Unlock the full potential of your legacy with the expert guidance of elder law attorney Todd Whatley and certified financial planner Ian Weiner. Together, they unravel the intricacies of wealth management across generations, blending legal know-how with financial expertise to protect your assets and ensure your loved ones thrive long into the future. This episode is a treasure trove of strategic insights, from understanding the 'use by date' on each dollar to navigating the often-misunderstood realm of annuities and phantom taxation.
If you've ever wondered how to balance the preservation of wealth with the need for steady income in your golden years, this conversation sheds light on the delicate dance between the two. Todd and Ian dissect real-world scenarios, demonstrating the critical importance of collaboration in financial planning and elder law to achieve optimal outcomes for clients. They provide a candid look at the potential pitfalls of CDs and the nuanced role of annuities in estate planning, all while considering the implications for Medicaid eligibility.
As our insightful episode draws to a close, remember that the path to a lasting financial legacy is as unique as your own life story. Take this opportunity to gain inspired knowledge that will empower you to make informed decisions tailored to your individual circumstances. And as you continue your journey to build and safeguard wealth for the generations that follow, allow the Wealth for Generations podcast to be your guide, offering ongoing support and resources to help you navigate the ever-evolving landscape of financial and legal planning.
Unlock the full potential of your legacy with the expert guidance of elder law attorney Todd Whatley and certified financial planner Ian Weiner. Together, they unravel the intricacies of wealth management across generations, blending legal know-how with financial expertise to protect your assets and ensure your loved ones thrive long into the future. This episode is a treasure trove of strategic insights, from understanding the 'use by date' on each dollar to navigating the often-misunderstood realm of annuities and phantom taxation.
If you've ever wondered how to balance the preservation of wealth with the need for steady income in your golden years, this conversation sheds light on the delicate dance between the two. Todd and Ian dissect real-world scenarios, demonstrating the critical importance of collaboration in financial planning and elder law to achieve optimal outcomes for clients. They provide a candid look at the potential pitfalls of CDs and the nuanced role of annuities in estate planning, all while considering the implications for Medicaid eligibility.
As our insightful episode draws to a close, remember that the path to a lasting financial legacy is as unique as your own life story. Take this opportunity to gain inspired knowledge that will empower you to make informed decisions tailored to your individual circumstances. And as you continue your journey to build and safeguard wealth for the generations that follow, allow the Wealth for Generations podcast to be your guide, offering ongoing support and resources to help you navigate the ever-evolving landscape of financial and legal planning.
Speaker 1:
Welcome to Wealth for Generations, the podcast where you learn to grow, protect and preserve your wealth for generations. Our hosts on today's show are Todd Wattley, a certified elder law attorney, and Ian Weiner, a certified financial planner. Join us and our expert guests as we uncover the mindsets, tools and strategies to help you maximize your wealth and impact. Let's embark on this journey to secure your legacy. Please note this podcast is for informational purposes only and is not intended as financial or legal advice. Always consult with a professional regarding your specific situation.
Speaker 2:
That's right. This is the Wealth for Generations podcast, and my name is Todd Wattley and I am anxious to be back. Ian and I have done a few. Well, he's done one by himself, and that may happen every now and then. We can't be on every one of them, but today it's Ian and I. Hey man, how are you?
Speaker 3:
I'm doing well. I'm excited to have this conversation today. This is an important one.
Speaker 2:
This is and this came from a real life scenario where I have a client, he has a client, same client, and no, actually I think she was your client, right? And then you came to me and said here's what I'm thinking. I was like wait it, no, no, no, no, no, no, no, hang on. You're like but, and so we had this conversation. And so basically, today we're going to redo this conversation, kind of reenact it, but talk about it, and the title of today's podcast is the Conversation that Never Happens, because, as we were having this conversation, I told him, I said this is the conversation that never occurs because lawyers and financial advisors don't communicate.
Speaker 3:
They didn't until until now. I guess this seems so obvious really to everyone. When we talk about this is like, yeah, we should all be at the same table solving these problems together. And it doesn't always happen that way, and so what I'm excited about, it never happens that way and just it.
