Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Brian Perry

In addition to overseeing Pure’s investment offering and platform, Brian works closely with Pure’s financial advisors, helping provide them with the tools and resources necessary to serve their clients and continue the firm’s mission of providing the highest quality financial education and planning to as many people as possible. He has been actively involved in [...]

Published On
October 22, 2019

Social Security strategies if you are married to a younger spouse and have a minor child, affected by the windfall elimination provision, considering divorce for a better benefit, or unsure of the restricted application. And should you spend 401(k) money before taking Social Security? Next, tax strategies for real estate: should you gift property now to reduce taxes later? Should you pay off your home? And discussion of the section 121 exclusion of gain from the sale of a principal residence on a split property.

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Show Notes

  • (01:01) 64 With a Much Younger Wife and Minor Child: What’s the Social Security Strategy?
  • (06:42) Windfall Elimination Provision vs. Social Security: Should I Work Two More Quarters?
  • (12:02) Should We Get Divorced for Social Security?
  • (16:55) Should I Spend My 401(k) or Take Social Security First?
  • (21:56) Social Security Restricted Application
  • (27:18) Property Gifting Strategy to Reduce Taxes?
  • (33:00) Should I Pay Off My Home?
  • (37:03) Section 121 Exclusion: Can You Split a Lot and Exclude a Portion of It?

Resources mentioned in this episode:

LISTEN: Spousal Social Security Claiming Strategies You Need to Know with “The Goddess of Social Security” Mary Beth Franklin

LISTEN: Social Security Changes in 2019

FREE DOWNLOAD: 6 Critical Social Security Facts Retirees Must Know


01:01 – 64 With a Much Younger Wife and Minor Child: What’s the Social Security Strategy?

Joe: All right. Robert from San Diego, “Joe and Al”.

Andi: Notice it’s Jo, J-O.

Joe: J-O. Robert.

Al: It’s a new way to spell your name.

Joe: Well it’s better than Joel.

Al: Yeah.

Andi: Except that’s the feminine way to spell Joe.

Joe: Yes. Maybe-

Al: That’s okay.  You have feminine qualities sometimes.

Joe: Yeah. “Joe and Al. I am 64 and always planned to take Social Security at age 70 and I plan on working to that age at least. However, I’m now married to a much younger lady and we have a 5-year-old daughter. My wife does not work. My question is about taking Social Security at 66, two months allowing us to take my benefits, as well as one for my wife and child or continue to wait until 70 to take our benefits. If I started 66, I estimate that we could collect over $200,000 prior to age 70 which could go straight to savings. If I wait till 70, my monthly benefit would be almost $1,000 more per month. We will need to rely on Social Security for a good portion of my retirement income. I would love to hear your thoughts on this decision. Thank you”. All right Robert. So he’s got a 5-year-old and he’s 64 years old.

Al: Yep and his wife is a much younger lady.

Joe: Much younger lady.

Al: So this required some analysis which I went to our planning department and had Susan –

Andi: Look at the guy with the prep here.

Joe: Really.  I could do this in my head. Take it now. Take it at 66, get the full family contribution benefit and move on.

Al: Wrong.

Joe: Damn.

Andi: Ohhh.

Joe: What would say life expectancy is?

Al: So first of all, I’d just had to do a little bit, because he didn’t say his wife’s age. So if his wife has a 5 year old daughter-

Andi: they have a 5-year-old daughter.

Al: Yes they. OK. So, and he’s 64. I’m assuming his wife is at least 20 years younger because-

Joe: 44?

Al: 44. Which means she had a daughter at 39. I mean that was what I used for purposes of this calculation.

Joe: So you’re calculating her survivor benefits.

Al: Yes. That’s why.

Joe: OK, that makes sense.

Andi: So if she’s even younger than that, then does this continue to work, this that you figured out?

Joe: Well because what he’s doing is that, let’s say if she’s 20 years younger he’s going to claim his benefit at age 70. He’s got $1,000 higher benefit. So you calculate that he’s killing poor Robert off and having his young wife have the survivor benefit for many years to come. So she still can’t claim the survivor benefit until age 60. Did you calculate that?

Al: I calculated when, let’s see-

Joe: When did Robert die?

Al: Let me back up a second and explain and then I’ll answer all those questions. So if he took it at full retirement, age 66 and two months, because his child is 17 or younger, they get the children’s benefit and the spousal benefit. And so it’s a fair amount of money. And so we calculated like he said about $50,000 a year. So that’s a couple hundred thousand dollars a year by the time you get to age- or not per year, total, by the time you get to age 70. So then it’s like well why shouldn’t I do that? And the answer is you’ve got to look at this in terms of break-even. And usually, when we talk about break-even analysis it’s around 81, 80, 81. This break-even analysis is 87. And that would be when she is age 67 if my assumption is right that she’s 20 years younger. But that’s the break-even point if she’s age 67 and then he passes away at whatever age it doesn’t really matter, she gets the survivor benefit at that point. And if she lives till, we just ran in this to her age 85, then it’s all gravy at that point, past his 87, past her 67. Because it’s a higher benefit and then she’s receiving the survivor-

Joe: Social Security is not going to be there.

