Doug Lodmell

Attorney, Douglass S. Lodmell, , J.D., LL.M. has been practicing in the area of asset protection since 1997. He is the founding member of the Asset Protection Council®, and managing partner and co-founder of Lodmell and Lodmell P.C.  He is recognized as one of the nation's leading providers of asset protection as well as the [...]


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 [...]

Published On
October 30, 2017

Asset ProtectionAsset protection attorney Doug Lodmell has the secrets to keeping your money safe in the event of a lawsuit. Social Security benefits and 401(k) contributions are going up, but the 401(k) thing may also be a nightmare. Al’s got 6 myths about freezing your credit in the wake of the Equifax double debacle, and the fellas answer your emails on when to take RMDs, family real estate entanglements, and how not to self-deal in your Roth IRA – because that’s illegal.

Show Notes

  • (00:58) 401(k) Changes = Nightmares
  • (15:14) Senate Passed a Budget
  • (21:21) Doug Lodmell – Asset Protection: When To Consider It?
  • (32:07) Doug Lodmell – Asset Protection Techniques
  • (42:06) Big Al’s List: 6 Myths About Credit Freezes
  • (51:40) Social Security
  • (1:00:46) Email Questions


“When does this become relevant, and when should I be thinking about it? The answer is the minute that the thought has crossed your mind, “Wow it really sucks to lose this money.” At that moment, whether that’s $100,000 or a million.” – Doug Lodmell, Asset Protection Attorney

100 grand? If I have a quarter in my pocket, I’m thinking it would suck to lose that money! Today on Your Money Your Wealth, asset protection attorney Doug Lodmell tells Joe and Big Al the secrets to keeping your money safe in the event of a lawsuit. Social Security benefits are going up and 401(k) contributions are going up, but Joe is practically foaming at the mouth on the 401(k) thing because it may also be a nightmare. Al’s got 6 myths about freezing your credit in the wake of the Equifax double debacle, and the fellas answer your emails on when to take RMDs, family real estate entanglements, and how not to self-deal in your Roth IRA, ‘cause that’s illegal. And Al snoops into what Joe does on his lunch break, only to find they’re seeing the same shrink. Now, here are two guys who definitely need therapy, Joe Anderson, CFP and Big Al Clopine, CPA.

00:58 – 401(k) Changes = Nightmares

JA: Right off the bat, Al, increases in our 401(k) savings next year.

AC: Well you are right about that, Joe. I think it was just announced this last week that your 401(k)m you’ll be able to put a little bit more money into it. $500. So right now it’s $18,000 per person, and you’ll be able to put in $18,500 per person next year, 2018. Remember, it’s still $18,000 this year. And don’t forget to max out your contribution if you can afford it. And, I will also say, if you’re over 50, 50 and older, you can do an extra $6,000 catch up. That’s for this year and next year, no change in the catch-up.

JA: Really? So $24,500 is the max. Why wouldn’t they increase the catch up by $500?

AC: Well, because it’s a lower amount. I guess they could have done it $6,125 or something like that. I guess they decided to leave with the same for simplicity. They seemed to like to increase these things $500 when they do. So they kind of wait till it seems to warrant it, but that may not matter Joe, because…

JA: So that’s all planned, 401(k), 403(b), 457, TSP. What about SEPs, SIMPLE contributions? They go up 500 bucks?

AC: IRAs were not discussed in the article that I saw. But the income levels- well actually no, IRAs were discussed. They didn’t change. $5,500 for normal and $6,500 if you’re 50 and older, but the income limitations for married couples for contributing to a Roth IRA next year will start to phase out at $189,000 and go to $199,000.

JA: So right now it’s $186,000 to $196,000.

AC: Right. And if you’re single, the phase-out would be from $120,000 to $135,000.

JA: That’s easier to remember.

AC: We’ll actually be able to remember it for at least one year (laughs). 120 to 135. That’s next year. But I was going to say, Joe, this may not matter, because what they’re talking about in Washington right now, according to the Wall Street Journal on Friday, there’s talk of capping 401(k) contributions at $2,400 per year.

JA: Capping the deductibility of it. So you can still put in your $18,000, but only $2,400 is going to be a pretax contribution.

AC: A tax deduction, and so presumably, the rest is a Roth. I suppose it could be just basis, which would be worse. Hopefully, the rest would at least be a Roth so that when you withdraw those funds, they’re tax-free.

JA: But here’s the catch with that. If I have after-tax contributions in my retirement plan now, I can take those out and move those directly into a Roth, without any tax consequences. So even if it does have a basis, you just have to move it out every year to put it into a Roth IRA, if your plan probably allows in-service withdrawals.

AC: Yeah a lot of them, you have to be 59 and a half, so you might be doing this for 30 years.

JA: Yeah but not necessarily with the after-tax contributions. It’s funny. With in-service distributions, in-service withdrawals. So let’s kind of discuss that. You can take money out of your retirement account, as you’re still in service, you’re still an active participant in the plan. So you’re putting in your money, but maybe you want it outside of your current employer 401(k) plan, for instance. What the law allows you to do is do an in-service distribution. So you’re still in service, you can take that money, roll it into an IRA. There is no tax consequence on that. And then you can pick and choose the investments of your choice. And where, Al, you’re coming from, is that in a lot of cases, you have to be over 59 and a half to do an in-service withdrawal. Some plans will allow you to take let’s say the company match, prior to 59 and a half, and move that. Other plans, there’s some weird formula that says, “OK, well certain dollar figures are allowed to do an in-service withdrawal or distribution if you’re under 59 and a half.” Some plans if you’re over 59 and a half still don’t allow the in-service withdrawal. So it’s all on the plan document, and I think that’s where people get confused too. Is that the IRS has certain statutes in the law, of what they put into the code. But the plain document is something completely different, and the plan document always trumps the law.

AC: Well, not always. If it’s contrary to the law.

JA: Well yes but look, if it says, “yeah, you can do in-service distributions, in-service withdrawals.” And then I go off my plan and say, “all right, I want to do an in-service distribution,” and they’re like, “no, the plan doesn’t allow it.” So then you’re stuck, you gotta keep it in the plan, that’s my point. I’m not stating that you can draft a 401(k) document and say, “take it out whenever, no tax, pretax contributions”

AC: I was just commenting on your use of the word “always.” (laughs)

JA: (laughs) Oh god. What, are you writing a textbook?

AC: I’m trying to keep you on the straight and narrow because I’m the accountant here. (laughs)

JA: OK. You get what I’m saying. (laughs)

AC: I do. I did. But I want to make our listeners do.

JA: So you have to look at whatever is the plan document is, plus what the IRS allows. You have to follow governing law.

AC: Yeah. Because the IRS says you can do in service withdrawals, but maybe the plan doesn’t allow it.

JA: Yeah but in most cases in my experience, after tax – because we don’t see a ton of after-tax contributions.

AC: Yeah, not these days, maybe some of the older plans.

JA: Right. And in most cases with the older plans, those individuals are over 59 and a half, so it’s really a non-issue. But there’s like 401(a) plans, for instance. There’s 401(a)s, there’s 401(k)s, there’s 403(b)s. So I don’t know why they had to come up with so many different terminologies here, but sometimes you have a 401(a) plan that’s an after-tax contribution, the employer is going to match you x, and once you get your job, and you do your benefits, you have to elect what you want to defer. And the maximum might be 6%, but you can’t change it once you elect whatever that you want to defer. But in some cases, those are after-tax contributions, and with those plans, potentially, you could move those after-tax dollars directly into a Roth IRA each and every year, no matter what your age is.

AC: That is true. That was a law that was about three years ago. Three or four years ago where that came into being.

