Joe and Big Al weigh in on 10 retirement resolutions experts say you should make for 2018. We’ll learn some new opportunities, challenges and potential tricks coming out of President Donald Trump’s new tax law. We’ll find out the secrets to Big Al’s big wallet, and how Joe is unwillingly helping his boy Mikey cut expenses. And we’ll hear one of the rare instances when the fellas kinda butcher the answer to an estate planning question.

Show Notes

(1:18) Don’t Misunderstand Social Security Spousal Benefits
(12:17) Big Al’s List: 10 Retirement Resolutions According to the Experts
(22:46) Big Al’s List, Continued
(37:43) New Tax Opportunities – and Challenges – for Small Business Owners
(46:28) Email: Will Transfer of Ownership of Inherited Property Cause Tax Re-Assessment?
(55:41) California Considering New Charity Trick & New Tax Tables to Take Effect in February

Transcription

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Today on Your Money, Your Wealth, Joe and Big Al weigh in on 10 retirement resolutions experts say you should make for 2018. We’ll learn some of the new opportunities, challenges and potential tricks coming out of President Donald Trump’s new tax law. We’ll find out the secrets to Big Al’s big wallet, and how Joe is unwillingly helping his boy Mikey cut expenses. And we’ll hear one of the rare instances when the fellas kinda butcher the answer to an estate planning question, as well as butchering as the names of some of the most highly respected financial minds in the world. Now, with some pretty impressive financial minds of their own, but their mouths just need to catch up, here are Joe Anderson, CFP, and Big Al Clopine, CPA.

1:18 – Don’t Misunderstand Social Security Spousal Benefits

JA: Got a lot of things to discuss today. Some good, some probably boring, some exciting. It’s just the whole mixed bag of goodies.

AC: So you’re stepping out on a limb to think that some of our show is exciting?

JA: Well I don’t know. You said you had some weird trust that we could shelter taxes forever? That’s exciting.

AC: Yeah but I don’t know if that’s exciting. I will like it. (laughs) I don’t know if our listeners will. Or you. I think the main thing is I have to keep you entertained.

JA: That is true. Because I fall asleep fairly quickly.

AC: Maybe our listeners might like it too,

JA: A few things. We have a bunch of e-mails. Maybe we jump into that, just to get that show-off and rockin’. And a few other things too – still a lot of questions in regards to Social Security, and still the Security Administration, God bless them, but there needs to be some training. (laughs)

AC: You’re talking about the Social Security agents? They’re probably listening.

JA: Yeah, because they’re getting tuned out. They gotta figure out the rules.

AC: First segment we’re going to go over Social Security?

JA: Well, here’s the problem, is that I met with a nice couple, hypothetically, earlier this week.

AC: You have a lot of hypothetical meetings. (laughs)

JA: Yes. It’s all make-believe, Al. I don’t really do anything, all day. (laughs) I dream about meetings.

AC: Meetings that you may or may not have.

JA: Yeah, I meditate about them.

AC: Somehow you get very specific in these hypothetical meetings. (laughs)

JA: Yes. This nice couple that came in, both 64 years of age. He turned 65, I believe, this month. She just retired. And we were going through some of the different strategies in creating income, and he’s like, well, she just started claiming her Social Security benefit. So she was a special ed teacher part-time. And so her Social Security benefit wasn’t that great compared to his. He fully maxed his out. So his benefit was $2,800 a month at full retirement age, and hers was around $600.

AC: OK. Something much lower.

JA: Yes. Hypothetically of course. (laughs)

AC: That’s pretty specific for that hypothetical meeting. (laughs) And I see you don’t even have any notes, it’s just right out of your head. That’s pretty good. (laughs) You really go deep.

JA: Yes I do, it’s deep thought with Joe Anderson. (laughs) And well, the problem is that they went to the Social Security Administration twice, they said. And so, she took her benefit at 64. And the reasoning behind that was like, well, it’s 600 bucks, it’s reduced those $500 some odd dollars because you get a reduction in benefit if you don’t take it at full retirement age. So it’s like, let’s take the benefit, and then when she turns full retirement age, then she would switch over to the spousal benefit because at that point he would claim his benefit. So that was the advice that they received. And I said, “yeah that’s fine. But you’re going to have a reduced spousal benefit,” and he’s like, “No I’m not.” I love that don’t you? I was like “OK. I’ve been doing this 20 years.”

AC: It’s like Joe, obviously you don’t know what you’re talking about. (laughs)

JA: Obviously I’m a complete imbecile. (laughs) I was like, “well no, this is how it works, is that you can claim your own benefit, but the spousal benefit doesn’t come into play until the other spouse claims their benefit.” So what a spousal benefit is, for those who you don’t know, is that with Social Security, you can claim your benefit or half of your spouse’s benefit, whichever is higher. And to be really technical, you actually receive both of those benefits. You receive your own benefit, and then Social Security shores you up to get to half of the spouse’s benefit.

AC: So here’s an example: so she would get $500 on her benefit, and let’s just say half of his is $1,500. So then she can get an extra $1,000 for the spousal. But that’s how the $1,500 would be calculated.

JA: You got it got. So when she claims her own benefit early, she’s going to receive a reduction in benefit. And so it doesn’t automatically just switch to the spousal, and say all right, I’m going to receive half of your benefit. So it’s going to be a reduced benefit, you’re not going to get a total 50%. It’s going to be something less than that because she claimed her own benefit early. And so they went round and round, and then finally it kind of clicked. He goes, “yeah, that does make sense, because why wouldn’t everyone do that?” I go, “Yeah exactly.” That would just be free money, and then that would blow up the system even more. And so that’s just one small example, is that when it comes to spousal benefits, survivor benefits when you claim. And then sometimes it’s like, I’m going to wait to claim the spousal benefit because if I have my own benefit, and if I wait from my full retirement age to age 70, I get an 8% delayed retirement credit. That does not hold true to the spousal benefit. You’re only going to receive 50%, or something less than that, depending on when you claim your benefit. So if I wait till age 70 to claim a spousal benefit, I’m only going to receive 50% of my spouse’s benefit.

AC: So I might as well have taken it at 66.

JA: Yeah, it doesn’t make any sense not to take it full retirement age.

AC: But your spouse has to be taking it.

JA: Your spouse has to be claiming the benefit.

