, in that
9:20
Speaker 2: the combination of baby boomer retirements and immigrant deportations is
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Speaker 2: creating a labor force that is growing at a much
9:29
Speaker 2: slower rate than last year, or potentially even shrinking very
9:33
Speaker 2: slightly this year. And so could you end up with
9:36
Speaker 2: like something weird where the Fed says, hey, GDP growth
9:40
Speaker 2: next year is gonna be you know, one to six. Still,
9:43
Speaker 2: the unemployment rate we think is gonna be four to
9:45
Speaker 2: two pc. Inflation's gonna be like two seven, so hotter
9:52
Speaker 2: than they thought. But we're still gonna cut because we
9:55
Speaker 2: can't control labor supply and we see real risk to
9:58
Speaker 2: labor demand if we don't cut. Like these are some
10:02
Speaker 2: of the just weird things that we have to consider
10:05
Speaker 2: right now because the labor market is quite honestly in
10:09
Speaker 2: a place where we have never seen it as Americans before.
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Speaker 2: There's never been a time when we've had good economic
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Speaker 2: data where we've been able to say, hey, there are
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Speaker 2: real questions about labor supply as a limiting factor in
10:23
Speaker 2: the job market.
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Speaker 3: No, it's a subject that's never you've never really think about.
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Speaker 2: America did not exist when the bubonic plague was you know,
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Speaker 2: a big thing, and we didn't have economic statistics that
10:34
Speaker 2: were reliable back then either.
10:35
Speaker 3: And it's it seems like, unless I've missed something, is
10:38
Speaker 3: there really a good statistic to track the supply pieces?
10:42
Speaker 2: Not really like all estimates, we have no idea what's
10:47
Speaker 2: actually going on with labor supply. The estimates that we've
10:51
Speaker 2: seen that I've seen personally are that anywhere between three
10:56
Speaker 2: hundred thousand and one point five million mcgrants are no
11:00
Speaker 2: longer in the labor force now. But that's a wide range.
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Speaker 2: I mean, that's almost one percent of the total working
11:06
Speaker 2: population that you're talking about there in that range of estimates.
11:10
Speaker 2: And so there are vastly different things that that means,
11:15
Speaker 2: depending on you know how you know how how the
11:19
Speaker 2: labor market and the economy progresses. So no one has
11:22
Speaker 2: a really good handle on it. I don't profess to,
11:25
Speaker 2: and anyone who does, I kind of say, okay, like,
11:27
Speaker 2: what'd you do? Go and interview three hundred and thirty
11:30
Speaker 2: million people?
11:30
Speaker 3: And no, Like, it's we should eventually get the retirement data.
11:35
Speaker 3: Doesn't the Dallas Fed do a sort of gauge onto
11:38
Speaker 3: how many people have left the work force? Obviously that
11:40
Speaker 3: they'll do two.
11:41
Speaker 2: Years, Like we're gonna get into like twenty twenty seven
11:44
Speaker 2: and be like, oh, that's what happened with like retirements
11:46
Speaker 2: this year. Great, like, but yeah, it's it's messy and
11:49
Speaker 2: no one has a great handle on this stuff. So
11:52
Speaker 2: let's take a quick break here. When we come back
11:55
Speaker 2: let's talk a little bit about what we're seeing in
11:57
Speaker 2: the economy right now, because we're really seeing an extension
12:01
Speaker 2: of what was talked about a couple of years ago
12:02
Speaker 2: with this this idea of a K shaped economy. How
12:07
Speaker 2: do you make an economy look like a K? We'll
12:10
Speaker 2: tell you in a bit. Okay.
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13:21
Speaker 2: Piece in the Wall Street Journal, the two speed economy
13:24
Speaker 2: is back as low income Americans give up gains. And
13:26
Speaker 2: this is something that you know, is starting to become
13:30
Speaker 2: very apparent in the economic data that we've been getting
13:32
Speaker 2: this year, which is that, hey, if you look at
13:37
Speaker 2: you know, whether you're looking at broad economic data or
13:39
Speaker 2: companies that are reporting earnings, there's a clear divergence where
13:44
Speaker 2: just as an example, yesterday, United CEO comes out and says, yeah,
13:47
Speaker 2: like we're seeing a real resurgence and a real like
13:50
Speaker 2: growth in high end bookings, but main cabin is still
13:53
Speaker 2: flat to down. And basically what that tells you is, hey,
13:57
Speaker 2: if someone has the money to be booking you know,
14:00
Speaker 2: first class or business class or those kinds of seats,
14:02
Speaker 2: they're doing it now, and they're doing it in higher
14:04
Speaker 2: numbers than they were previously. If you are sitting in
14:08
Speaker 2: the back of the plane with everyone else and saying, hey,
14:11
Speaker 2: how come you know, I'm not getting you know, eight
14:15
Speaker 2: blankets and forty two pillows and stuff like that. Yeah,
14:19
Speaker 2: those bookings are down because the average American is struggling
14:24
Speaker 2: at this point with wage growth that is slowing, price
14:29
Speaker 2: growth that is increasing, and it's it's pretty uncomfortable for
14:34
Speaker 2: most folks out there.