Andi: That’s what I was going to say, not necessarily it’s not going to be there, but-

Joe: Take the $200,000 Robert.

Andi: They’re going to have like 75% of their benefit or something like that?

Joe: 2035. But we’ll see. That’ll change.

Al: Yeah they’ll change it. Now I would say wait.

Joe: You’re going to say wait, I say take it. I say take it.

Al: You say bird in the hand.

Joe: Yes. Invest it. Did you run that?

Al: No. Because they’re going to spend it. That’s why.

Joe: No. That $200,000 you go straight to savings. Put that $200,000, put that in your overall retirement accounts, let it compound. I think that’s right. Break-even’s 87. Robert’s 87. So he’s got a live past age 87 for him to wait till 70 is going to be better? In his life?

Al: But because she is so much younger-

Joe: I understand but that’s his life’s break-even is at age 87.

Al: Yeah exactly.

Joe: So I don’t know. Maybe she’s going to leave him.

Al: Maybe.

Andi: I guess you do have to consider worst-case scenario, but geez.

Joe: Maybe he does have a bigger benefit.

Al: So I would, personally I would say because of the survivor benefit that works better for the couple to wait.

Joe: For the couple. But to Robert in his retirement and until his age 87 it’s going to be better for him to take the family contribution.

Al: If you just look at Robert.

Joe: So there you go, Robert. If you want to just kind of skid your tires a little bit better?

Al: Got it. Have a little more fun when you’re younger?

06:42 – Windfall Elimination Provision vs. Social Security: Should I Work Two More Quarters?

Joe: All right. Scott writes in. He goes “If I have a-” First of all Scott, a common way to start an email would be like, ‘Dear Joe and Al’-

Al: Yes.

Simultaneous: “Love the show.”

Al: “Been binge watching all over YouTube.”

Joe: “Andi’s, oh she is so great.” Versus just jump right in, I mean you know it’s kind of rude.

Al: Well plus the way he asked if “I have a”. Do you have it or not?

Joe: Yeah. Do you have it or not? What the hell is this all about, Scott?

Al: What do you mean, if?

Joe: “If I have a city government pension of $150,000 a year with no Social Security paid-” Oh look at you. Life is tough, Scott.

Al: It’s a pretty good gig.

Joe: Yeah. Right? He’s got “38 Social Security quarters from prior work. Is it worth it for me to come out of retirement?” Oh he’s coming out of retirement “and work the other 2 quarters needed for Social Security benefits, in light of the Windfall Elimination Provision. Thank you.” Scott. If you go back to work for 2 quarters I’m guessing, I don’t know what your Social Security statement is, but if you have $150,000 government pension, I’m guessing you worked for the government for a pretty long time and you had a pretty high well-paying job and your Social Security quarters of 38 were maybe a long time ago. And so I’m guessing you could, you would get something but it wouldn’t be much.

Al: It wouldn’t be much. But on the other hand, I think he only has to earn, what, $600 or $800 for a quarter. To have it count?

Joe: Yes. I don’t know what the exact amount but close enough.

Al: But something like that. Let’s say $1,000. You earn $1,000. Part-time, 2 quarters, you’d probably get something. It won’t be tons. But yeah, I would probably do that.

Joe: But why, why?

Al: Because why not get a couple extra bucks?

Joe: I guess but would you want to go back to work now to get an extra $3 a month?

Al: No. But I can have my son pay me the-

Andi: “You must earn at least $1,320 in a quarter in 2019 for it to count.”

Joe: There you go. $1,300.

Al: Ok, that’s the amount. I can do consulting. I could do something to make that money. Right?

Joe: Yeah. No sure. But I would have to look at a Social Security statement because he would probably not be eligible.

Al: Here’s another way to ask the question. I know there would be very little benefit but is the benefit something greater than zero? Does this Windfall Elimination Provision take a person or a couple down to zero?

Joe: That’s a good question. And I’ve seen it. I don’t know.

Al: Because I’m not sure either. So I guess we’re not doing a very good job of answering it. But I guess we’re presuming that though virtually all of your Social Security benefit would be eliminated, you might get some benefit.