JA: Yeah. That was under the jobs act. That was 2013 I believe. And then that also came about with in-plan conversions, where you could take, let’s say if you had a Roth provision in your 401(k) plan, you could move pre-tax dollars into the Roth portion of your own 401(k) plan through your own employer. So you could do an inter-plan conversion. But the downside of doing an inter-plan conversion is that you could never re-characterize it. So if you did that conversion, then you’re stuck with it. You have to pay the tax.

AC: Yeah if you did too much, you got a big bonus and you put yourself in a higher bracket, you couldn’t undo it like a regular IRA to Roth conversion, you can always undo it. It’s called re-characterization. You can undo it all the way to the tax filing date in the following year. Which is a pretty nice thing. In other words, when you file your tax return, you look at the Roth conversion, it’s like, “whoops that was a little too much based on my circumstance, I want to claw back some.” That’s a re-characterization.

JA: So this could be a whole nightmare. $2,400, I’m putting in $18,000. Is it basis? Is it not basis? Is it Roth? If it is basis, is the plan going to allow me to do the inter-plan, either an inter-plan conversion, or move it directly out of the plan as an in-service distribution into my own Roth IRA, or am I going to have to wait? Because let’s say I put in $12,400 into my plan. $2,400 would be pretax. The other $10,000 is after tax. And if I cannot do an inter-plan conversion, move that money into the Roth – I’m just assuming it has basis and then all the growth is going to grow tax-deferred, but that growth is going to be taxed at ordinary income rates.

AC: Right, and that’s the problem.

JA: Right. So then 5, 10, 15, 20 years is what you’re alluding to, is that now you have this basis in your 401(k) plan, but that basis also had growth on it because you invested in growth mutual funds.

AC: Maybe you got $10,000 of basis, and it doubled twice in your career. So it went from 20 to 40. Well, that extra $30,000 of growth would be fully taxable, It’s only that $10,000 of basis – unless you could get it into a Roth 401(k), then that whole 40 would be tax-free.

JA: So here’s where you got to look at some significant planning. We’re running into this problem now, let’s say you have after-tax contributions, you have pretax contributions, and you have Roth contributions, all in your 401(k) plan. And then now it’s time to start taking distributions. So then you have this whole pro-rata formula. It’s like which one’s Roth, which one is after tax, which one is pretax? And then you’ve got to take a look at the pro-rata formula to say, “what percentage of the total account balance is after tax versus Roth versus pretax, and then that’s what my distribution is going to be.” And then just doing the tax filing on that is going to be an utter nightmare as well.

AC: Yeah and I thought we’re trying to get simpler taxes?

JA: Right. So how much more money is that going to cost the custodians to try to track all this? The more complexity that you put in – because these small businesses, a lot of them, you know the numbers probably better than I do. But, they don’t want to even go with these 401(k) plans, because it’s like, OK well it cost me money. I’ve got a third-party administrator. I have to do 5500 tax filings. I’ve got to act as a fiduciary, but I’m in the steel industry, how the hell do I know what a fiduciary is when it comes to investments, I’m giving my employees an option to save for retirement. And then now we’re throwing all these complexities on top of the plan and figuring out the tax implications on the way out. It’s like what are we doing guys? We’ve got to simplify this whole retirement thing. And then for them to go after retirement plans still, it just drives me nuts, because we need more incentives to save.

AC: Yeah we should have a $30,000 contribution limit.

JA: It should be whatever! Unlimited!

AC: Whatever you want!

JA: Because most people aren’t saving. When you go to an average person, they could put $24,000 in it they’re over 50. How much are they saving? $3,000. “It’s unlimited, sir. You can save a million into this plan.” They’ll move it up to like $3,100.

AC: Yeah they scrape up for another $100.

JA: I get it, well then the highly compensated employees, the CEOs of the world, and all those that are making millions of dollars…

AC: I think that’s why you have to cap it at some point. It couldn’t be unlimited, people would put $3 million into their 401(k).

JA: Well hopefully if they’re making 3 million bucks.

AC: That’s what I’m saying. The highly compensated. That doesn’t include you and me. (laughs)

JA: It does not. Does not. So what is the right number? $24,000, that’s a decent number, but if I look at a defined contribution plan, the total amount that I can put in the D.C. plan is $52,000, give or take a couple of bucks. All right so let’s say if I’m self-employed, I could put in 50 some odd thousand dollars. Or maybe I’m a schoolteacher, that I have a 403(b) and a 457, I’m over 50. I could put $24,000 in each of those. And then I’m Joe Schmoe up the street that works for a small business, and the CEO or the owner of the company says, “I’m not going to deal with this BS. It’s too complicated, I don’t want to deal with it. It’s going to cost me money. You don’t get a 401(k) plan. You can do your IRA. $5,500.” Thank you so much. This thing is just jacked.

AC: That’s the worst part. It should be consistent. You shouldn’t be penalized if you work for a small business that doesn’t have a 401(k) plan.

JA: The IRA limits should be $18,000 or $18,524.

AC: Right, and they should be merged together so everyone’s on the same playing field.

JA: Right. Why is it that difficult?

AC: It’s not. But for some reason, we can’t get there.

JA: So the 401(k) is $18,500 for next year, $18,000 this year, IRA $5,500. We’ve seen the stats. Alan, you got to 401(k) plan. I do not have a 401(k) plan. We make the same amount of money. 30 years later, who’s going to have more money saved for retirement?

AC: Yeah the one with the 401(k) plan, we see that over and over again because it’s easy. You have withdrawals from your paycheck. You don’t even realize it, it just happens automatically every month.

JA: Yeah. So I don’t know. Stay tuned. All this stuff it’s just, whatever.

While Joe goes and cools off from that rant, let’s talk about what you can do if some of that was as confusing for you as it was for me. Call 888-994-6257 and make an appointment to ask any questions you may have, to make sure you’re on the right track for retirement, and to schedule a personalized tax reduction analysis. That’s 888-994-6257. How are these new 401(k) rules and the massive proposed tax reform going to affect you? Start end of year tax planning now to help you not just this year, but for the rest of your life. Don’t wait until the last minute – find out how your current tax strategy may be changing before the end of 2017 – which is just weeks away – and what you can do to keep up. Get a forward-looking, personalized tax reduction analysis at no cost or obligation to you. Call Pure Financial at 888-994-6257. 888-994-6257. Now the question is, are we ever going to get to that massive proposed tax reform?

15:14 – Senate Passed a Budget

JA: Big Al’s been a CPA for over 30 years. I’m a Certified Financial Planner, I’ve been doing financial planning for…

AC: What would you say?

JA: I don’t even know.

AC: When did you start, I’ll compute it for you.

JA: That’s the problem. I think it was 1998. Close to 20 years is what I say but it might have been 1999?

AC: That’s still close to 20.

JA: Yeah I feel old now.

AC: Well, sure. I tell you what happens, when you feel old is when it’s over 30. And then you don’t say 36 years, or 39 or 40. You just say over 30. Good enough.

JA: Yeah right. You’re 50 years in, “yeah I’ve been a CPA for over 30 years.” (laughs)

AC: (laughs) That’s all you ever say. 30 plus years.

JA: And then I’m 15 – I’m close to 20. (laughs) I’m trying to increase it, you’re trying to decrease it.

AC: A couple years you’ll be, “it’s only been 25.” (laughs)

JA: I was listening to this one guy. “Yeah, I’ve been helping people for over a decade.” That sounds like a lot yeah. But a decade is what, 10 years. (laughs)

AC: (laughs) You could say almost two decades.

JA: Two decades I’ve been helping people in their financial life.

AC: You could say I’ve been helping people over to millennials. (laughs) Anyway, whatever.

JA: We’ve been trying to help people on this radio show. I’m not sure if it helps.

