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 [...]

Andi Last

Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show and manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
October 12, 2021

Asset allocation is the delicate balance of stocks, bonds, and other assets in an investment portfolio. What allocation is best for your retirement needs? What’s a good mix of domestic and international stocks? Is it crazy to have a 90/10 allocation of equities to fixed income in a $10 million portfolio? Should Dad’s portfolio be rebalanced from 90% stocks to 60% stocks and 40% bonds? Can pension and Social Security be counted as your bond allocation? Plus, legacy tax planning: how can you avoid confiscatory estate taxes?

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Show Notes

  • (01:03) What’s a Good Domestic and International Stock Mix? (Brian, Albany, NY) 
  • (07:57) Is a 90/10 Stock/Bond Mix Crazy for a $10M Portfolio? (Sunny D, AZ) 
  • (18:48) Should Pension and Social Security Be Considered Part of My Fixed Income Allocation? (James, AZ)
  • (25:01) Should I Rebalance Dad’s Portfolio From 90% Stocks to 60/40 Stocks and Bonds? (Craig, Chicago)
  • (29:47) Legacy Tax Planning: How Can We Avoid Confiscatory Estate Taxes? (George, Ledbetter, TX) 

Free resources:

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READ THE BLOG | What is Asset Allocation?

LISTEN | YMYW Podcast #262: What’s the Right Retirement Asset Allocation for You?

Listen to today’s podcast episode on YouTube:


Asset allocation is the delicate balance of stocks, bonds, and other assets that make up your investment portfolio. Today on Your Money, Your Wealth® podcast 347, Joe and Big Al help YMYW listeners figure out the best asset allocations for their needs. What’s a good mix of domestic and international stocks? Is a 90/10 stock/bond mix crazy in a $10 million portfolio? Can pension and Social Security count as your bond allocation? Should Dad’s portfolio be rebalanced from 90% stocks to 60% stocks and 40% bonds? Then for something completely different we’ll wrap up with a legacy tax planning question: how to avoid “confiscatory” estate taxes? Go to YourMoneyYourWealth.com and click Ask Joe and Al On Air to send in your money questions and comments. Don’t forget to tell us where you’re from, when and where you listen, and what you’re drinking! I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

What’s a Good Domestic and International Stock Mix? (Brian, Albany, NY)

Joe: “Hi Joe Big Al and Andi. YMYW is the best. I never miss an episode”. Wow! Committed.

Al: That is impressive.

Joe: Or pathetic.

Al: You don’t say that to a fan.

Andi: A dedicated listener.

Al: That’s impressive.

Joe: “I have a simple non Roth question. I’ve determined that a 70/30 allocation is right for my risk tolerance. I’m not sure how to split the 70% between domestic and international. When I researched this on the web, the answers are all over the map from 50/50 to 100/0. What’s a reasonable mix? I’m thinking about 30% bonds, cash equivalents, 50% domestic stocks, 20% international. Does this make sense”?

Andi: And he signed it, Brian, in Albany, New York.

Joe: Yeah, I like that. You look at two different things here, Brian. My two cents is that if he believes that 7/30 is the appropriate mix, then you look at your bond allocation. What kind of bonds do you want to hold in your 30% bond allocation? He just says bonds and cash equivalents. So is that short term bonds, long term bonds, high yield bonds, corporate bonds, treasuries? You want to get a little bit more allocation. Is there are tips in there? There’s all sorts of different flavors and bonds. So if 30% is the bond equation, just make sure that you understand what type of bonds that you own in them. The stock component, you break this out probably into different sectors. So he wants to first know international versus domestic.

Al: Right.

Joe: You can look at the global market capitalization. When you look, most people are home biased, so they have more money in domestic stocks than they do in foreign stocks.

Al: Yeah. And are you okay with it?

Joe: I’m fine with that. I think they’re missing out on some pretty good diversification.

Al: Well, I think that everyone should have an international stock allocation, which Brian has. So, that’s a great start.

Joe: I think our allocation is 60% in domestic, 40% international.

Al: That’s exactly right. On just the stock side, bonds separate. If you look at your stocks, what we do for our clients is 60% domestic, 40% international. I personally like to think maybe two thirds is right in domestic one third. As long as you have some allocation and understand that the markets tend to go up and down somewhat in tandem, but not completely. I mean, we’ve had decades where the U.S. has done terrible and international has done great and vice versa. That’s why you actually have some of each because they tend to peak at different times.