Joe: Because what the Windfall Elimination Provision is, is that Scott works for the government. He works for the city of San Diego or did. And did not put dollars into Social Security. He put it into the pension. So he put zero dollars into the Social Security pool, all of his dollars went into the pension. And so it’s like even though he qualified he had 38 quarters, you need 40 quarters to qualify for a retirement benefit. So he’s asking maybe I go back, get a couple quarters of work, would that pay off? Even though he understands that he’s in light of this Windfall Elimination. So Social Security says we’re not going to give you the full Social Security benefit because you already have this other pension. And so they eliminate or they don’t eliminate it entirely, but they reduce the overall benefit substantially, to a certain-

Andi: “The maximum Social Security reduction will never be greater than one half of your pension amount. If you have more than 20 years of substantial covered earnings where you paid Social Security tax, the impact of the WEP begins to diminish. At 30 years of substantial covered earnings, the WEP does not apply.”

Al: That’s Social Security.

Joe: Right.

Al: But he’s got less than 10.

Joe: 5.

Al: He’s got 38 quarters. He’s got 9 and a half.

Joe:  He’s got 9 years. So the WEP is going to be large.

Al: It’s got to be large. I don’t think it’s 100%-

Andi: But it won’t be greater than one half of your pension amount.

Joe: So one half of his pension is $75,000. So it won’t be greater than $75,000?

Al: It’s probably $800 a month if that. Maybe $500 a month.

Andi: So should he work the extra 2 quarters or not?

Joe: I wouldn’t waste my time. You got $150,000 pension.

Al: I would. I’d earn $1300 a month and see what happens. That’s what I’d do. Like what if you had a rental property? You could pay yourself a little income from that.

Joe: Well that sounds, getting a little gray there Clopine.

Al: Or maybe your son has a rental property and you go and do some maintenance. Or you cut the grass. Whatever. You can figure it out.

12:02 – Should We Get Divorced for Social Security?

Joe: All right Michael from Oceanside. “What happens to each of the individual Social Security benefits if they get divorced? Are either or both impacted? My wife has a huge health care issue that requires her to live elsewhere. And I don’t know if it behooves us to get divorced”. So no. If you get divorced, here’s what happens. So let’s say I’m married. I have a lovely spouse and I have a benefit and she has a benefit. So her benefit is $2000 a month. My benefit is $2000 a month. As a household, it’s $4000 a month. If you get divorced, she takes her $2000. I take my $2000. No biggie right. You’ll just lose.

Al: Because it’s even.

Joe: It’s even.

Al: And by the way, we’re talking about California community property law. And we’re not attorneys.

Joe: Thank you. Now let’s say if you get divorced prior to you claiming your benefit. Because that kind of sounds like what he’s asking maybe?

Al: Or if it’s uneven benefits, one spouse gets $2000 one gets $1000.

Joe: But still, let’s say they’re claiming. Let’s say that I get $1000, she gets $2000, we get divorced. I still get my $1000, she gets her $2000. And then we go to court and then you look at I’m making less-

Al: She probably has to pay you alimony to even it out. If that’s your only income.

Joe: I think when you look at if I get a divorce, what does this all mean? So if she’s got a huge health benefit, I wonder if he’s saying-

Andi: Health issue.  Doesn’t say health benefit.

Joe: Issue. The opposite of benefit. So she’s got a health issue. I’ve seen this before too. It’s like I’m just going to divorce my ailing spouse. So they can qualify for federal aid. I don’t know if that’s what’s going on. But let me just talk about divorce Social Security benefits. The spousal benefit is this, if you’re married you could claim your benefit or your spouse’s, or half of your spouse’s, whichever is larger. So if let’s say I never had a benefit, I was a stay-at-home dad, my wife’s benefit is $2000. My benefit, my spousal benefit would be $1000. So let’s say if I get a divorce, as long as I was married to that individual for10 years, I could still claim the spousal benefit on a divorced spouse.

Al: Yes that’s true.

Joe: It does not reduce my divorced spouse’s benefit. Sometimes people want that to happen. They’re claiming on my benefit. I can’t believe-

Al: They’re not allowed to. They didn’t ask me.

Joe: I’m going to talk to my attorney.

Al: They can.

Joe: Yes. No, it’s just a factor that they’re using. So your benefit is $2000, your ex-spouse can then claim the spousal benefit as long as they were married for 10 years. So if that’s the case then you were married for 10 years, now you’re divorced. That spouse can still claim a spousal benefit as long as it qualifies.

Al: As well as a survivor.

Joe: And then a survivor benefit. Yes. You can still claim the survivor benefit as well. So I don’t know what really more I wanted to say about-

Al: Yeah. I think that was pretty clear. I mean there’s a couple of caveats there. Because you said if my wife’s benefits are $2000, that I can get a benefit of $1000, but my wife needs to be claiming first of all which in that example. But then I’d have to be at least full retirement age to get that full $1000. And if she’s getting $2000 at age 70 she would’ve got a lower amount at full retirement age 66. So there’s a little more math to it, but that’s the principle.