14:36
Speaker 3: Yeah, it's it's been really fascinating to watch. What you
14:38
Speaker 3: saw coming out of the pandemic era is the lower
14:42
Speaker 3: income earners actually did get a substantial amount of wage
14:45
Speaker 3: gains during that period of time from call it you know,
14:48
Speaker 3: twenty nineteen to twenty twenty four, where we saw about
14:51
Speaker 3: fifteen percent growth in real hourly wages over that five
14:55
Speaker 3: year span of nineteen to twenty four for those lower
14:57
Speaker 3: income earners. What we've seen more recently is the lower
15:01
Speaker 3: income earner growth has not kept up with the earnings
15:04
Speaker 3: growth of the top third of the economy. The salary
15:08
Speaker 3: growth that those lower earner income or lower income earners
15:11
Speaker 3: have seen is about one percent year over year as
15:14
Speaker 3: of August, compared to three and a half plus percent
15:18
Speaker 3: for those in the top third of income earnings. And
15:21
Speaker 3: we've covered this on yesterday's show, but really from a
15:24
Speaker 3: spending perspective. We had the retail sales report that came
15:26
Speaker 3: out yesterday that was a little bit stronger than anticipated.
15:30
Speaker 3: Some of that due to inflationary pressure, but overall showed
15:33
Speaker 3: a resilient consumer. It continues to be these higher income
15:37
Speaker 3: consumers that are keeping this economy going. This share of
15:41
Speaker 3: spending done by those making over two hundred and fifty thousand,
15:45
Speaker 3: which is the top ten percent of household earners out
15:49
Speaker 3: there in this country, is up to fifty percent. And
15:52
Speaker 3: so that's a statistic that we've talked about a lot,
15:54
Speaker 3: but continues to show a trend that those high income
15:56
Speaker 3: earners are really carrying a lot of water for this economy.
16:00
Speaker 2: Me other things that I look at in terms of
16:02
Speaker 2: what can potentially, you know, accelerate the economy and get
16:05
Speaker 2: it moving again. One of the things that we saw
16:07
Speaker 2: this morning. Quite honestly, I don't know if you had
16:09
Speaker 2: a chance to look at the UH mortgage data for
16:13
Speaker 2: last week. Bufis were up big, refis up sixty percent
16:19
Speaker 2: in the week.
16:19
Speaker 3: Hard it's easy to be up sixty percent when you're
16:21
Speaker 3: at like zero probably before.
16:22
Speaker 2: But yeah, so it's it's not at a great level,
16:26
Speaker 2: but it's not you know, awful. So to put it
16:29
Speaker 2: in perspective heading into this week, reefis we're running at
16:34
Speaker 2: about twenty percent of what they were in early twenty one.
16:37
Speaker 2: But remember early twenty one was like the biggest REFI
16:40
Speaker 2: boom in history because you didn't do it then, hey,
16:43
Speaker 2: like everyone's sitting there and it's like, wait, you're telling
16:46
Speaker 2: me I can borrow three hundred thousand dollars for thirty
16:50
Speaker 2: years at two point seventy five percent? Yes, where do
16:54
Speaker 2: where do I sign up? Like? What do I do
16:56
Speaker 2: in order to do so? REFI activity was all So
17:00
Speaker 2: if you want to compare it to like twenty four
17:02
Speaker 2: was running about double what it was last year, but
17:04
Speaker 2: obviously last year was you know, dramatically slowed down. So
17:07
Speaker 2: this is a big jump. It's just one week. But
17:10
Speaker 2: this happens with you know, mortgage rates coming down into
17:13
Speaker 2: the six and a quarter range on thirty year fixed
17:16
Speaker 2: and if you're willing to take the adjustment risk, if
17:21
Speaker 2: you look at adjustables now you're into the high fives.