AC: Yeah, so let’s say your spouse with a higher Social Security is younger, then you still have to wait. But let’s say your spouse is older. There’s no reason, if you want to take the spousal benefit, you would take it at 66 – full retirement age. Not later.

JA: Not later. You can take it earlier. Just know that you will receive a reduction in benefit.

AC: And that’s a reduced benefit forever.

JA: Forever. It’s a permanent reduction, a permanent haircut on your benefit forever.

AC: Yeah, and it turns out forever is a pretty long time. (laughs)

JA: It is. So we get a lot of e-mails questions from listeners. And this is from Mark. And so his question was, in regards to Social Security, “I heard it might be better to start taking Social Security at 62 because you will not receive full Social Security dollars if your income is too high. So take what you can early. Is that true?” Well, Mark, that’s the opposite.That’s the problem with Social Security. It doesn’t make any sense!

AC: Yeah it’s not true. I think he’s mixing up a couple of things. First of all, your benefit, the longer you wait, the higher the benefit. But there is a rule, Joe, that if you’re younger than full retirement age and you make too much money, they don’t let you keep the full amount. And I think that’s what he’s mixing this up with.

JA: Yeah. What you keep – that’s kind of a strong word too, because we say that and then people think Social Security is stealing it from them.

AC: Yeah it just recalculates your benefit later, as if you didn’t receive it. But the truth is it’s roughly $17,000 if you have earned income, salary income higher than that, then you’re not going to be able to currently keep. You go along with that?

JA: Yeah, every two dollars that you earn over that dollar figure, they take a dollar back from the benefit.

AC: Right. And then they put it back in the pool, so you’ll still get the benefit of waiting for that, per se. So there’s that rule, but that has nothing to do with how your benefit’s calculated. You can take it as early as 62 and as late as 70. And the longer you wait, the higher your benefit will be.

JA: Right. And they’ll never reduce the benefit. They calculate it on 35 years of earnings. So what’re the highest 35 years?

AC: And it’s not the average, so like let’s say you work part-time the last few years, it’s your highest 35 years. So go for it. Work part-time. It’s not going to hurt you.

JA: So if he wants to take it as soon as he could get it, sure. You’re going to receive a 25% permanent haircut for life. But you get it early, you get it at 62 versus 66.

AC: Right. Now on the other hand, at full retirement age 66, if you take Social Security, you can make any amount that you want, and you can keep your full Social Security. That’s where it gets a little confusing.

JA: Right. Let’s say if I continued to work when I’m full retirement, and I’m making a lot of money, more money than I ever have. They’re going to recalculate your benefit every year. So maybe, one year you had $40,000 of earnings. Now I’m 68, and I’m making $200,000. Well, they’re going to drop the $40,000 and plug in that one. So next year, when you get your Social Security check, it’s going to increase based on that 35-year average.

AC: So it’s a rolling total. And I suppose, if you’re 75 and making a bunch of money, you could still keep increasing your benefit, potentially.

JA: Yes, you can still increase your benefit. So maybe I work part-time. I didn’t have a high income from my 30s to my 50s. And then from 50 to 70, then I started making a lot of money. They’re still going to take the highest 35 years. So there’s a lot to this. The biggest reason that I think we get a lot of these questions in regards to Social Security, is that people don’t necessarily want to run out of money. They want to have a fixed income stream that they can count on in retirement.

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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, 10 Retirement Resolutions According To The Experts

12:17 – Big Al’s List: 10 Retirement Resolutions According to the Experts

AC: Time for my list. And this is maybe a little bit thought-provoking today, and I know we’re mid-January, so maybe you should have already done this, but I’d say it’s never too late. It’s never too late to plan out your year, and we’re still early on in the year. So Joe, would you like to know what these 10 are?

JA: I would love to.

AC: (laughs) The first one is – this is a suggestion from experts, and you can agree, disagree, comment, not comment, depending on what you want to do. The first one is to play mind games.

JA: Oh, I do that all the time. That’s why I’m single. (laughs)

AC: You have these hypothetical meetings all the time. (laughs) With the latest Star Wars film fresh in mind, this author is channeling her inner Jedi. She’s using tricks from the world of behavioral economics to improve financial habits. Trick your mind into being more money savvy by doing simple things, and I’ll give you some examples, as she says. Including paying cash whenever possible, because it makes us feel the loss of money more acutely. And I do believe that’s true.

JA: Without question. That’s why Vegas is chips. (laughs)

AC: (laughs) You’re right. Because it doesn’t feel like real money.

JA: It’s a chip it’s like what the hell is this?! If it’s like a stack of hundys, there’s no way!

AC: Yeah, if you go to the grocery store with a wad of $20 bills and you go to Costco and it’s $340, that’s painful.

JA: (laughs) You’re counting those out. You only have ones, though.

AC: (laughs) Yeah. 350 ones. That’s why I have a big wallet, by the way. Got a lotta ones. (laughs) Anyway. Or, if you whip out your debit card or your credit card, it’s not as painful. (laughs) You can’t get past my wallet. Do you want to know another trick? My trick?

JA: (laughs) Oh please. Please don’t whip it out on me.

AC: (laughs) Only your mind would go there. you see what I’m dealing with here for the last decade? This is supposed to be a professional show.

JA: (laughs) This is totally professional, I don’t know what you’re talking about?!

AC: Another trick: reframe your thoughts on spending by calculating how many hours or days you need to work to afford whatever you’re thinking of buying. I guess if it’s going to take 20 days to buy this Chewbacca mask (laughs). Or maybe you want the full suit this time.

JA: (laughs) Full suit with a crossbow.

AC: I know you have Darth Vader, but I I think you’re more of a Chewbacca.

JA: Well I am 6′ 5″. I’ve got stormtrooper masks… it’s ridiculous.

AC: Yeah. And you’ve got Michael Jackson moves. (laughs)

JA: (laughs) Chewbacca’s gonna be great. No, but that’s really cool advice. (laughs) Gotta go get the Chewbacca outfit. How much is it? Four grand. Holy buckets!

AC: (laughs) That’s gonna take me three years! Maybe I won’t buy it that way.

JA: (laughs) Oh yes, I’ll hold.