Speaker 2:
I mean it, just I've tried, I've tried as the attorney working with this person's financial person and they're like, well, yeah, and they just don't understand. I spend three fourths of my time educating them to the Medicaid rules and Ian's been with me now for six months and he has a really good understanding of the Medicaid rules and he's taught me a lot of things about investments and it's really interesting that we are having this very high level conversation for the benefit of the client.
Speaker 3:
And a lot of times the reason that these conversations don't happen is because and I'll beat up on advisors here they don't know a ton. Most advisors are product sales people. They have a handful of products that they know how to sell because that's what they're comfortable with. And the education stops there. Now imagine if they've been in the business for 25, 30 years, what they're selling All the stuff that was new 25 to 30 years ago.
Speaker 3:
And you think that I'm joking, but when I look at portfolios and when I look at, you know, the quote unquote plans that people have, it's just a bunch of products that have been hobbled together over the years and there's no cohesion. They don't work together and I can tell that the advisor is doing things like it's still 1984. And the reason is the best reason. And this is a terrible reason, but the best reason is it's working well enough. Why spend all that time learning something new?
Speaker 2:
So today's fact pattern basically was a lady who she has.
Speaker 3:
I think you said about 200,000 now after she had sewed her condo Paid some stuff off, which is a whole other conversation. So this person is moving to be closer to family, is upper 70s not a ton of current income and so needs to use this money to create income, presumably for the rest of her life, basically.
Speaker 2:
She's going to be living somewhere that's going to cost monthly right. Is she renting or it should be renting. Okay, so that's a monthly expense she didn't have.
Speaker 3:
We've got expenses right, and so one beneficiary Okay, one child is the beneficiary here. You know, not critical health right now, but you know there's a reason that these things are being consolidated and we're working through this.
Speaker 2:
We're seeing the things coming from a little ways away, okay so as a financial advisor, just and maybe not just you what have you seen in the past? I mean, I could tell you what I've seen, but as a just a purely financial advisor, what would you?
Speaker 3:
recommend for her. So it really depends on what is really the purpose of this money. You know, what are we trying to do with it? Do we need any of this to go to the daughter? Are we trying to transition this past, or is this a current income need, really? And in this case? So there's really two different thought patterns that develop, depending on which one of those it is. Do we want some of this money to pass on? Okay, we think about it differently than if we just need to use this money for her lifetime.
Speaker 2:
Yeah, passing on is preservation protecting, and particularly with the possibility of needing long term care. That brings in all kinds of things. But if she needs this money now, that's a different goal.
Speaker 3:
It's a different goal, and I think what's important is I want folks to realize. The way that we start to make these decisions is every dollar has a use by date. That's the nice way to think about it. You know every dollar has to be spent, but when is it going to be spent? And determining when it's going to be spent begins to tell us what asset allocation we're going to use. So, in her case, you know we're not passing this on for the you know her beneficiaries lifetime.
Speaker 3:
A lot of times this is counterintuitive, but a lot of times when I see folks who have worked with other advisors, they're taking not enough risk based on when that money actually needs to be used. You know, if it's meant to go to your grandkids, the time horizon is much longer than if it's just meant for the next five years, and so we need to think about that a little differently. In this case, it's the opposite. Okay, we've probably got 10, 15 years you know, at the most, that this money needs to last for. So we're talking about protection and we want to get a little bit of income, and so there's really three options. Okay, so one option is this is what most people do if they don't have an advisor, most people will buy a CD and the past year and a half, two years CDs have been paying what for feel like pretty high rates Now, right for the last few years last year or two, yeah, oh okay, the last year, but yeah, back in 21,.
Speaker 2:
It was like 1% yeah.
Speaker 3:
For us. And before that, you know they, we would joke about these right Certificates of disappointment, certificates of deflation, different terms for this, so people feel that that CDs are safe and they're protected by the FDIC. That's a whole other conversation.
Speaker 3:
My money's sitting right there at the bank that I can drive by every day, and so what I don't think a lot of folks understand is what determines the interest rate that you're getting is what the prevailing interest rates in the environment are. They're spread products, okay, so the the bank is going to make you know if they, if they're lending money at 10% and they can, they can bring it in and pay 4%. They're making the difference. That's their spread. That's how these work Now and it's likely in the environment that we're in, rates are going to trend down over the next year or two and so and the reason we think that is because you know, you're looking at some of these rates that are, you know, three and a half, four, four and a half percent. They're on shorter term CDs because the bank expects to be able to lend, to be able to bring in money at a lower rate, typically the longer you give them your money, the higher the rate.