Whether your situation is completely stock-standard or more unusual, like the ones we just heard, claiming Social Security is one of the most important decisions you’ll make for retirement. The Social Security Handbook walks you through everything you need to know: who is eligible, how benefits are calculated, the difference between collecting early and late, working while taking Social Security, the rules around spousal, survivor and divorced benefits, and the all-important taxation of your Social Security benefits. Click the link in the description of this episode in your podcast app to visit the show notes and download The Social Security Handbook, yours free from Joe and Big Al and Your Money, Your Wealth®. Now Joe is out for a few minutes, but we’re bringing in Brian Perry, CFP®, CFA, Pure Financial’s Director of Research, to help Big Al answer a couple more Social Security questions.

16:55 – Should I Spend My 401(k) or Take Social Security First?

Andi: This next one comes from TW. “I need a simple method (haha) for deciding whether to take the 401(k) money first, like at 62 or 65, or take Social Security first, say 65 and the 401(k) later at 70. It seems complicated for me to assess. I’d like a discussion of all the factors to consider”.

Al: Wow OK. That’s a pretty open-ended question but a good one because a lot of folks are, I think a lot of people, the majority of people actually start taking their benefits just as soon as they can. Which is age 62 and that’s not necessarily the right answer. Because the way it works currently is full retirement age is age 66. And let’s just say at that age you get $2,000 a month in benefits. And so if you take it at 62 it’s a 25% discount, so it’s $1,500. If you wait till age 70, then it’s a 32% increase, so it would be $2,6…

Brian: $50, $70, something like that.

Al: I should have done the math.

Brian: $2,670, or so, yeah.

Al: Anyway so it’s really a difference between we’ll call it $2,600+ to $1,500. And so that’s always a discussion as to when you should take it and how you should consider it. So a couple of things. And you can add as we go, Brian. First of all, if you need the money for Social Security, take it. I mean that’s the easiest thing to answer. If you can postpone retiring so you still have income then that helps you because your Social Security will be what benefit will be higher plus you have another year or two or whatever to save which increases to your portfolio and you’re not drawing money out of your portfolio. So it’s actually really useful to work an extra year or 2 or 3 or 4. It makes a pretty big difference in your retirement. So that’s first off. But what about the computation I guess between drawing from your 401(k) versus Social Security?

Brian: Social Security especially from 66 until 70 that’s an 8% growth rate. That’s tough to get in financial markets. You may be able to get it but it doesn’t come with a government guarantee. And so the idea of can you invest your portfolio and get a government guaranteed 8%? And Social Security has a little bit of tax benefit too there, it’s not taxed in the state of California. The maximum amount of it subject to taxation at the federal level is 85%. So that’s tough to match in a portfolio. And so like you said if you can wait for Social Security a lot of times that makes sense but a lot of times it’s a year by year decision. So you don’t have to decide hey I’m going to wait till 70 and lock it in stone. You can see what’s going on. If your portfolio falls in value if we’re in a bear market or maybe at that point you turn on Social Security at 67 and a half or something like that if you need to.

Al: So then you don’t have to draw from your portfolio when it’s down. So that can be a way to go. And I think when you just do the straight math, the longer you can wait, that if you can pull money from your 401(k) or your non-retirement accounts and let your Social Security grow that’s usually a good thing to do. Although I will say there are break-even points if you’re just looking at this in terms of raw numbers. And the break-even point is usually somewhere around 80 years of age. So that would be another consideration. If you believe you have impaired life expectancy you might want to draw those benefits earlier, particularly if you’re single. Now if you’re married it’s a little bit different because you actually want to look at the life expectancy of both of you, the two of you. Let’s say I’ve got impaired life expectancy but my wife is going to live forever. I might want to wait on my benefits so that when I pass she would get a higher benefit with the survivor benefit. So you’ve got to look at both ages. When you’re single you might look more just towards your own.

Brian: And that’s an important consideration. As we’re assuming that somebody is gonna live a full life. But if you’re going to not live as long you want to maximize your benefits. The other thing is you can get creative with it too. It is possible to take Social Security and then freeze the benefit and let it continue to grow again. So I just imagine a scenario where stocks are down sharply, it’s 2008 or something like that. You don’t want to draw your portfolio so you start Social Security and now a few years later your portfolio’s recovered. Maybe you freeze Social Security, let it continue to grow and then draw down your portfolio at that point.

Al: So there’s quite a bit of flexibility.

Brian: There’s quite a bit of flexibility.

Al: But I would say the math generally works out better to take from your 401(k) and delay your Social Security. But there are a lot of other factors to consider.