AC: Put it on layaway. 50 cents a month. (laughs) OK, the second one is cut the cord. And this is the CEO and President of Transamerica Center for Retirement Studies, Catherine Collinson. She’s cutting the cord on cable television in 2018, it’s part of the personal tradition of setting savings goals each January, tracking the progress. “The minimum of savings rate I strive for now is 20%. So I go through my expenses from the previous year, and I really look at things that I don’t need.” Cable, for example. What, we have a thousand channels? How many channels do you really watch?

JA: Well, my best buddy, Mikey Martin. So he goes “yep, I cut out cable.” I said, “well, that’s great.” But here’s what he does…

AC: He comes to your house. (laughs)

JA: No. I don’t watch a lot of TV. But I have HBO Go.

AC: Oh, so he watches on his phone. (laughs)

JA: Yeah! So he steals my stuff! (laughs) So I’m paying for his entertainment. “Oh, look at me, I cut cable out” and this and that. And I was like, “Stop stealing. Stop stealing from me.”

AC: So maybe it should say cut the cord, and piggy back on Joe Anderson’s plan. That would be the advice.

JA: Yeah right. You want my Netflix? Whatever you need.

AC: I have a Netflix account, and it was a two person. And so Anne got into Grey’s Anatomy. I think she watched every episode for a decade. And I don’t really watch Netflix that much. But anyway, so she was like every night, watching an episode on her little iPad in bed. I’m trying to go to bed.

JA: You got hooked?

AC: Dr. McDreamy. (laughs)

JA: Yes, I knew that was coming out. I knew it. (laughs) He’s so hot.

AC: I was having dreams about Dr. McDreamy. That’s what I heard as I fell asleep. (laughs) Anyway, and then both kids would be on, and she’d get kicked off, and she’d have to text them and say, “will one of you please get off, so I can watch McDreamy?”

JA: Oh really? That’s what happens?

AC: Yeah. So anyway, I went to a four-person plan. So now Anne and I have one. I got one for each kid, and I actually, believe it or not, now I have my parents on as well. I got them Roku for Christmas. You probably don’t know what that is.

JA: I think it’s a device that you can plug in.

AC: Well look at you!

JA: Well, my mother has Roku.

AC: Oh she does? So you plug it into the back your TV, needs a USB port, a drive I guess, or socket, whatever and then you can watch Netflix or other things – HBO Go. I need to get your password.

JA: I don’t even know what it is. Ask Mikey Martin.

AC: He would know. (laughs) Here’s the third one: redirect a payment. With their youngest child heading into the first semester of college, retirement consultant Marcia Mantell and her husband Dan are resolving to save the equivalent of those college tuition expenses in their retirement accounts. So you’re used to paying for college tuition. Don’t increase your lifestyle, just send all that money to your retirement account. I actually think that’s a great idea.

JA: Right. Well, that’s easier said than done.

AC: It is, because you’ve been putting off things for years, and finally we can go on this vacation.

JA: “Oh, I can breathe. I’m not stressing, there’s a couple of bucks in the checking account.”

AC: And I’m gonna tell Anne, “No Anne, Marcia Mantell said we have send that to retirement, so we can’t go to Africa after all.” (laughs) So you’re right. That’s that’s a good one, but sometimes easier said than done. Be more strategic about charity. So a financial advisor is waiving some of his advisory fees on assets pegged for clients’ charitable causes. And is helping clients think more strategically about their donor-advised funds. And donor-advised funds, that really is a great strategy, and if you’ve never heard of what a donor-advised fund, is it’s an account you can set up at a brokerage firm like Schwab, or T.D. Ameritrade, or Fidelity, for example. And you put money or you put stocks directly into this account, and when it goes into this account, you get a tax deduction as a charitable contribution. And then you’ve got this account that you can manage and do whatever you want to. Of course, it has to go to charity at some point. But the point is, you get the charitable deduction today, and you get to divvy it out to charities of your choice in the future, as you see fit. And that works really nicely if you’re in a really high tax bracket, and you know that you want to give to charity over your lifetime anyway, but you just kind of time your charitable deductions with the year you’re in a higher tax bracket.

JA: So he’s not charging fees on his donor-advised funds. And so that’s saving them money?

AC: Yeah.

JA: Well a lot of our donor advised funds, we don’t charge fees on either. (laughs)

AC: Yes same. We could have said this is us. Anyway. Yes. We’re right in there with Jonathan Guyton.

JA: Alright Johnny!

AC: Yeah. Veteran financial advisor.

JA: What makes someone a veteran financial advisor? Is there a guideline here?

AC: A professional guideline? When I hear veteran, I’m going to think 20 years.

JA: I was thinking 30 years plus.

AC: Veteran sounds like an old dude. (laughs)

JA: Yes, or an old lady, right?

AC: Would you say you’re a veteran?

JA: No.

AC: I could. (laughs)

JA: Yeah, you could. You’re definitely a veteran. I’m not. (laughs) I’ve got almost 20.

AC: My working career started in 1980. So compute that: 80s, 90s, 2000s, what 37, 38 years.

JA: Jeez. Yes, that’s definitely a veteran.

AC: Am I to the point where I’m forgetting more than I’m learning?

JA: Yes. Most definitely. (laughs) Totally. We gotta get that study out, once you reach a certain age your financial acumen just kinda blows up.

AC: Is my radio work less intelligible than it was a decade ago? (laughs)

JA: Intelligible! That’s pretty impressive. Is that a real word? (laughs)

AC: Trying to demonstrate I still got it. (laughs)

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22:46 – Big Al’s list, Continued

AC: Well Joe, I’m going over the 10 retirement resolutions, according to experts, to make in 2018. We got through four of them. The fifth one is, and I think you might agree with this, avoid Bitcoin.

JA: Bitcoin. Avoid it?

AC: Yeah, avoid it.

JA: All right. What do you think? Are you avoiding bitcoin?

AC: I am, yes.

JA: Because it’s scary? Is it like the unknown?

AC: Seems like a bubble. (laughs) Even Warren Buffett says to avoid it.

JA: Well, I don’t know. I think that – I’m not sure about Bitcoin, but the blockchain is definitely the future.

AC: I agree with that.

JA: So I don’t know if people really understand the difference between the blockchain and Bitcoin.

AC: I’d say 80% of people have no idea what blockchain is. Including me, until I looked it up a couple of months ago.

JA: Blockchain is what?