Speaker 2:
But that's not the case here is because they're concerned, that is, want to go down, okay, you know if they can.
Speaker 3:
If they can, you know, get, get money for cheaper. That's what they're going to do. And so CDs are kind of present and backward looking. If you will, the other option is okay, we can create a portfolio that's in the market. You know fixed income stocks, in this case the the client and the client's beneficiary. They're like we don't want to take any market risk here. I said, okay, we have some potential tax advantages here, we can do this, that. And they're like, no, we're not doing it.
Speaker 2:
So they personally did not want to do.
Speaker 3:
yes, the stock market, because, being almost 80 and putting all of your money into the stock market, it's kind of nerve-wracking it is, and it's one of these situations where, depending on your overall picture, we can talk through that and how that works and we can get comfortable with that. But in their case it's like, okay, no, we just need income and we need to not run out of money. Okay, and CDs don't produce income. They produce a little bit of interest, but they don't really produce an income stream.
Speaker 2:
Talk about. I just learned something here. I am 58 years, 57, 57 years old and I just learned something about CDs that I didn't know, and that's probably because I don't buy CDs. Okay, I put my money somewhere else, but if you own a CD, I bet there's something happening that might surprise you.
Speaker 3:
So this is a fun one. Cds can create what's called phantom taxation, like, oh boy, we got income taxation, we got a state taxation, now we got phantom taxation.
Speaker 1:
Phantom taxation great.
Speaker 3:
So what's happening is, let's say, your CD's locked up for five years, okay, and you're earning interest as it goes and you pay tax on the interest that you earned in the year that you earn it. That's how CDs work. But you don't get that money, but you have to pay tax on it, right you?
Speaker 2:
don't get all of your interest on your CD till you cash it in five years from now. That's right, but you've paid tax out of money that you didn't get All along the way, phantom taxation, yep, and it's taxed at ordinary income rates.
Speaker 3:
Okay, so that's your highest marginal bracket.
Speaker 2:
Okay, and it doesn't produce income because you don't see that money for five years. So had she thought about doing a CD, that would not have met her goal of income.
Speaker 3:
No, and realistically, the term that she was looking at, we would have come up in 11 months and gone. Okay, now what do we do? Sure. So in this case, the next option is okay, there's CDs are issued by banks typically are credit unions. Now there's a version that's issued by insurance companies. Okay, and before anyone starts screaming, just hear me out on this okay, if you're above 59 and a half, if we find that a CD is the right option for you and it rarely is but if we find out that a CD is the right option for you, if you're above 59 and a half, you wanna have a CD that's issued by an insurance company. And there's two reasons. Number one that income that you're, that interest that you're earning over that period, is tax deferred, so it's accumulating over time, but you're not paying tax on it the whole way.
Speaker 2:
No phantom taxation, yes, so we don't have phantom taxation here.
Speaker 3:
Now you might be listening and going okay, but what if I'm under 59 and a half? Well, we shouldn't be using this product, but if you are, you have a penalty. Okay, so that's why we don't do it right. And really, if you're under 59 and a half, you probably shouldn't have a CD either. So that's another story for another time. The other reason is insurance companies deal with interest rates differently. They're forward looking with their interest rates and so what they do is they buy a block of bonds that's gonna have a certain duration, a certain amount of time that they're gonna be good for. But that's forward looking. And so essentially what we can do, given the interest rate environment that we're in, is we can lock in those rates for a longer period of time. So it's kind of the opposite of the bank situation. So in this case we're going okay, we could lock in those rates for five, seven, 10 years, essentially, and the way that the spread that's built into it is built in for that period, for that five, seven, 10 year period of time.
Speaker 2:
They're buying bonds for that length of time to cover that CD.