AC: Yeah. Well, I don’t think our listeners expect much. (laughs)  But I do have some news that you could use, and that is the Republicans, the Senate I should say, approved a budget plan that smooths the path towards the tax cut. Which kinda, in some ways sounds kind of confusing. Why does a budget being passed have anything to do with the tax cut? And the reason it does is because in the budget they have this reconciliation language that simply states that they sort of paved the way for it to increase the deficit over the next 10 years, for $1.5 trillion, which is kind of what they’re thinking the tax cut is going to cost. And so because of that, then they have this ability to pass tax law, under the reconciliation part of the budget, which simply means you don’t need a 60 person majority, you only need 51 in the Senate, which means that they can pass it without any Democratic support. Which is, I think, what they’re going to try to do. The problem with that though is then it’s not a permanent change. It sunsets in 10 years, which is a long time.

JA: Well that’s the same thing with the EGTRRA, the economic growth, and reconciliation….

AC: Yeah, the Bush tax cuts, they were temporary. Estate taxes were going to increase, then go away in 2010, which they did, by the way. And then 2011 they came back because of the sunset. So that’s what they’re trying to do right now.

JA: EGTRRA. Was that Economic Growth Reconciliation Tax Act?

AC: I don’t know, you love those acronyms, I don’t pay any attention to ’em.

JA: (laughs) You gotta know the law, Al, so you can look it up!

AC: I know the law, I don’t have to know what EGTRRA stands for. (laughs) I don’t care what it stands for. I know it was a significant tax law passed in 2000, that affected 2001 and beyond. I don’t care what it’s called. Egg carton or EGTRRA, whatever. It doesn’t matter to me.

JA: But here’s what’s funny. So the Bush tax cuts. So they were due to expire in 2010. OK. So what, we’re in 2017? It’s pretty much the same. Except for the 39.6% tax bracket. You got the 3.8% net investment income tax.

AC: Yeah, but the reason why it’s the same, is because of the recession and the Obama administration went ahead and passed a different law, but basically retained the same tax brackets. Except for the highest bracket, I think went from 35 to 39.6%. And they’re trying to go back to 35 from 39.6, although Paul Ryan, he said tax overhaul will include a bracket aimed at the wealthy. Meaning that they’re thinking about adding a fourth bracket for the wealthy. It didn’t say at what income level. It didn’t say what the bracket would be. But there they’re talking about that right now.

JA: So then all of a sudden it’s going to go to five brackets, then it will go to six brackets. (laughs) And then guess what? We’re right back where we are.

AC: Well they counted as four right now, because of the $24,000 standard deduction. Which is the same exact thing we have now? So I don’t know. I will tell you this, and I’m not an expert on all news. But I am pretty familiar with tax news and don’t believe the headlines, they’re very misleading.

JA: Well that’s how we get our stuff. (laughs)

AC: I know but just I’m just telling you…

JA: Oh, this is gonna be a good article. It’s just nonsense.

AC: You read the headline and I actually know better, and I’m thinking, “how are they going to justify that?” Of course, they don’t. But it sounded good. Made me read it. So don’t just read headlines.

JA: They got you, Al, they gotcha.

AC: I know. And I know that’s the that’s the aim.

JA: So yeah. We got just a couple more months to see if anything gets passed here.

UPDATE: The Senate passed their budget, and now the House has endorsed it without changes, and the House Ways and Means Committee Chairman has announced that the text of the tax bill will be released on November first! Is all this talk of tax reform making you feel a bit uncertain? ‘cause it is me. Do you know what’s in your retirement future? ‘cause I’ve got no idea. But Joe and Big Al have got some little-known secrets for us about creating income to last a lifetime, making the most of your investing strategy in retirement, controlling your taxes and much more Visit the White Papers section of the Learning Center at YourMoneyYourWealth.com to download our FREE Retirement Readiness Guide. You’ll learn 7 plays to help you get retirement ready, despite the uncertainties we may face. Download the FREE Retirement Readiness Guide from the White Papers section of the Learning Center at YourMoneyYourWealth.com

21:21 – Doug Lodmell – Asset Protection: When To Consider It?

JA: Alan, it’s that time of the show.

AC: It is and I can’t wait, as usual.

JA: We’ve got a pretty smart individual on the line.

AC: We do. I can tell from talking to him at the break. Smarter than us.

JA: We’re going to talk about a little Taylor Swift… (laughs)

AC: (laughs) He knows little about everything. He can talk about the devaluation of the dollar, and also a little bit about asset protection.

JA: Yeah. I think that’s important for a lot of people. If you’ve accumulated a couple of bucks, you just need to know, hey, can I protect them. We have an attorney. We haven’t had an attorney on in quite some time. We have Douglas Lodmell. Is it Load-mell or Lodmell?

DL: Yep, Douglas Lodmell.

JA: Lodmell, OK. See, I’m from Minnesota and I’ve got a big fat tongue. I wanna say LOAD-mell. (laughs)

AC: (laughs) That’s where that comes from.

JA: Yes exactly. Well, welcome to the show my friend, how you been?

DL: Thank you. I’ve been great guys, glad to be here.

JA: Well let’s kind of dive in. There’s a lot of things that you’ve done in your career. Just tell our listeners a little bit of a backdrop of kind of what you do, where you came from, and where you’re going?

DL: OK. Well, I’m an attorney and I do asset protection. So this is an area of law that a lot of people when I started this 20 years ago, they had no idea what it was. I’d say, “I’m an asset protection attorney,” and they’d say, “what? Asset protection? Are you a security guard? What is that?” Today, asset protection is really common language. Every financial planner knows what it is. Every estate planning attorney knows what it is, or at least they know the word. I shouldn’t say they know what it is. They know that it’s a topic that clients are looking for. And to boil it all down, what it is is it’s legally protecting your assets from lawsuits. It’s really that simple. As in as a financial planner you protect principal by choosing good investments. As an asset protection attorney, I protect principal by making sure that if you get sued related to your business or your activities, your partnerships, your employees whatever it is, you are not creating an easy target for a plaintiff’s attorney to look at your net worth and go, “hey, easy pickings. Let’s go after that guy.” And keeping you out of a legal system that is clearly just run amok and no longer really based in any sense of fairness, but based on how can I use this to get a hold of somebody else’s money.

AC: So Doug, some people think you set up a living trust and you’ve got asset protection, which isn’t true. If you pass away, the kids have asset protection, but it’s much harder to get it when you’re actually still alive yourself.

DL: Right yeah. That’s exactly right. And you’re correct. Most people call me they go, “Yeah, I have a living trust, so I’m all set.” Well, you’re all set for dying, is what you’re all set.  And yes, if you draft it properly, your kids could end up with asset protection, although most of the time, the kids don’t, because what the living trust does is it just distributes assets to them. So at the time of your death, your kids get dropped a bunch of money on them, and they go and they co-mingle it with their spouse, and they invest in their business, and it’s now totally unprotected from their creditors. But certainly, for people who have accumulated wealth in their own life, and they have their own net worth, and now they’re looking at, “OK, how do I protect this from the normal course of business risks that I’m taking.” That’s a whole different topic, and a living trust is not the answer. It requires a little more sophisticated set of tools.

JA: Well let’s talk about that. Let’s talk a few different things here. We can say the average Joe, and then we can kind of build up the net worth scale. I would imagine the more assets that you have, the more complex things get when it comes to asset protection. Or maybe not. But if I’m just building up my net worth at this point, I have a living trust, I have maybe just a few hundred thousand dollars, I have my home, when would be that that limit where I would want to look for you to say, “Hey, now it’s getting a little bit scary where I built up a substantial net worth?” Because maybe I just have a couple of million dollar umbrella policy. Would that cover me, is that decent enough? Or can you kind of help us through the progression of what level of protection someone might need and when?