AC: So here’s my rudimentary understanding is, blockchain is an ability to record transactions that are permanent. It’s a ledger. And so, it could potentially transform the way we do business. For example, like in real estate, we have title insurance companies. We pay them to make sure that the title is right. Well with block chain, it’s always right, because it’s always there. And there’s no way to defraud it because it is what it is.

JA: We’ll have a blockchain, Bitcoin expert. (laughs)

AC: Yeah, because we’re not very good at this.

JA: I’m younger than you, Big Al. So I have a little bit…

AC: You have some money in Bitcoin?

JA: No I do not have any money. But it’s not like “avoid it at all costs.”

AC: I didn’t say that. It just says avoid it.

JA: Oh, I put it “at all costs.” (laughs)

AC: But this guy’s advice, I don’t agree with. Mosh Milvinksy? (editor’s note: Professor Moshe Milevsky)

JA: Oh yeah Mashee, Mosh, Moshi…. yes.

AC: Yeah you know him?

JA: Yeah, he’s up in Canada. He did… Yeah, I know him. Yeah. He does a bunch of stuff on annuities.

AC: He’s written extensively about annuities. He’s urging savers to take some stock market profits from recent years and put them in annuities and pay income for life in 2018. Stay away from Bitcoin, Ethereum, and other cryptocurrencies, he says.

JA: Yeah, well I think you don’t want to go all in and say, “I got a couple hundred thousand bucks. Let’s put a couple hundred in Bitcoin.”

AC: You might double your money.

JA: You probably will in three days.

AC: You might cut it in half, too. That’s the problem.

JA: So it’s different, it’s new. With something that volatile, it’s like the more volatile something is, the more headlines and press something receives. And then you get the weirdos on all sides of the spectrum.

AC: Yeah, but doesn’t that sort of remind you of the tech bubble? The internet and all that frenzy of the late 90s?

JA: Do you still not use the internet? (laughs)

AC: (laughs) No. I’ll put it this way, in my layman’s terms. Tech companies in the late 90s got way overblown in terms of valuations.

JA: Well yeah, if you had dot com at the end of your name.

AC: All of a sudden you had a huge valuation.

JA: Huge valuations with zero profit.

AC: Now this is just my prediction for what it’s worth. (laughs)

JA: Oh boy, Al’s doing a prediction.

AC: I think the Bitcoin will settle down into, probably a reasonable currency, or…

JA: It might not even be Bitcoin.

AC: It could be something else, but I think the concept is fine. And I think it will settle into a currency that’s stable. But right now, it’s not very stable.

JA: It’s a speculation is all that is, and that’s fine if you want to speculate, same with gold. Gold doesn’t turn into more gold. It’s just the ability of someone else’s perception of what they want to purchase that metal for. And the same thing is going on with Bitcoin right now, is that some are true believers, that this is the future – or Bitcoin is the future. So that’s why there’s a lot of people that are bidding up that price. On the other side, they’re saying, “I don’t know” and I think we’ll just wait and see, I guess. I’m interested to see what happens.

AC: Okay. Number six is: spend more. Most retirement books and articles boil down to “spending less, save more.” But here’s a retired physician that resolves to do the opposite.

JA: Yes because he’s a physician! God! (laughs) That’s why! You’ve saved!

AC: They’re going to take big foreign trips!

JA: Of course you are because you’re a physician!

AC: Are you saying the factory worker?

JA: My father was a cabinet maker! My mom was a secretary! No! They can’t! Don’t spend more!

AC: So if you’re a physician?

JA: Yes! Fine, I’m a small business owner, I sold my business for $20 million! You can spend a little bit more!

AC: So there’s a caveat.

JA: Yes! (laughs) So stupid.

AC: Number seven is: take smaller steps. So here’s a financial planner who is tired of unkept resolutions, so she’s urging her clients to think about smaller goals because if you never work out, it’s unrealistic to set a new year’s resolution to go to the gym every day. And by the same token, she’s urging her clients…

JA: The gym has already died out.

AC: Yeah right. Two weeks in. She’s urging her clients to find a hundred bucks a month in their current spending to save and boost their 401(k) accounts by 1%.

JA: You know what the best advice I’ve ever heard from a guest on our show when it comes to slow, gradual savings. Who was that one guy? He was fully retired at 34 because he saved 80% of his income. What did he say? It was something to the effect of each month, increase your savings by 1%.

AC: Yeah, that’s what he did. Not 1% a year, 1% month.

JA: “I’m saving X, and then next month I’m saving 1% more. Next month I’m saving 1% more. And then Al and I were like, “Yeah! It sounds like a really good idea! That’s great!” And the next month I was like, “Al, remember that guy? Are you doing that? Have you started that yet?” “No, we’ll start that next year.”

AC: Yeah I’m 20 years in, I’m saving 1,000% of my income. (laughs)

JA: (laughs) But that’s how you gradually do it, I think. Because those are small steps, but by the end of the year you’re saving 12% more? That’s pretty cool.

AC: Yeah I actually think that this is pretty profound, at least in my view. This is one of the most important things you can realize, when it comes to preparing for your retirement is if you take small steps when you’re younger, and when you’re middle age, when you’re older. You keep taking small steps, and it’s the collection of small steps that make a big, big difference.

JA: Right. It’s one step at a time.

AC: Yep that’s exactly right. Here’s another one, speak up at work.

JA: Yes. Not at Pure Financial though. (laughs)

AC: Here’s a person that suggests workers communicate their desire for a long career path. If they let it be known that they want to work well into their 60s, they improve their attractiveness to their employer.

JA: Versus, “hey, I want to punch in two years and find another job?” (laughs) That goes pretty well in the interview process.

AC:”I want to try this for six months, and if I like it, I might stay for a year.”

JA: “Yeah, just really looking to bridge the gap a little bit.”

AC: “‘Cause I’m pretty sure I’m going to get an inheritance in about eight or nine months. That’s what the trustees said anyway, so I need some tide me over.”

JA: “Just something, you know, I’m pretty bored. Whaddya think?”

AC: “Could I be CEO of the company?”

JA: Yeah. “I would like $200,000.”

AC: That seems like common sense. Here’s the ninth one. Get a housing game plan. So here’s a lady that’s planning to downsize sooner rather than later. I guess if housing is one of your biggest assets, and you’re going to need to downsize, why wait to retire? Go ahead and do it sooner rather than later. That’s what she’s advising, and that might be good advice, Joe. Because a lot of times, people retire, they stop working, they sort of lose their social network, and then they downsize, and they lose their neighborhood network too. And so the whole thing is brand new. Now some people can handle that. But for others, it makes it a very difficult transition in retirement.