17:23
Speaker 2: And so if you're someone who bought in the last
17:25
Speaker 2: couple of years at you know, seven seven in a quarter,
17:29
Speaker 2: you sit there and say, look, I can shave you know,
17:30
Speaker 2: ten to fifteen percent off my payment potentially. Yeah, like that.
17:34
Speaker 2: That's something that people are starting to look into. And
17:38
Speaker 2: so the plus side of this is twofold number one.
17:41
Speaker 2: It could allow even for some cash out refinances depending on,
17:45
Speaker 2: you know, the situation. If you bought in the last
17:47
Speaker 2: couple of years, you might not have enough equity there
17:49
Speaker 2: depending on where and exactly when you bought, so that
17:52
Speaker 2: that could be a question. But hey, if you're picking
17:55
Speaker 2: up an extra couple hundred bucks a month in cash
17:58
Speaker 2: flow because you're you know, mortgage monthly payment is going
18:01
Speaker 2: from twenty seven hundred down to twenty five hundred, Okay,
18:05
Speaker 2: it's a couple hundred bucks more that can be spent
18:07
Speaker 2: in the economy, but it's by people who already own homes,
18:10
Speaker 2: who typically have higher levels of wealth than those who don't,
18:14
Speaker 2: and so it kind of magnifies this k shaped economy
18:17
Speaker 2: feel that we have here.
18:18
Speaker 3: Plus, you're gonna have the tax reform package going through.
18:21
Speaker 3: I mean it's gone through, but you're gonna start to
18:23
Speaker 3: feel the impacts of that, where a lot of people
18:25
Speaker 3: are gonna be probably pleasantly surprised in terms of what
18:28
Speaker 3: they see when they file their taxes in April because
18:31
Speaker 3: of some of the changes that had been made in
18:34
Speaker 3: the big beautiful Bill.
18:36
Speaker 2: Yeah, so you've got those things that are you know,
18:39
Speaker 2: kind of feeding into this as well here and also
18:43
Speaker 2: this story that again just kind of messhes with it.
18:48
Speaker 2: Credit scores are following at the fastest pace since the
18:50
Speaker 2: Great Recession. So first of all, obviously that framing is
18:53
Speaker 2: designed to make you terrified that we're going to have
18:55
Speaker 2: another Great recession, man, which is really unlikely. I mean,
19:00
Speaker 2: I could see a recession being possible. Do I see
19:02
Speaker 2: like a two thousand and eight style event happening, Paul,
19:05
Speaker 2: Is there anything on your BNGO card that looks anything
19:07
Speaker 2: like two thousand and eight?
19:08
Speaker 3: It would be a total shock. We wouldn't see it coming.
19:11
Speaker 3: I didn't see that coming, no, exactly.
19:14
Speaker 2: So the average FICO score did drop by two points
19:16
Speaker 2: this year, that is the most since two thousand and nine.
19:19
Speaker 2: But then the caveat is credit scores remained significantly higher
19:23
Speaker 2: than during the Great Recession. Where you start matters, not
19:28
Speaker 2: just I know, we always say it's how you finish
19:30
Speaker 2: that matters, but you also have to pay attention to
19:32
Speaker 2: where he started. Let's take a quick break. When we
19:35
Speaker 2: come back, it's Wall Street Watch and ask ta da
19:37
Speaker 2: da da da da da da da change.
19:41
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19:48
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19:53
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20:00
Speaker 5: Markets are a little changed in a mixed territory on
20:04
Speaker 5: FED meeting day, where all expectations are anticipating in a
20:10
Speaker 5: quarter percentage interest rate cut from the Central Bank at
20:13
Speaker 5: the conclusion of their meeting at two o'clock. FED Chairman
20:15
Speaker 5: Jerome Powel will speak during a press conference at two thirty.