DL: Yeah, and you went straight for the $64,000 question. That really is the question. When does this become relevant and when should I be thinking about it? The answer is the minute that the thought has crossed your mind, “Wow it really sucks to lose this money.” At that moment, whether that’s $100,000 or a million. I can tell you that most people when they think about sophisticated asset protection structures, most attorneys that you ask, they’re going to be thinking in the $5 million and $10 million client range. That’s not my average client. My average client is between the $2 million and $5 million range. With even a couple of hundred thousand dollars though, I would be thinking about it. And you may not need the most sophisticated version of the planning, but even with two or three hundred thousand dollars that you’ve saved up that’s not in their retirement plan, there are things that can be done that make that much less accessible to creditors. So as soon as you’re worried about losing anything is the minute you should at least get informed about what you can do.

AC: So we’re talking about setting up an asset protection trust, and what are the mechanics? How do you go about that?

DL: Well, the asset protection trust is kind of the ultimate. That’s like the big asset protection vehicle. It’s a self-settled spendthrift trust. What that means is that from an estate planning standpoint, or from a tax standpoint, it’s a grantor trust, just like your revocable living trust is. The difference is two main things: One it has spendthrift provisions. And those are the provisions which limit a creditor’s access to the money. In other words, the trust itself says that the creditors trying to reach these assets that the trustee is not going to give them to them. And two, in order to really make that have teeth, it moves the jurisdiction of the trust into a more friendly jurisdiction, which could be another state or it could be out of the country. So the asset protection trust becomes relevant anytime you really want to be super serious about absolutely not losing your money.

JA: Let me ask you this. I want to kind of dumb it down first because there are some words here and I really didn’t understand. Big Al’s a CPA for over 30 years, he’s pretty smart.

AC: (laughs) I was fine, I was tracking.

JA: Yeah you were tracking, you went straight for the trust, I was like, well, does it have to be a trust? Can I do some asset protection without a trust? Let’s start there.

DL: Yes absolutely and that’s kind of what I was going to back into. Look if you only have $200,000, doing an asset protection trust is really not appropriate. You don’t need to spend the amount of money it would take, or have the maintenance. But, doing a limited liability company, or a limited partnership, so that you have some charging order protection around your investment account, would be totally appropriate, and very inexpensive, and very simple to maintain. And, when you do get enough money to where adding an asset protection trust become appropriate, you can just click it right into that limited liability company, or right into that limited partnership, so that you’re actually using it as a building block for a future, more sophisticated plan. And I think everybody, even with $20,000 of investments, should not be doing it in their own name, or in their revocable living trust. At the very least, you should set up a simple LLC, and have your investment account inside of that LLC – at the very least.

JA: All right so now I got more questions. So I have a $100,000, 40 years old, and then I’m thinking let’s get it on my name, let’s put it in this LLC. So that’s a limited liability company. But it’s not a company, it’s just my assets. How do I justify that my assets are a company?

DL: Well that’s a great question. The answer is that companies can be set up for all sorts of reasons, and a valid reason is managing your own personal money. That’s a valid business reason to set up a company. So you might choose a company in a jurisdiction that has very good charging order protection, meaning that a liability against one of the members of the limited liability company does not automatically attach to the assets of the company, and instead, the best thing that a creditor could hope for is a charge against that company. They call that a charging order. It’s kind of like putting a lien against your property, but it doesn’t force you to sell the underlying property. But if you’re looking at having $100,000 and you get sued and somebody gets a judgment, let’s say, for $20,000 for some kind of dispute that you had, and they go and they think they’re going to get 20 grand and they go and they find out all they get is a charge against your company, and no right to force you to distribute it. How much more leverage do you have now to negotiate that thing away? A lot.

JA: Yeah. And then so with that. So now I set that up, so the cost of setting up an LLC is minimal. And then I have to file a tax return for that LLC, so that’s a couple hundred bucks, and some to the state, couple hundred bucks, right – $700?

AC: $800 in California.

JA: $800 in California. So for that, you get a little bit more protection. I can have my brokerage account at Fidelity. Just change the title to my LLC Company from there. So that’s kind of my building block of a kind of building a little bit more of, I guess a safe around my overall assets.

AC: Would we put our home into it as well?

DL: Great question. No, your home’s not going to go into it, because your home already has three major benefits that we do not want to disrupt. Tax-free capital gain on the sale the home, home mortgage interest deduction, and your homestead exemption. So those three things, if we put them in a company, now the IRS says, “Well wait a second, this isn’t a primary residence anymore, it’s an investment property.” So we turn away those three gimme, freebie benefits from the government. And so we can’t put the home in the LLC. We can put the home in the asset protection trust. So again, depending on how much equity is in your home, what state you’re in, how much homestead exemption you already have, would determine whether we need to take a specific action around the home. If you’ve got, like in California, you’ve got a very modest home, and it’s worth $1.2 million. And you’ve worked really hard, and now it’s almost paid off. Let’s say you only owe $400,000. Well, that’s a ton of equity. Now we’re talking about probably looking at an asset protection trust of some form to protect that equity.

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32:07 – Doug Lodmell – Asset Protection Techniques

JA: Is there a certain occupation or lifestyle person that would do this more than someone else? I’m just trying to think…

AC: What are you thinking? Like a drug dealer?

JA: Well I don’t know! No, if I’m drunk every night, and I’m doing something stupid with my life, it’s like “I want to protect this stuff because I’m a complete idiot!” I don’t know if I screw up and I’m a heart surgeon. There’s certain occupations or businesses, I think, that are more prone to lawsuits than others. Is that a fair assumption?

DL: Yeah. Joe, you’re always really hitting the key questions here. It’s a function of your risk. Or I would even go as far as say a function of your perceived risk. In other words, your personal perception of your risk. So I’ve got some clients that I would on the outside look at and say very low risk, but their own perception of their risk, in other words, their own risk tolerance, is very low. And so, with a small amount of money, they’re willing to really put a big amount of effort into protecting it. I’ve got other clients that have a huge risk. They own multiple businesses. They’re operating in every state, thousands of employees. But at the same time, they’re so used to lawsuits, they’re so used to dealing with issues, that their perception of risk is such that, “I always handle it. It’s no big deal.” So to answer your question, the profile where I really see them the most worried is kind of your “Millionaire Next Door.” In other words, the dentist. He has 15 staff members, he’s worked 35 years to build up $2.5 million in net worth. And he just had an employee storm out of the office yelling, “I’m going to sue you.” That’s the guy that is going to be the most terrified because they cannot rebuild that wealth very quickly. It took them a long time to get it,  and they need to hold on it. And the risk of having even a small lawsuit turn into something big is is actually pretty high, especially in a state like California. So the answer is anyone with employees, anyone who is a medical professional, absolutely anybody running a business and dealing with customers and consumers and patients, all of those people are really the profile. And with a million plus in some type of asset that is unprotected, whether it’s home equity, or cash savings, or rental properties, that’s really the key profile of someone who would benefit the most from asset protection.

JA: Now you’ve made me completely paranoid. (laughs)

AC You better get one right away. (laughs)

JA: (laughs) It’s the world we live in though. Out of the blue, you think you’re best buddies with someone, and then you think you’re gonna get sued – I dunno, whatever. OK.

DL: Well I guess the biggest areas where people get hurt is partnerships. They go in, they don’t take the proper concern on the way in, they just kind of think it’s all going to work out. And when the business fails there are problems, or, ironically, when the business is really successful there are lots of problems. And then employees. Employees are the biggest issue today. By far. And if you’re in California it’s a bigger issue for you than anywhere else in the country. Employment laws around employees in California are so restrictive, so beneficial to the employee, as opposed to the employer, that you have to be exceedingly cautious. I have clients moving out of the states, simply because they can’t handle the risk that their employees create.