JA: Yep, I’m heading up to Minnesota, to close on Ruthie’s home here in a couple of weeks. It took her forever. The old man dies. And then so she’s like, “can’t do anything for two years. I read that in a Dear Abby article.” So she stayed in the house, then two years turned to four years, and then four years turns the five and everything. And then finally when I went home this summer, I was like, “Mom, all the neighbors are gone or dead. You don’t have any friends around here. Let’s figure something out.”

AC: And the last one, Joe, number 10? Forget retirement.

JA: Forget about it. Unless you’re a physician. Then spend a lot more money. (laughs)

AC: Michael Kitces. We’ve had him on our show before. He’s trying to forget the word retirement because retirement implies that you’re supposed to literally retire, and not be engaged in any kind of work. He said most people actually enjoy being engaged in some way. Instead, think of your coming transition as financial independence, the ability to choose whatever you want to do to stay active, regardless of any need for income. So don’t retire in the old sense of the rocking chair on the porch. Retire to something that keeps you active, whether it’s working, whether it’s volunteering.

JA: So what’s his term? Financial independence?

AC: Yeah. “Think of your coming transition as financial independence, the ability to choose whatever you want to do to stay active, regardless of any need for income.” Now that implies that you’ve saved enough to be able to do that. Like you’re a physician. (laughs) Assuming that, I think that’s true. I think I think we’re very clear on this, now, that retirement should be active. That’s what keeps you young, vibrant, your mind going.

JA: Right. I read something like men that retired early have a higher mortality rate than men that retired later. And then I also heard something is that our life expectancy is longer. But the period of time where we are unhealthy is longer as well. So if you look back, I don’t know, don’t quote me on this, please.

AC: (laughs) You don’t have to study?

JA: Yeah I don’t have a source. (laughs)

AC: (laughs) Then why say it?

JA: (laughs) But I was listening to this podcast. I think it was actually Michael Kitces’ podcast. And the gentleman was saying, this is what this study has found, or this group of people are studying this, is that maybe 20 years ago, 30 years ago, let’s say life expectancy was age 80. But they were unhealthy for maybe two years as they passed away. Now let’s say life expectancy is age 85, hypothetically, but now I’m not sick for two years, I’m sick for five years. So which is better quality? I don’t know. I don’t want to be sick for five years and just be miserable.

AC: So I get more time, but I’m going to be hatin’ life.

JA: Yeah right. Frail. In a walker. (laughs) No!

AC: Well I’ve just recently heard about this show called “Better Late Than Never.” And it’s Henry Winkler, Bill Shatner, Terry Bradshaw and George Foreman traveling throughout the world. It is the funniest thing you’ve ever seen.

JA: That is such an awful show. It’s so awful. (laughs)

AC: Don’t say that. It is one of the funniest shows I’ve ever seen. But Bill Shatner, he’s 85 and he is limber.

JA: He’s 85?! Captain Kirk is 85?

AC: We had no idea because the other guys are, they’re probably 70-ish. Late 60s, early 70s, and he’s 85, and he’s right in there with them. It’s pretty amazing. So you can, even in your mid-80s, be pretty active, as he. Captain Kirk.

JA: Yeah, Bill. I like ow you called him Bill, too, like you guys are boys. “Well, Bill Shatner.”

AC: Well they call him that on the show, so he and I now… (laughs)

JA: (laughs) I think you have the status as Bill Shatner. Big Al and Bill. (laughs)

AC: He would say, “Is that Big Al? Can I just call you Big?” I’d say, “Bill, you can call me anything you want.” (laughs)

JA: (laughs) Oh boy. I have so many lines after that. But we’d probably get kicked off the air.

So that expert who says you should avoid Bitcoin is the highly respected Dr. Moshe Milevsky, Professor of Finance at the Schulich School of Business at York University in Toronto, Canada. Should you take Dr Milevsky’s advice? Joe’s right, we are getting a Bitcoin/blockchain expert on the show! Listen to next week’s podcast, when the fellas learn all about “altcoin” from Amanda B. Johnson, an internationally recognized expert on the world’s most prominent cryptocurrencies, and the world’s first freelancer to be paid via blockchain. Amanda will tell us all everything we need to know about Bitcoin, Ethereum, blockchain and the rest, next week on Your Money, Your Wealth.

37:43 – New Tax Opportunities – and Challenges – for Small Business Owners

AC: This is for business owners. And you may have heard, if you have a small business, what they call a pass-through business, which is an S-corp, it’s an LLC, it’s a partnership, it’s a sole proprietorship. The main point here is these are businesses where the profits get taxed on your own personal tax return, which is probably the majority of small businesses. The other choice is a C-corporation, where the corporation itself pays its own tax. That’s usually reserved for larger corporations. Not always. But anyway, the pass-through corporations, we’ve got a lot of small business owners in Southern California, and across the country. And this new tax law, there’s a 20% reduction of profits. In other words if you make $100,000 of profit in your partnership, in your LLC, in your sole proprietorship, the IRS says you can take a $20,000 deduction, a write off, and now there’s all these weird limitations. And the main limitation is that 20% reduction of profits in your business – and this is net profits. Gross income, $150,000, that’s what you get from your customers. $50,000 of expenses, your profit’s $100,000. So you get to take 20% of a $100,000. But the first limitation is, it can’t be any more than 20% of your net taxable income. So if you only have business income, no other income, your taxable income is going to be lower, because of the standard deduction, or itemized deductions, so you’re going to be limited to 20% of that. But there’s these weird breakpoints, like if you’re single and your taxable income is less than $157,500, what happens is you get this 20%, but if it’s in excess of that, now you have to decide, are you a service business or not? And there’s completely different rules on service business.

JA: So the $157,500 limitation is only for service businesses?