20:19
Speaker 5: Right now, the Dow is down excuse me, up by
20:22
Speaker 5: about half a percent, s and P five hundred dipping
20:25
Speaker 5: five points lower. Nasdaq is down four tenths of one percent,
20:30
Speaker 5: Russell two thousand is up seven tenths of one percent,
20:32
Speaker 5: Tenure Treasure reeled currently at four point zero two six percent,
20:37
Speaker 5: and crude oil flat today, trading at sixty four dollars
20:40
Speaker 5: and forty eight cents of barrel. Some more news as
20:43
Speaker 5: it relates to Nvidia in China this morning. According to
20:46
Speaker 5: the Financial Times, China's Internet regulator has banned the country's
20:50
Speaker 5: largest tech firms from buying in Nvidia's AI chips, increasing
20:55
Speaker 5: China's efforts to lift its domestic industry and compete with
20:59
Speaker 5: the U U and Video. Stock is down nearly three
21:02
Speaker 5: percent on that news. Along the same lines, Chinese state
21:06
Speaker 5: media reported that Ali Baba won a major customer, China
21:09
Speaker 5: Unicom for its AI chips. Ali Baba shares are up
21:13
Speaker 5: almost two percent. Meanwhile, Lift soaring thirteen percent higher following
21:17
Speaker 5: news that Weimo has partnered with the ride hailing company
21:20
Speaker 5: for the first time in a commercial deal to enter
21:24
Speaker 5: Nashville next year. Elsewhere, Eli Lilly Sedik's experimental pill outperformed
21:29
Speaker 5: Novo Norda's own oral drug in the first head to
21:32
Speaker 5: head study comparing the two medicines in patients with type
21:36
Speaker 5: two diabetes. ELI shares are up one percent workday, jumping
21:41
Speaker 5: after activist investor Elliott Management disclosed a two billion dollar
21:46
Speaker 5: stake in the human resources software provider. That stock is
21:49
Speaker 5: up eight percent, and Loop Capital upgraded Netflix to buy
21:53
Speaker 5: from hold, with The firm said the streaming giant has
21:56
Speaker 5: won the streaming wars with its strong content and has
21:59
Speaker 5: higher long term margin assumptions as its content generates more revenue.
22:04
Speaker 5: Netflix shares are up nearly two percent. I'm Tucker Silvan.
22:08
Speaker 5: That is Walstree.
22:09
Speaker 2: Watch.
22:10
Speaker 1: This is Ask Todd on the Financial Exchange Radio network.
22:14
Speaker 1: If you have an existing estate plan or in the
22:16
Speaker 1: market for one, Todd Letsky is here to answer your
22:19
Speaker 1: questions and help you plan for a later life. Ask
22:22
Speaker 1: Todd is presented by Cushing and Dolan, serving Massachusetts and
22:25
Speaker 1: New England for more than thirty five years, helping families
22:28
Speaker 1: with a state and tax planning, Medicaid planning, and probate law.
22:32
Speaker 1: Visit Cushingdolan dot com. Now here's Todd Lutsky.
22:37
Speaker 2: Todd Lutsky does join us now from the law firm
22:40
Speaker 2: of Cushing and Dolan. The segment here is Ask Todd,
22:46
Speaker 2: and this is your chance to ask Todd your state
22:48
Speaker 2: planning questions live on air right now. Phone lines are
22:52
Speaker 2: open at eight eight eight two zero five two two
22:55
Speaker 2: sixty three. Get calling early and often if you want
22:58
Speaker 2: to ask Todd your state planning questions, because we do
23:01
Speaker 2: have limited space on those phone lines. Again, eight eight
23:05
Speaker 2: eight to zero five two two sixty three is the
23:09
Speaker 2: number one more time that is eight eight eight two
23:13
Speaker 2: zero five two two sixty three. And this is your
23:16
Speaker 2: opportunity to ask Todd your state planning questions. Mister Lutsky,
23:20
Speaker 2: how are you doing today?
23:22
Speaker 4: I am never better? How are you doing?
23:25
Speaker 2: I'm good? I uh. I was pretty intrigued by that
23:27
Speaker 2: story over the weekend about the uh duck that robbed
23:30
Speaker 2: the bank.
23:31
Speaker 4: All right, I must have missed that story.
23:33
Speaker 2: Yeah, he quacked the safe.
23:34
Speaker 4: Well, that's that's true.
23:35
Speaker 2: Yeah, pretty impressive stuff.
23:37
Speaker 4: Todd.
23:38
Speaker 2: I want to talk to you about beneficiary designations on
23:42
Speaker 2: iras and specifically, how does it let me ask you this?