Brian: Agreed. And unfortunately, it would be nice if there was a simple way to kind of figure this out and discuss all the factors in a simple way. But it’s just not like that. Retirement planning is not simple and straightforward. A lot of times there’s a lot of variables.

Andi: Well and Al mentioned the fact that if he has a shortened lifespan and his wife is going to live forever, I mean that changes things significantly.

Al: Yes it does. It does. And if my benefit is higher then I need to hang on as long as I can.

Brian: And if she’s going to live forever, invest all in stocks because at that point she’s an endowment.

Al: That’s right. That’s exactly right.

21:56 – Social Security Restricted Application

Andi: This one is from Bob from Delaware. He says “I have a question regarding the restricted application Social Security Strategy which appeared January of 2019. My wife was born in 1953. I was born in 1950 and began collecting at age 66. My wife will turn 66 in November and would like to claim a spousal benefit and restricted application to boost her benefit. Social Security informed us a surviving spouse will only be eligible for the primary benefit and not the boosted benefit claimed at 70. Can you offer any clarification? You seem to indicate the surviving spouse would receive the higher benefit”.

Al: Good question. We have a couple different things going on. There is a spousal benefit and there is a survivor benefit. And there are different rules and the spousal benefit, I guess that the big picture rule is that you can either take your own benefit or you can take half of your spouse’s full retirement benefit which right now is age 66, whichever is higher. But there are these deeming rules and it gets super complicated. Talk about mud, clear as mud – I don’t really want to get into that right now because that’s actually not even relevant to this question because Bob’s spouse was born in 1953 which is before 1954. Which is when this date changed. So the answer is that Bob, your wife can at age 66, go ahead and claim the spousal benefit which is half of your benefit at age 66. And then continue to have her benefit grow till age 70 and then switch to that benefit if that’s a higher benefit obviously at that point. That’s still available if in a couple of cases, one is if the person getting the spousal benefit was born before 1954 and if your other spouse is already collecting benefits. Those two things have to be going on which is true in this case. So that can work pretty well. But Brian what do you think about her question or Bob’s question I should say about Social Security informed as a surviving spouse would only be eligible for the primary benefit not boosted benefit claimed at 70?

Brian: I’m going to be honest, I can’t believe that with you in the room you’re asking me Social Security questions.

Al: I’m just trying to draw you in. See if you know the answer. See if I need to coach you.

Brian: This is a test.

Andi: Hot seat. Brian Perry.

Brian: What was the question again?

Al: I knew you’d say that. The question is, so we talked about a spousal benefit which by the way that’s what happens when your spouse is alive. But when your spouse passes away and now it’s a survivor benefit. Do you get the survivor benefit at age 66 or 70? Or how does that work?

Brian: You know it depends. So if your spouse is not yet 60 when they pass or not yet up to the Social Security eligibility when they pass, you can at age 60 claim your spouse’s survivor benefit. It will be reduced based on a reduction for you’re not being full retirement age but you can get it at that point. If your spouse passes away after Social Security eligibility you get their award as of the age they were when they either a) took Social Security or b) when they died. I mean that’s one of the reasons that with a lot of couples if one of the spouses has a much higher Social Security award, maybe they worked more outside of the home or made more money. A lot of times the longer that they wait to take Social Security the better off because you can then get a higher award. So in those instances waiting till 70 a lot of times can make a whole heck of a lot of sense for the higher-earning spouse.

Al: And I might add one thing. In terms of the rule of receiving the benefit, at age 66 that’s the full retirement age. That’s really like if your spouse dies before that age then when you start collecting at age 60 it’s based upon your spouse’s full retirement age. But there’s a discounted amount because you’re collecting early. But in terms of the benefit, like for example, I think Bob is essentially asking if his wife gets her benefit at age 70, then if she passes away does he get that benefit or full retirement age for her. And the answers he gets the 70-year-old benefit. And then there are all kinds of different rules. What if the spouse passes between 66 and 70 then it’s what they would and they’re not receiving benefits, it’s what they would’ve received on that day had they started that they passed away, so that boy there’s a lot to Social Security.

Brian: It really is clear as mud.

Click the link in the description of today’s episode in your podcast app or visit the podcast show notes at YourMoneyYourWealth.com to read the transcript of this show, listen to our previous discussions about spousal Social Security benefits with “the Goddess of Social Security” Mary Beth Franklin, and to access other free Social Security resources like 6 Critical Social Security Facts Retirees Must Know and Social Security Changes in 2019. Up next, three questions about real estate and taxes. We’re getting a lot of questions about taxes as we approach the end of the year, so I’ve included a link to the 2019 Tax Planning Guide in the show notes at YourMoneyYourWealth.com as well. While you’re there, click Ask Joe and Al On Air to send in your money questions, compliments, complaints or stories, and Joe and Big Al will answer right here on YMYW.