AC: Well no, it’s for the other business, because there’s new limitations. So let me start with the service business, and that’s like an accountant, an attorney, pretty much anyone that’s using their skill, I guess, to provide some kind of service. That’s kind of a vague definition, but that’s kind of how they defined it, to be honest. So a service business, if you’re single $157,000 below that, you get that 20% reduction. Of course, it has to be less than 20% of net income, you got that limitation. But once you’re over 157, if you’re married, it’s $315,000, then it starts phasing out. And so there’s this period of time where you only get a partial deduction. And for example, let’s say you’re single, $157,000, and the phase-out is $50,000 of income. So if you get $25,000 of extra income, you only get a 10% deduction. And then in the same way, for a married couple, the phase out period is $100,000, if you’re halfway, $50,000 of extra income, you only get a 10% deduction And the reason I bring all this up is, there’s this weird tax rate, and I’m going to sort of call it this “acceleration of tax” when you’re over those amounts, because now when you add a dollar of income, not only do you pay tax on that, but you’re also reducing the deduction at the same time, which means that now tax planning, it’s going to be actually more important than ever, because we sometimes illustrate tax brackets as stair steps, there’s stair step up, the more income you make, the higher the tax, you kind of keep stair stepping up. And then there’s going to be a range where there’s a big, big step and then it’s going to go back down again at a certain income rate. And so the point is, if you’re anywhere near that high tax, then you’re going to want to come up with tax deductions to be able to bring yourself off of that, so that you can be in a much lower tax bracket. On the other hand, if you haven’t made it to those figures, you’ve got some room, and you might want to add income, either in your business, or Roth conversions, there’s going to be all kinds of interesting planning this year for small business owners.

JA: Yeah but creating deductions now is even a little bit more challenging because you’re only really on the schedule A, where you have your itemized deductions, you’ve got medical expenses that are still allowable. Then you got your state tax and property tax, but that’s only limited to $10,000 and it caps you. And then you have charitable deductions. And then miscellaneous is gone.

AC: But probably the biggest one, Joe, would be your retirement plans. So a lot of small business owners don’t have retirement plans.

JA: So setting up like a defined benefit plan, maybe a SOLO 401(k).

AC: A SIMPLE IRA, a SOLO 401(k), a safe harbor 401(k), and if you’re making pretty good money, a defined benefit plan, I think you’re going to see a bunch more defined benefit plans, because of this. Because when you put, let’s say, $100,000 in it, and you think you’re in the 24% tax bracket, but all of a sudden you saved $37,000 because now you’re getting a double benefit. You’re saving the tax rate, but you’re also getting more of your deduction, which then lowers your tax rate further.

JA: Right. And a defined benefit plan is a little bit different than a defined contribution plan, where the defined contribution plan is simple as, well, your contributions are defined. Like, you’re familiar with a 401(k) plan? You can put in your $18,500 this year, and then if you are over 50, you get a catch-up. So $24,500 is the maximum. So that’s the contribution. A defined benefit plan re-engineers it. So I’m a small business owner, I got to get actuaries involved, and say hey I want to retire at 67 years old, and I want to create $100,000 income from my pension. You’re creating your own defined benefit pension plan. So then they backed the numbers up and say, “well given your age, given your income, and you wanted to develop $100,000 income out of this, you can fund this with a lot more money.” So you’re not tied to the defined contribution limits. You can actually fund it with a lot more capital. So that creates a tax deduction. So, it depends on if they have excess cash, how profitable those businesses are. And I think a lot of times, people shied away from those because it is complicated, there is a little bit more expense, and then we would run cost analysis, and they’re like, “yeah, that just seems like a pain.” But now you might get a double whammy by really taking a look at setting up some of these retirement accounts, even if you have to fund employees, and everything else, you really have to run the numbers.

AC: Like I say, I think it’s going to be more beneficial, and with defined benefit plans, the older you are, generally the more you can put into these plans. So think of it this way, if you want a $100,000 benefit, and you’re 25 years old, you have 30 years plus to fund that. Now if you’re 65 and want to retire 70 and you want $100,000 of benefit, to be able to get there, you have to put a lot in. Maybe $100,000 maybe $200,000, maybe $300,000 per year to get there. And all of that’s a tax deduction.

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Now, if you’ve got 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. Of course, Joe and Big Al are always willing to answer your email questions at info@purefinancial.com, or send them directly to joe.anderson@purefinancial.com, or alan.clopine@purefinancial.com

46:28 – Email: Will Transfer of Ownership of Inherited Property Cause Tax Re-Assessment?

JA: So this from John. And John asked this question. He inherited a condo from living trust. “Grantor and self were trustees. Will transfer of ownership cause property tax reassessment higher? Can I keep the trust going to avoid or roll into a new trust?”

AC: Okay, so he inherited a condo from a living trust.

JA: I guess, put it in layman’s terms… I like it, “grantor and self.” (laughs) Look at John. So he inherited a condo that was in a living trust.

AC: Presumably his parents, let’s just say.

JA: I would assume something like that.

AC: It wouldn’t have to have been. But that’s most likely.

JA: But he was also a trustee of the trust.

AC: Yeah. And so maybe parents, at a certain point, they wanted him to take care of their affairs, so he’s the trustee.

JA: Right. And some of this legalese gets a little bit confusing if you’ve never had a living trust before. And what a living trust basically is, is that you’re just transferring title of real property – so it could be your primary residence, a rental property, could be a brokerage account. Instead of having it in your name, or joint, or joint tenants, or whatever, you want to title it in the name of a living trust. And why people do that, is that avoids the probate process. That’s all it does.

AC: Yes. So you pass away, if you don’t have a trust if it’s over, what, $150,000, $170,000?

JA: Ish. We’re not attorneys, just a caveat there.

AC: Something in that range. I’m not sure the exact number, but if it’s over the specified level, then it has to get through the court system, and that’s called probate. And so the executor of the estate has to go in front of a judge and say, “here’s the will, and here’s how I’m going to divvy it up,” and the judge has to agree or disagree, or do whatever ruling they want to do. And so not only does that take time, and it costs money but it’s a public record. And so people set up trusts to void that whole thing.

JA: So it just avoids the courts. Because now what happens is that this trust is that I’m the trustee. And in that trust, I’m naming, in this legal document, who I want my stuff to go to if I were to pass away. So I’m going to leave all of my assets to Big Al. So then I pass away, Big Al is my beneficiary of the trust.

AC: Are they going to be over the limit?

JA: The $150,000? Probably not! I’m burning through that just in spite. (laughs)

AC: Just wondering whether we even need a trust. (laughs)

JA: Look at the Big Wallet on Big Al! (laughs)

AC: I’m just planning accordingly.