23:49
Speaker 2: I guess is there a conflict or a question in
23:52
Speaker 2: terms of potentially naming a trust as a beneficiary of
23:59
Speaker 2: an IRA right in order to help manage estate taxes
24:04
Speaker 2: in the future with trying to navigate the tenure withdraw
24:13
Speaker 2: rule that you have when that trust is named to
24:16
Speaker 2: beneficiary and perhaps ending up with your bennies paying more
24:20
Speaker 2: in taxes than they would otherwise.
24:22
Speaker 4: In income taxes.
24:23
Speaker 2: Correct, more income taxes than a state taxes that they
24:25
Speaker 2: would have paid.
24:26
Speaker 6: I think you got a great question there, because there's
24:29
Speaker 6: a lot of balls in the air, right, So one
24:31
Speaker 6: would be you know, we haven't when you're dealing.
24:33
Speaker 2: And someone asked me this the other day and I said,
24:35
Speaker 2: I don't know, but I have an estate planning attorney.
24:37
Speaker 2: I'm going to ask. So this is, you know, a
24:39
Speaker 2: real question that I got from someone.
24:41
Speaker 6: Real life stuff. That's what we do, real life stuff.
24:44
Speaker 6: And iras are complicated, right, because they do have as
24:47
Speaker 6: you are alluding to, Chuck, they have both the income
24:50
Speaker 6: tax component built into it and as many people forget,
24:55
Speaker 6: an estate tax component built into it, even like with
24:59
Speaker 6: Ross they think, oh well there are rots are income
25:01
Speaker 6: tax free, Yeah, but they're estate taxable. And so you
25:05
Speaker 6: got to remember that they have those two components built
25:08
Speaker 6: in it. Now, first and foremost, when we're talking about
25:11
Speaker 6: naming a trust, a beneficiary, or in general dealing with
25:15
Speaker 6: an IRA in your estate plan, let's start primary beneficiary.
25:19
Speaker 6: If you're marriage should probably always be I don't want
25:22
Speaker 6: to say always, there's never an always, but mostly be
25:25
Speaker 6: surviving spouse.
25:26
Speaker 2: Why wouldn't you do the trust in that case because
25:28
Speaker 2: that's specifically kind of what this is looking at.
25:30
Speaker 6: Yeah, so generally you want it to be the surviving
25:33
Speaker 6: spouse because of that RMD, the required minimum distribution rules, right,
25:38
Speaker 6: spouses are one of the few special beneficiaries under the
25:44
Speaker 6: Secure Act when the Secure Act changed. So example, if
25:50
Speaker 6: I leave, if I name my spouse the designated beneficiary,
25:53
Speaker 6: and my spouse, let's say when I die is seventy five,
25:58
Speaker 6: my spouse gets to take it out over her her
26:00
Speaker 6: life expectancy. If you look at a table, her life
26:02
Speaker 6: expectancy could be twelve, thirteen years, fourteen years. So that's
26:06
Speaker 6: a nice payout, better than if I name my children
26:10
Speaker 6: the beneficiary. It's going to come out over ten years
26:14
Speaker 6: most of the time, unless the child is a minor
26:17
Speaker 6: or disabled, So mostly this is going to come out
26:21
Speaker 6: over ten years. So there's a ten year rule, not
26:24
Speaker 6: a lifetime rule. The old rule used to be yeah,
26:25
Speaker 6: I would come out over the kid's life expectancy, but
26:28
Speaker 6: no more so. Now it comes out over ten years.
26:31
Speaker 6: So that's why the primary beneficiary is usually the spouse.
26:37
Speaker 6: Now that said, what if I'm the surviving spouse. Now
26:41
Speaker 6: who should the primary beneficiary be? Well, I need to
26:44
Speaker 6: look to my revocable trust. Let's say, if that's what
26:47
Speaker 6: I've done. Well, if my trust, which holds a bunch
26:50
Speaker 6: of my assets, says I leave everything equally to my kids,
26:54
Speaker 6: but held in trust for their life, divorce proof, creditor protected,
26:58
Speaker 6: generation skipping tax planning, all built in. Well, maybe I
27:02
Speaker 6: don't want my million dollar IRA going out to my kids,
27:05
Speaker 6: so I probably wouldn't name the kids. I would name
27:08
Speaker 6: the trust as the beneficiary if I'm now the surviving
27:12
Speaker 6: spouse are single, and that way it gets into the trust,
27:15
Speaker 6: sheltering it from all of those negative creditors tax or
27:20
Speaker 6: creditor issues and even generation skipping tax problems. But to
27:24
Speaker 6: your point, Chuck, not causing a problem with the ten
27:29
Speaker 6: year payout, so no conflict with the ten year payout.