27:18 – Property Gifting Strategy to Reduce Taxes?

Joe: We have Greg calling in or writing in from Temecula. Oh, wine country here. “Hi, guys. I’m living in beautiful Temecula, California.  “My mother-in-law, she has $1,700,000 in retirement, her RMD is about $70,000 a year. She collects rents of $12,000 a month from a business property in a B-Trust. She also takes a director’s fee of about $40,000 a year from her other businesses and another $12,000 a year from Social Security. She hates paying all the taxes and doesn’t need or want all this money. Great problem to have. Is there a way she can give her son and daughter 1/3 of the property each now so all 3 can make about $4,000 month off it not screwing up gift law? She already maxes out gifting for her kids and grandkids. Thanks.” We’re missing some info here, a little bit.

Al: Let me try to dissect it. Can she give her son and daughter 1/3 each? So that’s only 2/3. I guess she would keep 1/3.

Joe: Keep 1/3. And then they all split $4,000 because it’s $12,000.

Al: Right off the bat there’s a potential problem because it’s in the trust. In the B-Trust.

Joe: It’s irrevocable.

Al: Yeah irrevocable. It’s owned by the B-Trust. Now if the son and daughter are the beneficiaries you might be able to go to an attorney if that’s what you really want to do and distribute some early. But she doesn’t really technically own the B-Trust.

Joe: She doesn’t. She’s got income rights to the B-Trust.

Andi: Wait, wait, wait. What is a B-Trust?

Joe: If someone passes away and if their estate is to a certain level, some people did this that they shouldn’t have done, is that they split the trust up into 2 trusts.

Andi: A-Trust and B-Trust.

Joe: A-Trust would be the living trust. B-Trust would be the decedent.

Andi: OK.

Joe: OK. So the decedent trust, so let’s say the annual exclusion for estate tax, to make this really simple, was $5,000,000. We had a $10,000,000 estate. So one spouse dies, $5,000,000 goes in the decedent trust, the other $5,000,000 goes in the survivor trust. And the reason for that is that because let’s say I died I wanted to protect my half of the wealth of the family. So that is irrevocable. My wife can have income to it. But those beneficiaries are going to, let’s say our kids, she gets remarried. And then that remarriage, they have kids, they can’t touch the B-Trust. That B-Trust is going to my beneficiaries. So it’s totally irrevocable. So, there are properties in the B-Trust if it’s kicking out all this income and he’s like well hey can’t we-? She doesn’t want the income. She could disclaim the income though to the kids.

Al: I don’t think so. I think that’s only, and we’re not attorneys.

Joe: Right. Caveat. Please consult an estate planning attorney.

Al: Please disregard everything we’re about to say. I think that the disclaiming part happens at the trust or the will level.

Joe: But if she’s getting income from the B-Trust, she can’t disclaim that income?

Al: I don’t think so because she would be the income beneficiary. She could leave the income in the B-Trust and then B-Trust pays taxes on it at higher tax rates. Could do that.

Joe: That doesn’t make sense.

Al: Not really. I guess I have seen a case, at least I’ve heard of a case where there was one beneficiary in the B-Trust and the beneficiary and the spouse, the surviving spouse, wanted the asset to go to the beneficiary.

I don’t know if you have to go to court or you have to go to something to try to break the trust. But if it’s the same-same – but in many cases, it’s not the same beneficiaries and you’re kind of stuck. You’re stuck with how it was set up because it’s irrevocable. So, in other words, your mother-in-law doesn’t really have control.

Joe: The reason for that it avoids estate tax upon her passing.

Al: That’s right and now-

Joe: there’s a reason why the B-Trust exists, because that $5,000,000 could grow to $20,000,000. And then when she dies. That $20,000,000 then goes to the heirs estate tax-free.

Al: That’s right.

Joe: But then there’s gonna be capital gains on whatever the growth is within that asset.

Al: That’s exactly right. There are reasons to do it.  For estate taxes, there are also reasons, if it’s a blended family and you each have different kids to set up A-Trust/ B-Trusts so that you even if you pass away you know that your heirs are going to get at least half of the assets. Because the other part, that A-Trust is still, it’s a revocable trust that can be changed.

Joe: So if the property is in the A-Trust or there are other properties in the A-Trust or things like that that she’s getting then she has full control, she’s the trustee of that.

Al: So she can. And it says that I guess she’s already maxing out the gifting.

Joe: So but what’s the estate? You know what I mean? She could gift a lot more if the estate is under let’s say $10,000,000.