JA: You know what, never mind! Deb, you’re my beneficiary! (laughs)

AC: I’m out of the will. (laughs)

JA: So when I die, what happens is then the successor trustee, whoever I name to be the successor trustee, steps in, and was like, “OK, well now I’m the boss. What do I need to do? What is the direction?” And I’ve already laid out the direction in the trust. “Please give X Y Z to so-and-so.” So the successor trustee’s job is then to distribute the money to the beneficiaries. If you don’t have that, no one really knows what the hell is going on, so then you have to go to the courts, and the courts look at everything and make sure, and then you’ve got to pay attorney’s fees and so on. So back to his question: John. He inherited a condo. The condo was titled in this living trust. And so the grantor – all that is, is the person who set it up – and self were trustees. (laughs) Will transfer of ownership cause property tax reassessment? So that’s what he’s really concerned about. So dad and mom had the condo. They bought it 40 years ago for $50,000. They made some improvements, maybe the property tax on it is $1,000. Now when mom and dad died, he inherited it. So it’s now worth $500,000. So he still wants to keep that low property tax basis of $1,000. So I believe, if it’s father/ mother to child, there’s the Prop 65?

AC: I think it’s Prop 60.

JA: Prop 60?

AC: No, that’s when you’re over 55. (laughs) I don’t have the Prop number in front of me, but I’ll answer it this way. The answer is yes, there would be a reassessment in the property taxes for the value at the date of death, except there is an exception, and that’s a parent/child exception. And I think – is it a million dollars, I think, of property, it can go down to the child and still keep the same property tax level? You should’ve told me the question so I could look it up beforehand. (laughs)

JA: No, this is the part of the show so great.

AC: (laughs) Anyway. But yeah, let’s assume it was his mother or father. Then he can claim that parent/child exception. I was going to say it’s Prop 60 or 90, I’m not sure of that. I think it’s a different Prop actually. But there’s a proposition.

JA: Prop 65. (laughs) I’m totally guessing.

AC: Well let’s see, I’ll see if you’re right as we’re talking.

JA: So I guess to answer his other question, “can I keep the trust going to avoid or roll into a new trust?” So there are benefits of keeping it in the existing trust, depending on how that trust was drafted.

AC: Sure, I agree with that. Prop 65, by the way, is the Safe Drinking Water and Toxic Enforcement Act.

JA: Yes! That’s exactly what I’m talking about! You gotta be a safe drinker! (laughs) To get your property taxes in line!

AC: So don’t go to Prop 65. It’s gotta be another one. (laughs) So there might be a reason to keep it in the trust. Why is that?

JA: Well it depends on how that trust was drafted. But if I keep it in the existing trust, then it’s sheltered for creditors.

AC: Yes. And that is the benefit. And a lot of people spend an awful lot of money trying to get creditor protection when they’re living, and it is possible, you can set up these specialized trusts, and they’re complicated. Joe and I had someone on the air that talked about them, and generally, you’re going to spend $25,000 or more to set them up.

JA: A blind trust. What was his called?

AC: Yeah he had some other name.

JA: The ultimate? The Ultimate Badass Trust? (laughs)

AC: And several thousand dollars per year to administer, but once you pass away, and if your beneficiaries get the assets in the trust, if they leave it in the trust, they had that protection already – which simply means this: they have full access to the benefits of the income or even principal. They can distribute it anytime they want to. But if it’s in the trust, and if they go bankrupt, or they get divorced, or whatever, that asset is not part of that. So it stays safe from creditors.

JA: Do they have to file a tax return?

AC: Yes they do.

JA: So now you’re subject to trust tax rates.

AC: You are.

JA: So you just want to be careful to understand how all of that works.

AC: And the way that you get around that, Joe, in most cases, is whatever the income is, you distribute it to the beneficiaries. So it’s taxed on their tax rates, because the problem is, the trust tax rates, although they’re the same rates as individuals, you hit the highest level at $11,000, $12,000 of income. It’s not very much.

JA: So you can kind of blow yourself up, tax-wise, fairly quickly. So there you go, John. Hopefully, that answered your question. So we just need to figure out that Prop number for the parent/child exclusion to keep the property tax basis. People are listening to this in any other part of the country, they’re like what the hell is Prop? (laughs)

AC: It’s a proposition!

JA: A prop is what is behind my boat!

AC: Yeah – got it.

Oh, fellas! Proposition 58 is the California Constitutional amendment which excludes from reassessment transfers of real property between parents and children. Incidentally, California Prop 193 does the same between grandparents and grandchildren. Now, to avoid any confusion when a family member dies or becomes disabled, it’s really important to be ready before it becomes necessary. Visit the white papers section of the learning center at YourMoneyYourWealth.com and download our free Estate Plan Organizer! It’s designed to help ensure your assets and desires are carried out upon your departure. Find all the relevant information, fill out the forms completely, keep them up-to-date and store them in a safe, easily accessible place for your heirs. To get your free estate plan organizer, just visit the white papers section of the Learning Center at YourMoneyYourWealth.com

55:41 – California Considering New Charity Trick to Make up for the Limited SALT Deduction & New Tax Tables to Take Effect in February

JA: So this tax code, I really don’t want to go through the ins and outs of the new tax legislation.

AC: I got it bullet by bullet, 1 through 60. (laughs)

JA: But if we could discuss… let the games begin, in a sense. This is where it gets fun for Al and I. Now we’ve had some time to dissect the code a little bit, and then we start thinking of ideas and strategies to say, “how can we utilize the code,” because the code doesn’t tell us what we can do, what tells us what we cannot do.

AC: Right. And then you have to kind of fill in the gaps yourself.

JA: Yes. So then we do a lot of research on some of the top minds in our industry, to see what they’re doing, and what they’re coming up with. So what is this charitable trap of saving money in state taxes?

AC: Well this is only an idea. So this is not gospel yet, but our state of California, you and I live in Southern California, and so what they’re trying to do, Joe, as you know, as our listeners know, the new tax law limits our deduction for state and local taxes, any combination of state and local taxes, and property taxes, to $10,000. And the state of California did a little analysis, and they found out that two and a half million taxpayers in California claimed more than $10,000 in combined state and local taxes with property taxes.

JA: Two and a half million people. How many people live here in California?