27:32
Speaker 6: It's still gonna come out over ten years. No better,
27:35
Speaker 6: but no worse.
27:36
Speaker 2: Talking with Todd Lutsky from Cushing and Dolan. If you've
27:38
Speaker 2: got a question for Todd, this is your chance to
27:41
Speaker 2: ask it. Eight eight eight two zero five two two
27:44
Speaker 2: sixty three is the number to call. We do still
27:46
Speaker 2: have a little bit of room on the phone lines,
27:49
Speaker 2: so called eight eight eight to zero five two two
27:52
Speaker 2: six three to ask Todd your estate planning questions. That
27:56
Speaker 2: number again is eight eight eight to zero five two
28:00
Speaker 2: two six three. We're gonna take a quick break here,
28:03
Speaker 2: but when we come back it is going to be
28:05
Speaker 2: right to your questions with Todd. That phone number one
28:08
Speaker 2: more time is eight eight eight two zero five two
28:12
Speaker 2: two six three.
28:14
Speaker 1: Ask Todd with Todd Lutsky every Wednesday at ten thirty
28:17
Speaker 1: only here on the Financial Exchange Radio Network. Todd Letsky
28:23
Speaker 1: answers your questions about a state and elder life planning
28:26
Speaker 1: every Wednesday at ten thirty right here on the Financial
28:29
Speaker 1: Exchange Radio Network.
28:38
Speaker 2: Still a little bit of room on the phone lines
28:39
Speaker 2: if you've got a question for Todd Lutsky. Eight eight
28:43
Speaker 2: eight to zero five two two sixty three is the
28:47
Speaker 2: number again, it is eight eight eight to zero five
28:52
Speaker 2: two two six three. Let's go now to Bob in Charlestown. Bob,
28:56
Speaker 2: what's your question for Todd?
28:58
Speaker 7: Good morning, Mike. Question concerns the income tax aspects of
29:03
Speaker 7: the four oh one K when it goes through the
29:07
Speaker 7: testamentary trust. So if there's no surviving spouse and the
29:13
Speaker 7: four oh one K is the beneficiary, is the estate
29:17
Speaker 7: got it and none of the will it passes into
29:19
Speaker 7: the testamentary trust. So now I presume the trust will
29:24
Speaker 7: now own the four oh one k. And since the
29:27
Speaker 7: beneficiaries of the children and not a surviving spouse. Is
29:31
Speaker 7: the trust required to pay out that money to the
29:34
Speaker 7: kids in the tenure SIP frame as if it had
29:37
Speaker 7: never gone to the trust.
29:38
Speaker 6: So we have to sort of clarify your question because
29:42
Speaker 6: the question you're answering is one that I likely would
29:46
Speaker 6: never suggest. Okay, So when I talk about naming the
29:51
Speaker 6: estate the beneficiary, that's when you are married, you do that.
29:58
Speaker 4: Okay.
29:59
Speaker 6: So if you're married, and so we got husband and wife, right,
30:02
Speaker 6: and they both have you're saying for a one K.
30:04
Speaker 6: But let's say they've retired and they've rolled there four
30:06
Speaker 6: a one K into an IRA. It's the same deal, right,
30:10
Speaker 6: And so now we're married, and I've got this iras
30:13
Speaker 6: sitting there, and I'm over seventy three years of age
30:17
Speaker 6: or or seventy three Okay, unless the IRA is small
30:22
Speaker 6: enough that a five year payout doesn't matter. But let's
30:25
Speaker 6: say it's large enough that I don't want a five
30:27
Speaker 6: year payout. So I got to make sure I'm seventy
30:29
Speaker 6: three years of age or or older. That's the first requirement,
30:34
Speaker 6: and that makes it payable over the ghost life expectancy
30:39
Speaker 6: of the participant, so that that's huge. So now I
30:44
Speaker 6: don't have a negative income tax consequences. Then I die well,
30:50
Speaker 6: then the estate it would flow into a testamentary trust
30:54
Speaker 6: for the benefit of who my spouse right first and foremost.