JA: So we have employees.

AC: We have a bunch. We got what 55? Better be good to ’em. (laughs)

JA: I dunno, maybe we better fire ’em all. (laughs)

DL: You gotta get it right, is what you’ve got to do. You just got to get absolutely every employment issue in California dead on right. And put asset protection in place for yourself. That would absolutely be the formula that I would prescribe. Do the right thing, and have a backup, so that if somehow it still goes bad, you’re personally protected.

AC: So I want to go back to that asset protection trust, which if I heard you right, is probably somewhere in the $2 to $5 million range in unprotected assets. We’re not really talking about retirement accounts, but assets outside of retirement, or more. And tell me how that works. There’s something called a bridge trust too?

DL: Yeah. To simplify the asset protection trust world, there are really two ways you can do it. You can do it fully offshore, which means you’re using an offshore jurisdiction like Nevis or the Cook Islands, and you’re using the laws in that jurisdiction, which do simplify it, make it virtually impossible for a creditor to get into a trust. So, if you’re really serious about protecting your trust, offshore is the way to do it. You can physically move your money away from a court and the legal system here, inside of a trust that’s governed by a set of laws and statutes in that country, that makes it exceedingly difficult for a creditor to get into it. That first occurred in 1984. The Cook Islands were the first country to pass a statute that specifically allowed for that. And what was really kind of surprising, but very interesting, is that the United States followed suit, about 20 years later in 1998. Alaska passed a similar law, based on the Cook Islands laws and said, “hey wait, why send it offshore? Why not just send the money here to Alaska?” Since then, there have been 17 U.S. states that have passed some form of domestic asset protection trust statute, which allows for the same thing. Which is to take your money, put it into a trust, put spendthrift provisions around it, and make it difficult for a creditor to get into that trust. So the upside of the offshore is that it’s incredibly protective. The downside is it costs more, and there’s a lot more compliance and maintenance. Al, you’d know, if you have a foreign trust, you have to file a Form 3520 and some disclosures, and it’s something that a lot of clients are just pretty averse to doing.

The domestic trust solves that. It’s domestic, you don’t have any foreign trust tax compliance issues. You don’t have any foreign accounts. The problem with the domestic trust is that they really aren’t as strong because Nevada or Alaska can’t really disregard a California judgment. Whereas the Cook Islands can literally throw it into the circular file. An Alaska trustee or a Nevada trustee are going to have to respect it because we have a constitutional requirement that the states recognize the judicial proceedings of every other state. And so, the history of the domestic trust is much less reliable than the history of the foreign trust. The way that we solve this in our practice is that I created something called a bridge trust. And it is both a foreign and a domestic trust. So it’s filed in a foreign jurisdiction, it has all the formalities of a foreign trust, and we have a foreign trustee in the Cook Islands sitting in a standby position, ready to accept the trust if we ever have to use it. However, for the purposes of the IRS, we make it a domestic trust. So from a compliance standpoint, there are no foreign trust tax compliance issues, there’s no foreign account that you have to deal with. Your money can stay right here in the U.S. in that LLC, or in that limited partnership that we were talking about earlier. The trust can connect to that, and then quietly sit there, and if there’s ever an emergency in the future, we can cross the bridge. Trigger the trust, we can drop the U.S. citizenship, and it becomes, at that point, a fully foreign asset protection trust, with all the protections.

JA: This is reminding me of that movie with Tom Cruise and Gene Hackman when they go to the Bahamas and they have the cocktails and then he digs in the files…

DL: Oh, The Firm!

JA: Yeah, The Firm! The young, nice college grad, he’s got his law degree, then he goes to Chattanooga, or Tennessee, goes to this rinky-dink firm, they pay him like $2 million a year. He’s like, “why are they paying me so much?” Because we’re doing all this… the Mob. Are you part of that firm Doug??

DL: No! Right! (laughs) I probably wouldn’t be doing a radio show if I was a part of that firm! I think I’d be a little more quiet about it! (laughs)

JA: Can I see your client list? (laughs)

DL: Yeah. Well you know what’s funny is, is that it’s all a function of taxes. So, there are two ways to see anything related offshore. And this is something that everybody listening can take to the bank. You really want to get this. If you’re using offshore for a tax-motivated purpose, run. Run away fast. There is no legitimate reason that, unless you’re Google or Apple, there’s no other way in which a normal business person can do anything offshore that is legitimate to reduce your taxes. It’s just a very, very – with almost no exceptions – it shouldn’t go together. But when you’re using offshore for an asset protection the only purpose, meaning there is no tax motivation whatsoever, you’re going to pay every penny in taxes, regardless of where in the world your money is. Then it’s a different story. Because now you’re utilizing the laws of a jurisdiction for their protectiveness, not because they’re going to allow you to pay fewer taxes. And that’s why asset protection is legitimate, and offshore planning with a bogus company that’s going to bill you for consulting and all that is illegitimate.

JA: Doug, this is great stuff. What can people find you if they want more information?

DL: They can go online, that’s probably the best place to get a lot of information, and that’s just Lodmell.com. And they can certainly call me, (800) 231-7112. They can talk to my assistant and set up an appointment, I’ll be happy to speak with them.

JA: And we’ll have that on our show notes at YourMoneyYourWealth.com as well. Doug, hey this was great, man. I really appreciate it. Thank you for being a good sport. This is crazy stuff. This is good, but I still think this has something to do with The Firm. (laughs)

DL: Alright guys. My pleasure, thank you so much.

JA: All right, buddy. Take care.

If you have a burning money question, just call 888-994-6257 for your chance to talk to Joe and Big Al and have your question answered live during Your Money Your Wealth. That number again is 888-994-6257. 888-994-6257.

Time now for Big Al’s List: Every week, Big Al Clopine scours the media to find the best tips, do’s and don’ts, mistakes, myths and advice to improve your overall financial picture – in handy bullet-point format. This week, 6 Myths About Credit Freezes

42:06 – Big Al’s List: 6 Myths About Credit Freezes

JA: Well it’s topical! Did you hear that Equifax gets breached again?

AC: No. I didn’t hear that. Really?

JA: I did.

AC: OK. What did you hear?

JA: That Equifax got breached again. That’s all I got. (laughs)

AC: You’re hoping I would be able to follow up with it. (laughs) No, I didn’t hear that. But I do know that they were breached, it was a gigantic breach.

JA: 143 million, half the population.

AC: Yeah. And so we’ve got some clients that have, I don’t know whether it was related to this or not, but that have had some identity issues. And one thing that you can do, although it’s not foolproof, it helps stop some things, is put a freeze, a credit freeze on your credit. And what that is, if you don’t know, is that’s going to the three major credit bureaus. So that’s Equifax, Experian, and TransUnion. And then you just simply freeze your credit, which means that no one can access your credit, open up a new credit card, or a loan account. But that’s about all it does, as far as opening new credit. But my list today, Joe is six myths about credit freezes, because folks don’t really understand what it does or don’t do. And myth number one is, you have to be an identity theft victim to request a credit freeze. The answer to that is absolutely not. Anyone can be a credit freeze. Although, when you look at who should probably consider a credit freeze, it’s someone that’s been a victim – here’s the list. You’ve been a victim of identity theft. Well, that’s kind of obvious. Your credit card number has been stolen, your mail has been tampered with, or here’s the most important one – you want to protect yourself from identity theft.

JA: So a freeze costs what, $35?