Speaker 3:
Yes, so it's different than the way the banks do it, but this is advantageous if the pieces make sense here, and so what we talked about in her case is okay, that could work. This is a simple version. We can get a higher interest rate. I think prevailing rates for five years are about 5.25 right now, which is pretty good, but that doesn't solve the income problem. So it solves the volatility problem, it solves the tax challenge essentially, but it doesn't solve the income problem. So then we go okay, what other products do insurance companies offer that address income? Okay, and this is the naughty A word, this is the annuity word. So you're getting to see. Okay, what's the thought process? How do we get here? Okay, we need income. So in this case, we're looking at okay, we need to create, you know, between 12 and $18,000 a year for her, for the, for the rest of her life if we can $1,500 a month.
Speaker 3:
Yeah, roughly, if we can. Now that was the ask. We're pushing it a little bit, sure we can do it, and so in this case we're gonna have, we're gonna have a product that has that tracks, an index. Okay. So what they do is they take that, that interest that they get from the bonds, and they buy options. But because we can lock in the higher rates right now, we can have a higher participation rate with those indexes.
Speaker 2:
Okay so you brought that to me and and that's literally how most financial advisors well, they would jump to annuity. Someone walks in and says I need income. They're like great, we can do this five minute process, fill out some paperwork, sign that you're done and you have an annuity that will meet your goal of providing income. But if you talk to a, an attorney, who understands Medicaid and is thinking five, 10, 15 years down the road, I'm like hang on. A second annuities have huge. So Medicaid looks at annuities. Well, there's annuities are different. Okay, there were some annuities that once you annuitize it, it is just payments nothing technically.
Speaker 3:
You don't own it. The insurance company right.
Speaker 2:
And there, they are making you payments and that's all you can get out of it, and so under Medicaid rules, that's income. But some annuities still have a cash value and they're just sending you payments from it, and so if there is a cash value, medicaid counts that as as cash, and if it's over $2,000 you're disqualified from Medicaid. Oops, so, yeah, so that's a problem, and so we need to cash it in. Well, we can cash it in, but typically there were huge surrender charges that are basically what was paid to the agent who sewed this to you.
Speaker 2:
Okay, I get aggravated because people say, oh, I bought a hundred thousand dollar annuity and see my paperwork here says there's a hundred thousand dollars there. Sometimes there's even hundred, fifteen, hundred, twenty, because they give you a bonus. And you're like, oh well, man, he did that for free, my, my agent did this for free, because see, all my money's in this annuity. Well, yeah, that's true, until you want to cash it out and they're keeping out fifteen or twenty thousand dollars, you're like, wait a second, what's this for? Well, that's the commission. We paid your, your agent, plus expenses and things like that. So, as an order law attorney, had she come to see me in five years needing nursing home care. And I'm thinking of this. I'm like hang on, ian, what are the surrender charges on this? Because she's going to lose a chunk of change. If we need to cash this in and we need income of eight, nine or ten thousand dollars a month, this annuity is not doing it, so I've got to get her on Medicaid, and so that's my objection.
Speaker 3:
And then you're like oh yeah this is what this is what's great, so, and this is similar to the way that we had the conversation, which is, which is fun, you know, one thing I want to add about surrender charges is typically what's happening is, you know we talked about how the insurance company is buying a block of bonds. You know they're expecting to hold them for the period of that contract, sure, and so if they don't, they have to sell those at a loss, right, and so the insurance company is the. They're the big partner in this contract. Guess who takes the guess? Who takes the loss? Not the big partner, yeah, and so this is just the way that it works, and so that's.
Speaker 3:
But a lot of times, that's not, that's not thought through very well, and what most people listen, that's going okay. We got a huge problem here. How do we make this work? Yeah, well, not all of the products that are available. Is this a problem for and this was fun to watch you go, oh, wait, we can do this Like yeah, so any product that I'm gonna use, and I have access to all of the products, except for proprietary ones with New York Life, guess how many times or Northwestern ones both beat up both of those big guys. Guess how many times those are at the top of the list in terms of the best ones.
Speaker 1:
They never are so we don't need them.
Speaker 3:
But I have access to all of them, but I don't use all of them. We wanna find the right tool for the specific situation, and so the thing that we need to have in this case, and in every case when I use one of these tools is there's an option it's sometimes called a rider, but not always where, if you have to go into a nursing home between 30, 60, or 90 days, we can take all the money that's in the contract out surrender charge free, and that's not on every annuity, obviously it is not, and so that's something that we have to specifically look for, and that's something that we have to be thoughtful about putting in place, especially in a situation like this, and a person pays for that right. Well, no, they don't.