30:59
Speaker 6: If my spouse has already died well, then I usually
31:03
Speaker 6: get a call from the surviving spouse saying I lost
31:06
Speaker 6: my spouse. What do I do We update their estate
31:09
Speaker 6: plan because they're now single after all, and we need
31:11
Speaker 6: to make some changes to their plan. And one of
31:15
Speaker 6: those changes would be okay, well, we now need to
31:17
Speaker 6: rethink your designated beneficiary because you're single. So as a
31:22
Speaker 6: single person, I probably would go back to the idea
31:24
Speaker 6: of what Chuck and I were talking about a minute ago,
31:27
Speaker 6: and that is I would probably not name the estate
31:31
Speaker 6: the beneficiary. Well, why because I don't have a spouse, right.
31:36
Speaker 6: The whole point of naming the estate the beneficiary is
31:39
Speaker 6: so that I can provide for my spouse, just like
31:44
Speaker 6: I could if I named her the beneficiary. But at
31:48
Speaker 6: the same time, instead of naming her as the beneficiary,
31:52
Speaker 6: I am allowing her to not only enjoy it, but
31:55
Speaker 6: if she gets sick, it's immediately protected from the nursing
31:58
Speaker 6: home for her. To me, that's the big reason for
32:02
Speaker 6: doing this. Yeah, there's some mistate tax benefits as well,
32:04
Speaker 6: but to me, that's a really big reason, you know,
32:07
Speaker 6: for doing this. So if I don't have that spouse,
32:10
Speaker 6: well I'm not so worried about it, right because it's mine,
32:12
Speaker 6: and if I get sick, it's outside the trust, it's
32:14
Speaker 6: subject to the nursing home. If I die, I wanted
32:17
Speaker 6: to go probably to my trust for the benefit of
32:20
Speaker 6: my kids, divorce, prove credit or protection and whatever other
32:24
Speaker 6: kind of controls I want to put over it to them.
32:28
Speaker 6: Now that's set. So my answer, so I think your
32:31
Speaker 6: point is that you're hypothetical. I would never do so
32:34
Speaker 6: if I was single, I wouldn't be naming my estate
32:37
Speaker 6: the beneficiary in which the testamentary trust would be the children.
32:41
Speaker 6: Now having said that, I guess the question could be,
32:44
Speaker 6: what if we've done this, my wife's alive, it flows
32:49
Speaker 6: into this testamentary trust, then my wife dies, Well, well
32:54
Speaker 6: that's different. Well that that could happen. So so, Bob,
32:57
Speaker 6: I just wanted to help everybody understand that different and
33:00
Speaker 6: how this could not generally be set up that way,
33:03
Speaker 6: but it could end up that it's now for the kids.
33:06
Speaker 6: The required minimum distributions will come out and hit the
33:09
Speaker 6: trust over the ten year rule that we talked about.
33:13
Speaker 6: So now the kids are the beneficiaries. If this trust
33:16
Speaker 6: says paid out to the kids, divided equally and paid
33:19
Speaker 6: out to the kids, well, then as the money comes
33:22
Speaker 6: into the trust, it comes out to the kids. The
33:25
Speaker 6: kids pick it up on their income tax return and
33:27
Speaker 6: that's the end of it. If it's completely a payout,
33:29
Speaker 6: then the whole entire ira could technically just flow through
33:32
Speaker 6: and go right to the kids, and then they can
33:34
Speaker 6: take it out over ten years at tax at their rate.
33:37
Speaker 6: If it's held in divorce proof credit or protection language
33:41
Speaker 6: like hold it in trust for the benefit of the kids,
33:43
Speaker 6: and you know, let them have income and principle and
33:46
Speaker 6: the trustees sole discretion, which I like. Well, then you
33:49
Speaker 6: have to make a decision. And you're absolutely right about this, Bob,
33:52
Speaker 6: that if that money comes out the minimum distribution you
33:56
Speaker 6: reach in, take it out, put it in the trust.
33:58
Speaker 6: That's a taxable event to the trust. If the trust
34:03
Speaker 6: then distributes out that income to the beneficiary, well then
34:07
Speaker 6: they can carry an income distribution deduction and have a
34:10
Speaker 6: tax at the kids level. If the kid's going through
34:13
Speaker 6: a divorce and we don't want the money to come out. Well,
34:15
Speaker 6: then you know what, we're going to have to pay
34:17
Speaker 6: the tax at the trust level. So yes, you could
34:20
Speaker 6: have that issue, but it's kind of optional. So great question, Bob.