AC: Well it depends, it costs between $5 and $20 depending upon the credit bureau. Got it. Number two, credit freezes ensure you won’t be a victim of fraud. And that unfortunately false, because I guess they say it’s not a cure-all. It won’t stop someone from running up a balance on an existing credit card, or draining a bank account, or filing a fake tax return. Those things can still happen. What it does do though, is it doesn’t allow anybody to open up a new credit card or a new loan in your name, because what happens if they try to, the credit bureau has frozen your access. So this third part,y let’s just say it’s Wells Fargo, the person is trying to get a credit card through Wells Fargo in your name. Wells Fargo contacts Experian, and it’s frozen. They’re not allowed to access it.

JA: How do you unfreeze it? Does it take a while?

AC: Well no, it doesn’t take awhile, but usually there’s cost to unfreeze it as well.

JA: So if I pay five bucks to freeze it, and I pay five bucks to unfreeze it. Is it like almost simultaneously, or do you think it takes a couple of weeks?

AC: The hard part nowadays is to get through on the phone.

JA: Right. This is what I hear, it’s like if you’re planning on doing something in the future, you probably don’t want to do it. What does that mean? I’m going to purchase a new car in four months.

AC: Right. How long does it take?

JA: So do I not freeze it until I purchase the car? If I’m going to lease it or have credit?

AC: Yeah I think that’s what they would say, and I think the getting unfroze….

JA: Or is it just to save, $10.

AC: Well I don’t know, but what I’ve heard, Joe…

JA: And I’m asking you a lot of questions because you’re the expert in credit freezes. (laughs)

AC: I’m just reading a list of six myths, I don’t know anything else. What I have heard, probably misinformation because it was a headline. (laughs) What I heard was that you can unfreeze it very quickly. So there you go. That was the headline. You can unfreeze quickly. Number three, you only have to request a freeze from one credit bureau. Huge mistake. Huge mistake. There are three credit bureaus. You gotta do all three.

JA: What is that, Equifax, TransUnion, and Experian?

AC: Correct. And I guess what I have also heard, from another reading, is that, let’s say you want to buy a new car. Maybe you might ask the dealer which credit bureau do you use?

JA: Oh, just unfreeze that one.

AC: So that could work, that can be clever. Myth number four, it’s difficult to request a freeze. No, it’s very simple. You do it online, by phone, or mail. A lot of folks tell you not to do it online because all your private information is floating around the internet.

JA: Isn’t it already out there?

AC: Well yeah, but what happens is people think they’re freezing their credit, and they go to this site that’s made to look like a credit bureau. And so then they’re giving the thieves all this, and they’re trying to do the right thing, and they end up putting it in the wrong hands. So I think a lot of folks say maybe use the telephone.

JA: And then you can be on hold.

AC: Yeah, be on hold. Yeah, it’s kind of like calling the IRS. You’re going to give up your morning. And I’m not going to read these three phone numbers but we’ll put them in our show notes, how about that?

Experian: 1 888 EXPERIAN (1 888 397 3742)

Equifax: 1-800-685-1111

TransUnion: 1-888-909-8872

JA: You can go to YourMoneyYourWealth.com for those. It gets transcribed. Everything we are saying right now is transcribed right now, right this second. Everything, everything. See these words are transcribed. (laughs)

AC: Brittany, you can delete that part. (laughs) OK. Number five is You won’t be able to use your credit after you freeze it. So this is what it says. A security freeze will prohibit new lines of credit but can be lifted at any time on a temporary or permanent basis. To lift a freeze customers must provide a pin that was issued when the freeze was initially granted. There also may be a fee for this service. So there you go. That’s how you do that. Number six, a credit freeze and credit lock or the same thing – because they’re not.

JA: Oh, so if I got LifeLock versus a credit freeze – LifeLock use a third party company. It’s a service that monitors your credit, versus going to the credit agencies.

AC: Exactly right. See you know this stuff. Locks are products, and they are definitely missing certain protections. Freezes are part of the law. Most notably, credit locks may have language in their contracts for requiring arbitration, which is great. And like LifeLock, which I actually have, and so does Ann, if you do have an identity theft, they will step in and help you out. And they will even cover the legal cost up to, I think it’s a million bucks if I’m not mistaken. So that’s $9.99 a month. There’s probably more and better, I don’t know we, just got the cheapest one. (laughs) Probably that’s the one where we get a trainee and we get $4,000 of free legal, I don’t know what it is. But Joseph, It’s kind of an important topic and I actually just went to a conference last week and they had a consumer panel that was being interviewed by a financial planner. And the questions were, what’s top of mind for you when it comes to your finances, and financial planning, and your investments. And you know what they all said was security breaches. That’s what people are very concerned about, particularly – we had Target and others.

JA: I can see why that’s a concern. If someone’s going to steal my money, they’re going to take it all, versus the market might take 50% of it, in the worst case scenario. Well not worst case, it’s 100%.

AC: Interestingly enough they asked a question to these four panelists that are consumers. They said “would you be willing to have more hassle just to get to your data,” and they all four said yes if it provides more protection. Although one out of the four said it better provide more protection, otherwise they’re going to be pissed. Right now you try to log on to something, and then you have to do the password, and then sometimes you have to get a code on your phone, and all that stuff.

JA: It’s awful.

AC: Yeah right?

JA: I had a couple clients just to log in to Social Security. I said, “just log into your Social Security.” They go, “Joe, we tried but we couldn’t answer the questions.”

AC: Yeah, I didn’t know the street I lived on in junior high – I couldn’t remember. (laughs)

JA: Right.

Identity theft – we’ve got a webinar on that! Visit the webinars section of the Learning Center at YourMoneyYourWealth.com to watch it. Learn how identity theft happens, where criminals get info about you, what you can do to protect yourself, and steps to take if you become a victim. While you’re in the learning center, check out the white papers, articles, webinars and hundreds of video clips on tax planning, investing, retirement planning, Social Security, estate planning, small business strategies and more. It’s a veritable treasure-trove of information just waiting for you at YourMoneyYourWealth.com. If you need more help, you can always email us at info@purefinancial.com, or pick up the phone and call us at 888-99-GOALS. That’s 888-994-6257.

51:40 – Social Security

JA: Social Security’s going up a couple of percents.

AC: Well it is and it’s a pretty good increase compared to recent times, Joe, and they did announce that recently, that the Social Security Administration recipients of the benefits, 65 million recipients, will get a 2% cost of living adjustment in 2018. The year before, 2017, they got a .3% which means it’s less than a percent, about a third of a percent.

JA: Right. We calculated that. I think the average Social Security benefit is what $1,300? And then so what’s .3 of $1,300? I think it was a can of Pabst Blue Ribbon a month. (laughs)

AC: It was about $5. (laughs) And the year before the raise was zero, I remember that. Anyway, so the average now, Joe, the average retired worker will now cross and breach $1400 per month, $1404. They’ll get a $27 a month increase. But unfortunately, many recipients will find that most or all of their increase is eaten up by Medicare Part B premiums that are deducted from their monthly Social Security check. So you may not actually see any extra money.

JA: Yeah but Medicare premiums go up. Health insurance, in general, is expensive. It’s not coming out of pocket. Well, it is coming out of pocket, but you’ve got to increase to cover that.

AC: And this kind of brings me to a point that I want to make with regards to taxes, because a lot of folks sort of get this mixed up, which is simply this: The amount of Social Security that you receive, either by check, or directly in their bank account, or whatever. The amount that you receive is not the amount you pay taxes on. The amount you pay taxes on is the gross amount before they withheld amounts going for Medicare premiums. And so like let’s just say you’re supposed to get $2,000 a month but the Medicare premiums is $300 for you. Let’s just say, to make up a number, so you’re going to get a check of $1700. But you’ve got to pay taxes on $2,000. And I’ve had a lot of people, year after year, come to me and say, “1099 I got from Social Security is wrong.”