Speaker 3:
So it's built into the contract. So I suppose in one way you could say that it's kind of like your home in auto, right? Sometimes that whole package is built together and you get your price on it. But I will say that thankfully, these are becoming more and more common now because we've pushed and said, hey, this is an issue that we need to be able to solve when this comes up, and that's why the guy making investments from 1984 puts it in the standard annuity.
Speaker 2:
That costs my client tens of thousands of dollars to cash in.
Speaker 3:
And typically the type of annuity that that is is one that has an income rider on it, and so what's happening is, once that income rider's turned on, the function in the contract is you're getting income from that contract, but what the income is coming from first is your account value. So you still have an account value and it's coming from that first. And so that's where those types of products they're anticipating that it's gonna be a longer term thing, and so they don't always build those in. And I'll tell you this realistically the contracts that are the best contracts have this. The ones that aren't quite as good from not quite as good carriers don't have it, and so if you don't have one of these, we need to do a trade in. And it's like trading in a car, like okay, let's get airbags and seat belts here.
Speaker 3:
It's a car, but it doesn't have these really nice features Seat belts, and technically I mean, this is where the suitability standard comes in right it has four wheels. Technically it's a car, it's an annuity. You're getting income.
Speaker 2:
But and so, yes, that is the conversation that during this I said. You realize, this conversation we just had probably doesn't happen hardly anywhere else besides this office, because you have your lawyer doing his silo thing, you have your financial advisor doing their silo thing and those two silos never communicate and they don't think about what is really gonna be best for the client, and so the next layer of the conversation is okay, does it maybe make sense to gift that money now and have the daughter own that product?
Speaker 3:
That's the next conversation. Or the beneficiary, I should say own that product. Now we're thinking about it even a little bit differently, because now we have a little bit more flexibility in terms of what tools we can use. One thing we didn't talk about is, once you attain a certain age, the product offerings are much more limited, and so that could be a potential option as well. The challenge there is okay, if she does go into the, if the client does need to go into a nursing home facility, will that rider work Depends depends on how we set it up.
Speaker 3:
So this is like we've taken you from basic annuity planning to advanced annuity planning here, and so that's something that, in any given case, we've gotta think about. Okay, then what? What would we do in that situation? But that goes back to what's the ultimate purpose of the money. Is it meant to just take the income for the client or is it meant to go to the next generation? But if we could make it go to the next generation and still cover the needs of the client. That could be an even bigger win.
Speaker 2:
Yeah, so could the daughter be the owner and the mom get the payments?
Speaker 3:
Potentially so. This is where it would be a little tricky. We would probably have to have it be owned by a trust, and so that's where we have a lot more debates is when does a trust make sense? I think in this case it's probably a little bit too complicated for that to really make sense just in terms of the overall cost-benefit analysis there. But Think about, you know, one of the reasons I brought this up is, you know, if we think about some of these things in a little bit Longer term, this can be a really interesting planning tool for For gifting. You know, if we have a little bit of a higher asset level here and we intend for this money to go to whether it's the kids, the grandkids, nieces and nephews anyway, okay, what if we started gifting now, gifting earlier, and that that money has a longer time horizon and we can invest it differently?
Speaker 3:
A Lot of folks aren't thinking that way Because they're trying to make sure that they're covered for their life. But once we've solved that, okay, there's another. There's another thing that we need to think about is what's gonna happen next. It's gonna get eaten up by taxes. Are we gonna lose liquidity when that happens? So there it's. It's after we figured out how you don't run out of money, then what?
Speaker 2:
yeah, that's where we spend a lot of our time planning and I think this is in Interesting because I think there's a lot of people out there who would think two hundred thousand dollars it's not worrying about yeah.