Al: People don’t realize that if you give more than the $15,000, you just have to file a gift tax return and it reduces your future exclusion which is like $11,000,000+ per person.

Joe: So let’s say the estate is worth $5,000,000, she could give all of it. There’s no gift tax.

Al: But not in the B-Trust.

Joe: Not in the B-Trust. The B-Trust is irrevocable. Hope that helps Greg.

33:00 – Should I Pay Off My Home?

Joe: I got Matt from Carlsbad. He writes in, “I am retiring from my first career next year with a pension. I’m considering paying off my home free and clear early and beginning a second career. I’ll be considered cash poor for about a year but would have saved a considerable amount of interest and would own my home. Would this be a good move? Thank you”. I’m guessing Matt is in the United States Navy and he is retiring from service and he’s getting a pension and he’s starting his second career and he’s probably 40 some odd years of age. I’m guessing.

Andi:  Wow, you’re like the Sherlock Holmes of finance.

Joe: I’m guessing here.

Al: I would agree with that Carlsbad is right near Camp Pendleton.

Joe: That would not be Navy but, that would be the Marines.

Al: I’m guessing he’s a Marine. Same thing though.

Joe: Got it.

Al: So at any rate. Typically those that retire young-

Joe: When they say “second career and I’m getting a pension” you usually don’t get a pension and start a second career. Well, you could. I mean it could be law enforcement. I don’t know Matt. I’m just spitballing here.

Al: It could be. But what do you think? Good idea, bad idea?

Joe: I like the idea.

Al: I don’t.

Joe: I don’t care.

Andi: I like it when you guys don’t agree.

Al: I wouldn’t do it because, well, of course, we don’t have enough details to start with. So based upon what little we know, I don’t like the idea of spending all your capital to not have a mortgage. What if something goes wrong? What if you don’t find that second career?

Joe: He’s got a pension. He’s got income, guaranteed.

Al: He’s going to be cash poor. What if something happens? What if he wrecks his car? What if he has some kind of medical need? What if he-

Joe: He’s a Navy Seal.

Al: What if he was to go on a trip? What if he’s got a son or daughter-

Joe: Well just keep enough in cash. That will be a safety net.

Al: So that’s probably a good way to say it, is figure out what your short term cash needs, have an emergency fund as well. And then if you still have money extra then yeah by all means.

Joe: Yeah I don’t know how old Matt is. I don’t know what his pension is. I don’t know what his income is. I don’t know what other assets that man has. I don’t know anything about Matt. Just knowing that he’s going to retire from his first career with a pension, and should he pay off his mortgage. I think emotionally speaking everyone wants to be debt-free. But is it financially wise? Not necessarily. Interest rates are at all-time lows. He’s probably got a pretty low-interest rate on his house. You know it could be 3% or 4%. I don’t know the likelihood if we see those low rates. We could. So I don’t know, if it makes you feel better man. And you’re young enough to pay it off, and then you can save a bunch of money, then you don’t have a mortgage, you own your home. I like the idea. You have to save the hell out of your paycheck coming in because now you’re double-dipping. You got the pension and then you’re going to have an income. So your pension, 100% of that, save it.

Al:  So the answer to me depends on whether your short term needs and emergency needs are met.

Joe: You’re a big like emergency fund guy.

Al: I am.

Andi: That’s important stuff, Joe. Do you have an emergency fund?

Joe: That stuff is so boring.

Al: I am big on that.

Andi: It’s boring. I tell you it’ll be real exciting if you have an emergency and you don’t have one.

Joe: Make sure that you have an emergency fund.

Al: Yeah I used to be a big proponent of being invested at all times and then the Great Recession hit and then I changed my mind.

Joe: You got burned, huh?

Al: I got burned a little bit on my real estate.

Andi: Joe wants to live dangerously.

Joe: No, I have a cash reserve. Of course I do.

Andi: OK.

Al: $1,000? Like Dave Ramsey recommends?

Joe: No. It’s at least twelve months of my income, um expenses.

Al: Twelve months’ expenses. Oh, that’s what, $12,000?

37:03 – Section 121 Exclusion: Can You Split a Lot and Exclude a Portion of It?

Joe: Dennis from Coronado, California. Dennis, Dennis, Dennis.

Al: Yeah we know you, Dennis.

Joe: Yes we do know you. Denny.

Joe: “Andi. I have another tax question for YMYW. Assuming Section 121 duration and ownership requirements are met-“

Al: Sounds like a CPA wrote that.

Joe: Yes exactly. “Can a homeowner exclude a portion of the gain on the sale of a lot split-off from the parcel the principal residence is on?” Dennis. Seriously, you’re doing your extended return right now and he’s like oh my God, what do I do? Well, I gotta call Big Al.