JA: Well the $2,000 is what’s going to be computed to see how much of that would be subject to income tax.

AC: Correct. And then we’ll get to that in a second because that’s a whole nother part. But I just had a client come to me recently that said, “it’s all messed up, because, in my Quicken, we only got $30,000, and they’re saying we got $36,000 on 1099,” and the difference is the Medicare premiums. So they’re taxing you for the gross. So in that example, $36,000 is the gross.

JA: Can I pay my Medicare premium – I’m going to ask you another question that you probably don’t know. (laughs) Like you’re the Social Security Administration. Can I pay my Medicare premiums outside of…?

AC: You can, and that’s actually what happens when you sign up for Medicare before receiving Social Security benefits. You have to pay it outside.

JA: So if I’m 65, I’m paying it outside. Then let’s say I delay my Social Security benefits to 70.

AC: Yeah right. And once you’re on Social Security, no, I don’t think they allow you that because it’s just like any company, and auto-pay is a lot more reliable than waiting for someone to send you a check.

JA: Right. So then once I turn 70 and start collecting, they’re going to automatically deduct it from my Social Security, you think?

AC: That’s my strong hunch on that one.

JA: Fact check. (laughs)

AC: Yep. (laughs) That’s our whole show, you need to be fact-checked. And I’m OK with that because it’s probably 94% accurate. (laughs)

JA: Oh remember that one guy that blew us up on the HSA or something? I don’t even remember.

AC: We get blown up all the time. Vinnie said misnomer. We’re using that word wrong, it’s a misconception. I’ve been really careful. I don’t think I’ve said a misnomer, until this show, for about two years. So Vinnie, if you’re listening, thank you for that. And there’s probably about 25 other things I’m saying wrong, so let me know what they are so I can fix it. (laughs) Now back to the topic, Social Security income. So let’s just say, I’m going to make it real simple math, so we can understand this. So you receive $10,000 of benefits annually.

JA: Net or gross?

AC: Gross. (laughs) That’s what your 1099 from Social Security Administration says.

JA: But I didn’t receive 10, I probably received 7.

AC: Seven probably. Well, that’s true. The gross amount is 10. (laughs) Anyway, so then it’s like, maybe none of that’s taxable, maybe half of it’s taxable. Maybe 85% of that is taxable. And by the way, those are not tax rates. That’s just how much of that income is subject to tax. Meaning that, if $10,000, you get $10,000 and 85% of it’s taxable. So it’s as if you made an extra $8,500 and then that goes on your tax return, and that’s what you pay taxes on. If you’re in the 10% bracket, just to make this super simple, then that’s $850 is your tax on that $10,000 gross.

JA: Got it. So the thresholds are $34,000 single, $44,000 married to get to that 85%.

AC: Yeah that’s right. In other words, the more money you make outside of Social Security, the more likely it is to be taxable.

JA: Right. So they look at half of your Social Security benefits. It’s called provisional income. So they look at a half of your Social Security benefits. So my benefit’s $20,000. They’ll say, “OK, well let’s start at 1,0” and then they take your adjusted gross income – so that your interest, dividends, 401(k) distribution, pensions, anything else, even municipal bond interest, they’ll take a look at. So they’ll add that up, your adjusted gross, the add back is half of your Social Security benefit. And if you’re married, if you’re over $44,000, then 85% of your Social Security benefit is subject to income tax.

AC: Yeah. But here’s where it gets even more confusing is, it’s not a cliff. It’s not all or nothing, it phases in that extra amount. So really it’s actually not zero to 50 it’s zero to an amount that gets to 50, and then it’s 50 to an amount that gets to 85.

JA: Right well actually they add another 35% on top of it. To call it 85. To be very specific.

AC: Well yeah, but I guess what I’m saying though is, you can be over the $44,000 and still not pay 85% on everything. It’s still a graduated schedule. That I know. You just have to trust me on that fact. Fact check.

JA: Well you do taxes! (laughs)

AC: Yeah. So anyway that’s good news. $27 month increase Social Security for the average person. If your benefit is double that and then you get 50 bucks a month more to spend. Pretty exciting. In Southern California, what does it buy in Southern California?

JA: I don’t know. Dinner.

AC: Dinner at Chili’s? Without drinks? (laughs)

JA: TGI Fridays. When’s the last time you’ve been to Chili’s?

AC: It’s been a long time, to be honest. I can’t remember. We have one near our work but I think I’ve been there once.

JA: Really? I’ve been there. I used to like to go there for lunch maybe every now and again.

AC: Well you never eat lunch out.

JA: I’m right at my desk. I’m busy. (laughs)

AC: I know you are. But lately, you’ve been disappearing at lunch. So you’ve got a new life balance thing?

JA: What are you talking about?

AC: Your car’s gone a lot of times at lunch.

JA: There’s been, I’ve had a dermatologist appointment. (laughs)

AC: Oh ok. If I must know. (laughs) You had a physical checkup? Car fixed?

JA: I gotta see my shrink. Lay on a black couch for a couple. (laughs) Working with you, man, I gotta get my life balance. (laughs)

AC: I see him right after you. It’s funny we haven’t run into each other.

JA: (laughs) Right. Hear the doorbell, “oh, that’s Big Al, the session is over.”

AC: “Can I go out the back? I can see him up front there. He looked like he’s hurtin’. I’d better leave, he needs more help than I do.” (laughs)

San Diego, for those of you not in need of a lunchtime therapy session, how about joining us for a one-hour lunch n’ learn on Thursday, November 30th instead? We’ll look back, review the year’s major headlines, and discuss what may be ahead. Learn what the data is telling us about the economy’s health, what financial experts predict for the end of 2017, and which details you should pay attention to. Visit purefinancial.com/marketupdate to register for this free event – lunch is included! Visit purefinancial.com/marketupdate

It’s time to dip into the email bag, with financial questions courtesy of Advisor Insights from Investopedia, and you, the Your Money Your Wealth listeners. Joe and Big Al are always willing to answer your money questions! Email info@purefinancial.com – or you can send your questions directly to joe.anderson@purefinancial.com, or alan.clopine@purefinancial.com 

1:00:46 – Email Questions

JA: All right we got the e-mail bag, Al, we got maybe time for a couple more of your e-mails. Let’s see here. “I had a partial rental property that my daughter has lived in for 14 years, while I rented the basement out, until a few years ago. My daughter doesn’t pay rent on a regular basis, and the property has been losing money during the last several years. So I sold the property to my son so that he could build his credit with the gift of equity of $80,000. When I purchased the house, I built a workshop on the property, so that I could use the property for my needs as a contractor. The value of the house is much higher than when I bought it. Is there any rule that can reduce capital gains tax if it is a family home, occupied by family, sold to family, and has been available for personal use?

AC: Great question, the answer is no. Next. (laughs)

JA: Next! (laughs) Good try! Denied!

AC: Once it’s sold, I don’t care if it’s to your son or daughter or sister, that’s a taxable sale. So, it’s very simple. It’s what you sold it for minus closing costs. You compare that to what you bought it for. Plus improvements. And that difference is your gain on sale. And it sounds like, this individual, they didn’t live in it, so there’s no principal residence exclusion, so it’s just fully taxable as capital gain.

JA: So gift the whole property to the son.

AC: Right, if you don’t want to pay tax on it.

JA: Have the son live in the house two out of the last five years, and have him sell it.

AC: Look at you. Yeah.

JA: And they give the money back to dad. That would avoid the tax.

AC: Yes. And file gift tax returns both directions.

JA: Please. Please comply with the law. (laughs)

AC: So that’s what should’ve happened. But it’s too late.