AC: Well that’s two and a half million tax returns, so that would include joint filers too, so that could be – let’s just call it four million people. I think L.A. alone has about 17 million people. And the greater San Diego is probably three and a half, four million. I’m not sure about San Francisco, bigger than San Diego, I think. So yeah, it’s probably, I don’t know, 25, 30 million. So maybe 10%.

JA: That’s still significant.

AC: Yes. So here’s what here’s what our state is working on. So you’re not allowed to take any more deduction than $10,000 for state taxes, property taxes. What if California could set up its own charitable fund, and you could actually donate to that charitable fund, and they’d use that fund for roads and schools, and basically anything that’s in the California budget, and they would then reduce your California taxes, perhaps dollar for dollar. So let’s just say, you have $20,000 of California taxes, and you got $10,000 dollars in property taxes. So the $10,000, you’ve already hit the maximum.Maybe do that, your property taxes. And then before December 31st, you would contribute $20,000 to this charitable fund, to the state of California. And then you would get a charitable deduction on your federal return. Thereby, it’s a tricky way to continue to deduct your state and local taxes, and then you would get a tax credit in California, so that when April 15th came around, you wouldn’t owe anything. You would’ve owed $20,000, but because you gave $20,000 to this charitable fund, it subtracts off the tax as a credit and you don’t end up owing anything. That’s the idea.

JA: So but you’re still out the 20 grand.

AC: Yeah, you still got to pay the 20.

JA: But I can choose who the money goes to?

AC: Well no. It just allows you to deduct it on your federal return. You have to pay the 20 one way or another to the state of California because that’s your tax. They’re giving you an option to contribute it to them, rather than pay a tax.

JA: So I put the $20,000 into this charitable fund, then that wipes out my state taxes. So I don’t owe anything to the Franchise Tax Board. But then, in addition to that, I also received an additional $20,000 deduction on my federal return. So I got the $10,000 that was the max, property tax. Now I’m able to receive the $20,000 deduction. So if I’m in a 37% tax rate, then that’s pretty good savings.

AC: It’s pretty good savings. I don’t have any idea whether this will fly or not. My suspicion is it won’t.

JA: So this isn’t law, we’re just talking here.

AC: No, this is just an idea. It’s not the code, and there is some precedent for tax credits. In other words, if you want to designate x number of dollars of your tax liability to a certain fund, it reduces your tax, dollar for dollar. This would just be an extreme case of it. Now the federal government, do you think they would like us doing this? I’ve got to believe no. (laughs) So we’re going to have to see if this works, and one of the things they’re talking about is maybe it won’t be a dollar for dollar credit. Maybe you do this to the donation fund and you get 80% credit. But if you’re in the highest tax bracket, it still works out to your benefit.

JA: But here’s what is so confusing to me is that two and a half million – so 10%. I think that’s a fairly low number, because what’s the average cost of a home in Southern California? Or California in general. $700,000?

AC: Yeah, I know in San Diego, it’s probably between 5 and $600,000 Los Angeles, San Francisco, higher, I would say.

JA: So without Prop 13, with some of the baby boomers and everything else, they have little bit lower property taxes, they lived in their house for 30 years. And so yeah, I’ve met with someone, hypothetically, they got a $1.4 million home, but their property taxes is about $4,000 because they bought it 30 years ago. So let’s say you’re a younger individual, that is purchasing a home for the first time, and you’re buying a $500,000 house. My property taxes are going to be over $5,000. And if I can afford a $500,000 house, I’m probably going to have state taxes higher than $5,000. Do you agree with that?

AC: Yes I would.

JA: So it just seems to me that that number is going to continue to climb unless younger people don’t necessarily buy homes.

AC: Well, and that’s a concern.

JA: And when I say younger people, I’m probably looking at 30 to 50-year-olds.

AC: Yeah. Well exactly. Because in fact, there’s a person in our office, Joe, that decided to back out of his escrow, partly because there was a flaw, part of it was was not permanent. But really, one of the bigger reasons was because the tax law changed, and all of a sudden the deduction, the write off wouldn’t be the same, and it became unaffordable. So he backed out of it, and I think you’re going to see more of that, which is going to hurt the real estate industry in California. So our state legislatures are trying to come up with a work around. Whether this can work or not, I don’t know, but it’s an interesting concept. And even our Governor, Jerry Brown, Here’s what he says he says, he goes, “I’m certainly open to it. It looks interesting.” That’s what the governor says.

JA: There you go through. (laughs) Pretty much law, now. (laughs What else? Any final thoughts, Big Al?

AC: Well, the Treasury just came out this week and said that the the the new tax withholding tables, reflecting the new tax law, the new tax brackets, will probably take effect in February. In fact, it’s a requirement that employers go ahead and use these new tables for withholding by February 15th, although they can use them earlier if they want to, voluntarily. And the idea here is that, with lower tax rates, then there’s going to be less withholding, and the take-home pay will be higher, so people will have more money to spend, and they’ll feel wealthier, and then that will improve the economy. That’s the idea.

JA: That’s the whole crux of this whole thing.

AC: So anyway, I guess, expect a little bit higher net pay, starting next month. For some.

JA: For some. And for others, well, not so much.

AC: I actually think most people will probably have less withholding, but if you live in a high tax state, like California, you’re probably going to owe on April 15th, so be aware of that. Because withholding is not the same as your tax bill. Withholding is just an estimate of what your tax bill is, and you settle up when you do your tax return. And if you don’t have enough withholding, well then you owe with your tax return on April 15th.

JA: All right. That’s it for us for Big Al Clopine, I’m Joe Anderson, the show’s called Your Money, Your Wealth. We’ll see you next week.

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So, to recap today’s show: Before collecting Social Security, talk to a retirement professional about it, in addition to talking to the folks at Social Security. Don’t spend more in retirement unless you know for sure you can afford it, and if you’re a small business owner, the new tax law may be a good, but complicated, thing for you. And if you’re in California, maybe you’ll be paying your state taxes as a charitable donation in the future! Stay tuned. For more information or assistance with any of this stuff, call 888-994-6257 – we may even put you and your financial question on the show, live.

Subscribe to the podcast at YourMoneyYourWealth.com, through your favorite podcatcher or on iTunes, where you can also check out our ratings and reviews. Listen next week for the basics of cryptocurrencies with Amanda B. Johnson on 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.