Al: What do I do? Well Dennis, first of all, you’re a CPA who used to work for me. Didn’t I teach you how to do tax research?

Andi: He’s doing it right now.

Al: This is how he does it. Anyway. Because you wrote YMYW, I will answer your question. I have no choice. So here is the answer. And according to Steven Fishman, an attorney because I don’t know the answer. So but anyway this seems to be pretty much on point. So what he said is yes. You can split your lot and you can-

Joe: So let’s back this up for our listeners.

Al: All right. I suppose we should translate it.

Joe: Yes. OK. So assuming Section 121 duration and ownership requirements are met. So that’s a primary residence. So you’ve got to live in your house 2 out of the last 5 years and own it.

Al: Yeah. Two out of the last 5 years. So we translated half of it so far.

Joe: So with that, you can exclude up to $250,000 of gain if you are single, $500,000 if you are married. So now the question goes on. “Can a homeowner exclude a portion of the gain on the sale of a lot split-off from the parcel the principal residence is on?”

Andi: So is he’s saying if he’s got like a one-acre lot and the house is on it can he split it in half and-?

Al: He’s saying he probably did split it in half and now he’s trying to figure out and he’d probably sold the lot and he still has the home. Can I get part of the exclusion here? So in that example, the answer is no unless you sell your home within the same 2 out of 5 year period. And Dennis let me tell you what the rules are. So here’s where you can do it. This is an example written by this attorney which I assume is right. I don’t know that for sure. But at any rate, it says if you own a vacant lot surrounding your home which would be a lot split that you sell separately from the home itself it can qualify for the exclusion. If you answer yes to all of these things. The vacant land is adjacent to the land containing your home which probably it is. The sale occurs within 2 years before or 2 years after the date of the sale of your residence. So here’s where if you’re going to sell your residence, yeah this works. If you’re not going to sell your residence, forget about it. The third thing is you own and use your vacant land as part of your main home. And three is the use of vacant land satisfies the 2-year ownership and use rule. So basically what they’re saying is and even if you have like 2 separate lots, you didn’t even do the split yourself, you just bought your home and then you bought another vacant lot next door that’s adjacent to it. If you sell em both within a certain period of time you can apply that exclusion to both of it. But if you sell just one like the lot then no, you’d have to sell the home itself.

Joe: Hopefully that helps, Dennis.

Al: Yeah hopefully. Actually, more importantly, hopefully, Steven Fishman Attorney at Law, is right, in the article that I found. Because this kind of stuff, I will say is very hard to find in the tax code.

Andi: That’s why he contacts you because he knows that you are the man.

Al: But I just I typed in lot split Section 121 exclusions, the first thing that came up. Dennis, you can do that. I know you can.

Joe: Okay. “So what if a house were to be built on the split-off lot and sold?”  So, Dennis, he was talking about Section 121 exclusion. So that means that if you lived in your house 2 of the last 5 years, you can exclude $250,000 of gain if you’re single, $500,000 if you’re married. And he was curious, “can a homeowner exclude a portion of the gain on a sale of a lot split from a parcel?” So he’s trying to do some creative tax strategy here.

Al: Game the system? Yeah, he’s trying to get the exclusion on both the parcel A and B after the split. And we answered that question by saying if the lots were contiguous, then the answer would appear to be yes, as long as he had lived and owned 2 out of the last 5 years after you’ve sold.

Joe: Contiguous.

Al: Yeah. You like that word?

Joe: First time I’ve ever heard it.

Al: Touching? Dumb it down a little bit? So you could put one foot in one lot and one foot in the other? That’s contiguous.

Joe: Thank you.

Al: Does that work for you?

Joe: Yes, that works out perfectly.

Al: So it’s like you know Four Corners, have you ever done that?

Andi:  Be in four states at one time?

Al: Yeah. Four states at one time, two hands and two feet. You take your picture. Everyone looks like a tarantula. It’s that. That’s adjacent.

Joe: Thank you. Contiguous.

Al: OK. Dennis.

Joe: So what if a house were to be built on-

Al: So now you subdivide it first. And I told you it was contiguous so you could do it. Now, what if you build a home on that lot and sell it? So I guess theoretically, you could then take a partial exclusion for the part of that property allocated towards the lot. I think so. But you know what this is now getting, you probably want some real honest-to-goodness tax research as opposed to two yahoos and then-

Joe: You’re getting into some deep legal stuff here Dennis. You know, “I’m just going to write in to Big Al. He can say big words.”

Al: By the way, he used to work for me.

Joe: Yes, I know.

Al: Apparently, I didn’t train him well enough to do his own research.

Joe: All right, thank you Andi, great job Al, I’m Joe. We’ll see you next week. The show is called Your Money, Your Wealth®.


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