Speaker 2:
It's not worth worrying about that much money. But in this lady's situation that was all she had and I think our conversation probably conservatively resulted in $20,000 difference at at least you're just going from. You know my. If I was a non-advisor, just an elder law attorney, I would say, okay, the easiest thing is just put it in the bank and just live off of it. Okay, that way, if if we do need to get you qualified for Medicaid, we can basically give away half, and so we take this cash, give it to your daughter, we can get you qualified very quickly, no surrender charges, it's just easy. But the problem is with cash. It doesn't make much.
Speaker 3:
Okay, we're not. We're not keeping up with inflation. Yeah, and that's the bigger issue here.
Speaker 2:
Yeah, and so you know that's my plan. Your plan, or the typical Advisors plan is yeah, let's just do this old-fashioned annuity that that will pay out maybe a thousand bucks a month, but then, when it has to be cashed in, you're gonna lose 20,000 bucks. Well, that's not good, and so it's. You know, but having this conversation, probably, and if you got one, even with the 90-day rider, what people need to understand is you can go into a nursing home and be on Medicare for up to 100 days, and so if, if those 100 days starts that 90-day look-back period or you know what's it called again, yeah, look, look back period, or the elimination, elimination period, that's yeah, we can start that, and so then, by the time you start having to pay for the nursing home, we can cash in this annuity, do our Medicaid planning thing with it and protect a good portion of it.
Speaker 3:
You know, I think it's not unreasonable to say that you know, and that's let's call that you know $25,000 over that three month period. I think that's fairly conservative, you know. So it's not unreasonable that the difference between us having this conversation and doing a little bit of thoughtful planning is a difference of between $30,000 and $50,000 over the next few years for these folks.
Speaker 2:
And that's just for $200,000. Yeah, if you've got half a million, three quarters of a million bucks working with us going through this process, where I give you my input, ian gives you his input and we come up with a really solid game plan, could be hundreds of thousands of dollars. Yeah, there's a great.
Speaker 3:
I need to. I'll put it on the show notes here and I'm going to feature it prominently on the website. I found this document from Kitsis he's like kind of the big nerd in the planning world, sure, and it quantifies and I love this because it's something I always try to do and sometimes it's hard, but it quantifies the value of advice and good planning and it is incredible to see how much value we can bring by doing stuff that either the client didn't even know was possible All the time you know, or things that I just take for granted because it's just prudent, it's just good planning and it's things from you know, tens of thousands of dollars to millions of dollars. And I mean, I am so confident that we can save people money that if we can't save you money, we can't work with you. Like we have a fiduciary obligation, we won't work with you. But that's never happened.
Speaker 2:
There's always something we can do to make a difference somewhere. So cool, so, yes, that is the conversation that we had. That probably rarely, if ever, happens outside of this office.
Speaker 3:
And I want to make sure that I'm very clear about this. We're not suggesting that this is the right plan for anyone particular. Okay, if you're listening to this, going, hey, that's what I need to do. No, what you need to do is have a conversation. You know, this is general information. This is not specific advice. But if you come and have a conversation with us, we can look at all of the unique details of your life and then give you specific advice, and it will very, very, very likely be different than this, because you're a different person Right.
Speaker 2:
The purpose of the show was to show how I, as an attorney, would think this way, a typical financial advisor would think one way, and we came together and came up with a much better product because both of our input, that's the sole purpose of this and that's having a conversation that never occurs elsewhere. So thank you all very much for listening today. Hopefully you learned something. If you would like to work with us, very simple call the office 479-6014-119. Even if you're not in Arkansas, you can still call the office. You can still work with EN. I will find you an attorney in the state that you're in. But if you're anywhere in Arkansas, we can do this, and if you're outside of Arkansas, you can still work with EN, but I will go through the process of finding you a very good attorney that will talk to EN and will do basically what we just learned.
Speaker 3:
Make sure that they're doing what we need to do.
Speaker 1:
Thank you for joining us on Wealth for Generations. We hope today's insights inspire and guide you in your financial journey. Remember, the path to wealth and legacy is unique for each of us and we're here to help illuminate your way. Before we part, a quick reminder this podcast does not provide financial or legal advice. The content discussed is for informational purposes only. Please consult a financial planner or legal advisor for advice specific to your situation. Visit us at wwwwealth the-number-four-generationscom for more resources and don't forget to subscribe to Wealth for Generations. Until next time, keep building your legacy, one decision at a time.