34:26
Speaker 6: Lots going on in that question. Sorry it was such
34:28
Speaker 6: a long winded answer, but it's important because it really
34:31
Speaker 6: does deal with what this guide is talking about this month, right.
34:35
Speaker 4: This guide is saying how do.
34:37
Speaker 6: You name your IRA the beneficiary? Not only how do
34:40
Speaker 6: you do it? When do you do it? Why do
34:41
Speaker 6: you do it right? And same thing with life insurance.
34:44
Speaker 6: You can make the life insurance the beneficiary and age
34:47
Speaker 6: is not an issue, but with an IRA, as we saw,
34:50
Speaker 6: the age should be at least the required required beginning
34:53
Speaker 6: date of seventy three.
34:55
Speaker 4: That's all laid out in the guide.
34:56
Speaker 6: It explains the Testamentary Trust, how it's connected with these assets,
35:01
Speaker 6: and will then help you do estate tax planning. It
35:05
Speaker 6: will protect it from the nursing home without a five
35:08
Speaker 6: year waiting period and all without causing adverse income tax consequences,
35:14
Speaker 6: which I hope I just explained in this in this
35:17
Speaker 6: to Bob, in this in this call eight six six
35:20
Speaker 6: eight four eight five six nine nine is the guide folks,
35:24
Speaker 6: or a legal Exchange show dot com. This guide explains
35:27
Speaker 6: all of those things and how they work together. Call
35:30
Speaker 6: and Get It eight six six eight four eight five
35:33
Speaker 6: six nine nine or Legal Exchange Show dot com.
35:37
Speaker 2: Todd just kind of looking at that situation that we
35:40
Speaker 2: outlined earlier, any other considerations, just for you know, how
35:44
Speaker 2: someone goes about making the decision for naming beneficiaries on
35:50
Speaker 2: retirement accounts given the complexities that we went through.
35:54
Speaker 6: Yeah, I'd say a couple of things. One, the size
35:56
Speaker 6: of the IRA. Right, So if someone's trying to do
35:59
Speaker 6: planning and they say, what, you know, I got one
36:00
Speaker 6: hundred thousand dollars in my IRA. Well one, you know,
36:03
Speaker 6: maybe I don't care about trying to protect that from
36:05
Speaker 6: the nursing home. Maybe it's small enough that I'll just
36:07
Speaker 6: leave my spouse the beneficiary and I don't need to
36:10
Speaker 6: go to probate for that. So that could be or
36:14
Speaker 6: the size could be you know, one hundred, two hundred,
36:16
Speaker 6: even three hundred thousand dollars. You know, if I got
36:18
Speaker 6: to pay that out over five years, that's not a
36:21
Speaker 6: huge income tax hit, right, you know, I'm not taking
36:24
Speaker 6: out a ton of money if I've got three hundred
36:27
Speaker 6: thousand over five years. That's not going to blow me
36:30
Speaker 6: into a higher income tax bracket. So maybe I don't
36:33
Speaker 6: need to wait until I'm seventy three. I can just
36:36
Speaker 6: set that up right away. So those are some options.
36:39
Speaker 6: And I think if you're not doing nursing home planning,
36:41
Speaker 6: certainly we're never going to be doing a testamentary trust
36:44
Speaker 6: if we're not doing nursing home planning. But I still
36:47
Speaker 6: might name the estate. I still might name the trust
36:50
Speaker 6: the beneficiary on a revocable trust, I would say you
36:53
Speaker 6: would do that primarily only if the way you're leaving
36:57
Speaker 6: the assets to the spouse to the kids is to
36:59
Speaker 6: pre detective from divorces and generation skipping tax purposes.
37:03
Speaker 2: Otherwise, probably just name the kids. Mister Wutski, thank you
37:05
Speaker 2: so much for joining us today.
37:07
Speaker 4: Always a pleasure.
37:09
Speaker 1: This has been Asked Odd on the Financial Exchange Radio network.
37:12
Speaker 1: Ask Todd with Todd. Lutsky has been presented by Cushing
37:15
Speaker 1: and Dolan, serving Massachusetts and New England for more than
37:18
Speaker 1: thirty years, helping families with the state and tax planning,
37:21
Speaker 1: Medicaid planning and probate law Call eight hundred and three
37:23
Speaker 1: nine 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. He does not provide any
37:32
Speaker 1: legal or tax advice. Please consult with your legal or
37:34
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37:36
Speaker 1: endorse each other and are not affiliated.