1:02:35 – JA:  I know the year you turn 70 and a half, RMDs are required. Does that mean exactly on that date? Or is there some span of time to start the RMD? For example, my wife will turn 70 and a half years old on February 1st, 2018. Do RMDs start on that date, between then and sometime during the year, or by 4/15/2018?  April 15th of the next year. It’s not April 15th, it’s April 1st, but… he’s using the tax filing deadline.

AC: April 1st, but he said 2018, not 19. Anyway, so a few issues there I suppose. So when you when you turn 70 and a half, yes you’re supposed to start taking required minimum distributions, but you’re required beginning is April 1st of the following year. So if I wrote this down right, Joe, his wife’s going to turn 70 and a half February 1st of 2018. So that first required minimum distribution, the required beginning date would be April 1st, 2019. However, since that’s the following year, they have to take two RMDs. So it might actually be smarter to take one in 2018, and then take another one in 2019 to spread out that liability.

JA: Yeah, everything is based on the required beginning date, and the required beginning date is April 1st, the year following you turned 70 and a half. So this is where it gets a little bit confusing too, depending on when your birthday is. So if your birthday is between January and June, or June through December….

AC: Yeah, because it’s at 70 and a half, not 70.

JA: It’s when your 70 and a half birthday hit. So people think “once I turn 70” but it’s not, it’s 70 and a half. So then you got to figure out when you’re 70 and a half birthday, then you have the following year after you turn 70 and a half, by April 1st, to take that required minimum distribution. And it’s going to be based on the balance of the overall account, of 12/31 the previous year. So you take an aggregate of all of the accounts that you own, that’s in the shell of a retirement account, and then whatever that balance is, then you could take the required distribution the year you turn 70 and a half. If you don’t want to take the distribution that year, you don’t have to. There’s no penalty. And the penalty is 50%. 50%. You don’t want to miss it. So then you can wait till April 1st the following year. And I think the IRS did that just to give people a little bit of timespan.

AC: Because a lot of people don’t know the rule, and then they turn 70 and a half, and then somewhere along the line they heard, “oh shoot, I’ve got to take the required distribution.”

JA: Right. So you turn 70 and a half in December….

AC: So they let you do it to April 1st of the following year so you have time to kind of fix it because they’re not really necessarily trying to have you’d pay a 50% penalty. But if you miss that date, then that’s what they require. Now I will say this Joe, if this happened to you, they will very often grant a one-time exclusion from the penalty. But if you do this year after year, you’re going to pay the penalty.

JA: Right. OK, I got time for one more. Getting a little tired here.

AC: Yeah me too. (laughs) Better be an easy one.

1:06:03 – JA: (laughs) Yes. “My wife has two annuities due in less than two years for an approximate value of $150,000. Rather than reinvest in another annuity, we’re thinking of loaning this Roth money to our daughter and son in law, for them to build their dream home.” Oh, God. Those wheels are coming right off.

AC: This one has you all over it.

JA: We’re not certain of the length of the loan yet. 7 to 10 years? 10 to 15 years? But the rate would be about 3%. I would think that 3% interest that we receive is not taxable to us, but can our daughter and son in law deduct the mortgage interest from their taxes? Oh jeez. This is just a can of worms.

AC: We might need some more time to unravel this. But I guess, first of all, what does that mean? Two annuities are due in two years? What does that mean?

JA: Well OK. Well, first of all, I guess he’s got these annuities in his Roth IRA, and he’s got $150,000 in his Roth, but he bought two annuities. First of all, it’s kind of clear this up. An annuity is just a contract issued by a life insurance company, that is either a deferred annuity, it’s a fixed annuity, variable annuity, whatever. What he means by “is coming due” is that the surrender charge is over.

AC: That’s when the surrendered charge is over. So you don’t have to do anything. But you can pull the money out if you want.

JA: Well I guarantee he would get a call from the insurance agent, three minutes after the thing is due, and say, “hey, your contract is due!” Let’s get another one!”

AC: “Let’s renew it, I need a new commission.”

JA: Yeah sure. But now he’s saying it’s in a Roth. And then he wants to give it to his kids for a dream home. What are you doing?? (laughs) So, if you’re pulling money from a Roth, first of all, it’s tax-free. So then you’re going to take the distribution of $150,000. But he’s saying, “we’re thinking of loaning this Roth money” – so you get to take a distribution from the Roth. You can’t take a loan from the Roth. You can take a loan from your 401(k).

AC: I think that’s what he’s thinking. So if that’s what he really wants to, do then it’s a distribution from the Roth, which, if he’s not 59 and a half, some of it could be subject to penalties.

JA: Depending on what his basis is because it’s first in first out. But still, that’s a lot of money in a Roth. Go anywhere else but there.

AC: Well, but I think you’re right, I think he was thinking it’s just an investment inside of his Roth. And the answer is no, you can’t loan your children something out of your Roth and have it stay in the Roth, they pay back the Roth.

JA: Right, and he’s thinking, “well, the interest that I get is tax-free.” No

AC: No you can’t do that. That’s a prohibited transaction.

JA: The whole thing blows up. So you loan your kids money. You charge them 3%. They’re going to pay you 3%. That is a taxable event to you because you’re getting interest. It doesn’t matter if it’s your kids.

AC: Yeah, but that’s with money outside of retirement accounts.

JA: He’s saying it’s tax-free because he thinks he’s loaning the money in the Roth and he’s just going to funnel it through.

AC: And so that’s a new investment in the Roth, I’m going to loan it to my kids. And you can’t do that, that’s self-dealing. You can buy trust deeds though, in a Roth, but just make sure if it’s a related party, there are all kinds of traps and issues you got to be aware of.

JA: But here’s the question I have then. So everything else is blown up here, except for this last question. So if I’m lending money to someone, I’m charging them 3%, and it’s for a primary residence, can they deduct the interest then off their tax return?

AC: They can if you, the lender, secure the note and actually record it with the county.

JA: But if it’s just Mother Daughter, what’s the likelihood of them doing that?

AC: Yeah probably not. And so from tax law, then no, you can’t deduct it at that point. It has to be secured by the property.

JA: This is the problem with individuals trying to do stuff a little…

AC: Yes, a little bit too creatively.

JA: A little bit. Well, I’m going to give it from the Roth. It’s in the Roth, so there’s no tax. I listen to Joe and Big Al! They’re saying it’s always tax-free! So I’m going to loan this money to my kids so they can buy their dream home, and blow up my retirement, so they can live happily ever after. And then I’m going to end up living in their basement because I’m going to jail because I did tax fraud! (laughs) That’s it for us today, hopefully, you enjoyed the show. We’ll see you next week, show’s called Your Money, Your Wealth.


So, to recap today’s show: Joe thinks we should be able to make unlimited contributions to our retirement plans and he’s pretty pissed about how complex they’re making it for us to save. The budget has passed, so look for tax reform very soon. A credit freeze can help you avoid identity theft, but don’t buy into the myths – it isn’t foolproof or a cure-all. I wonder if they can just put a freeze on Equifax to avoid more breaches? And no, you can’t give your kids a tax-free loan from your Roth to build their dream home, it’s ideas like those that drive Joe and Big Al to see a psychiatrist.

Special thanks to our guest, Doug Lodmell, who swears his asset protection techniques are nothing like what we saw in the movie The Firm. Visit lodmell.com to learn more about asset protection, because losing money sucks.

Subscribe to the podcast at YourMoneyYourWealth.com, through your favorite podcatcher or on iTunes, where you can also check out our ratings and reviews. And remember, if you have a burning money question for Joe and Big Al to answer on Your Money, Your Wealth, just email info@purefinancial.com, or call 888-994-6257! Listen next week for more Your Money, Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.

Your Money, Your Wealth Opening song, Motown Gold by Karl James Pestka, is licensed under a  Creative Commons Attribution 3.0 Unported License.

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