Joe: We’re in one of those decades now. Where the US has done great and international’s like???

Al: Right. Which generally then would mean maybe there’s more opportunity in international but as I say that I cringe because you never know. We could have another decade where U.S. outperforms. We just don’t know.

Joe: But the issue is, do you want that type of portfolio? Because you’re going to compare it to the S&P 500 and then you’re going to look at your portfolio and it’s either going to outperform or lag the S&P 500 because you have a good portion of your portfolio in AAA bonds, 30% of it in international stocks. So your benchmark is going to be up and then you’re going to make moves and you’re going to do changes potentially to the portfolio because you’re comparing apples and oranges.

Al: That’s a good point. We in the industry call that tracking error. Other words, you’re you’re not tracking to the US indexes, which is what you see. And so if you feel like you’re going to have an issue there, maybe you have less international just so you have less tracking error.

Joe: Right. You also want to make sure in your international stock component you have emerging markets.

Al: Agreed.

Joe: So then what is the actual split? The easiest way to do it is that you look at your bond component, even though that’s 30% of the portfolio, block it off to to say, here’s my bond component. I want 50% in short term bonds, 50% in cash. Here’s my stock component, I want 60% in equity US. I want 40% in international. From the international, maybe you want 70% in international stocks and 30% in emerging markets.

Al: Yeah, I like that.

Joe: And then you break it out even more so you can kind of see this pyramid building. Then you’re going to look at what kind of stocks you want to own. Do you want to own value stocks? How much of your percentage do you want to have in value type stocks versus growth stocks? Small company stocks versus large company stocks? So this is building portfolio construction 101. I think he’s off to a good start here but there’s a lot more layers to the cake that you want to consider.

Al: Yeah and the interesting thing, Joe, is that that these different asset classes don’t all perform the same. So, for example, large company growth stocks have outperformed generally over the last 5 years.

Joe: Everything! Because you have Amazon, you have Alphabet, you have Tesla, you have Netflix, you have Google.

Al: Nevertheless, since last fall, small companies have started slightly outperforming large companies.

Joe: Why is that? Maybe it’s the cycle that we’re in? Maybe we just got out of a pandemic and then maybe these smaller companies that got really hurt are now coming back? Who knows, we can’t predict the future. We can always look in the past and look at performance. We’ve known over the past hundred years that smaller companies have outperformed larger companies because there’s more risk. Smaller companies, like half of them, are doomed to fail. Because of that, the other half are going to outperform, which you’ll be compensated for the risk that you’re taking there.

Al: Otherwise, no one would invest in them. So then, by definition, they better perform better.

Joe: You have to get paid for the risk you’re taking.

Al: Now here’s the problem, it doesn’t happen every year, it doesn’t happen every five years, sometimes 10 years in a row it doesn’t happen. But when you look back 100 years, small companies have beat large companies. And when you look back 100 years, value companies have beat growth companies. That’s not been true the last five+ years but that has been true historically.

Joe: Just food for thought as you’re constructing your overall portfolio. I think the point of the discussion is, I’m glad you’re thinking about international versus domestic but you should be taking this a little bit deeper.

Is a 90/10 Stock/Bond Mix Crazy for a $10M Portfolio? (Sunny D, AZ)

Joe: “Hi, Andi. First, not Last, Big Al and Dyn… Dynamic or Dynamite o”?

Andi: Dynamite Joe.

Joe: “I’m in sunny Arizona and this is my first email to you”. Well, thank you for the email. “I’m 65 years old. Quit working in 2017, while wife, 60, has been a homemaker since day one. Finally, by searching best retirement podcasts.”

Andi: Nice!

Al: We made some kind of list.

Joe: We came up?

Al: Apparently. How about that?

Andi: We are funny, the best podcast with humor, according to I think it was… a financial physician guy?

Al: It was a group of doctors, right? I remember them.

Joe: “Typically, listen while on walks and started with episode 250”. What episode are we on now?

Andi: This one is 347.

Al: Oooh, I guess if you do one a day, maybe you double up to get caught up.

Andi: He’s been listening for 2 months.

Joe: Wow. “Have enjoyed each segment and must admit that I admire your knowledge, tenacity and patience. I listen at one and a half times speed and increase it to two times when the same question is being answered”. Think back to a Roth.

Al: Yeah, we have answered that one a lot.

Joe: He goes to two times,

Al: Two times, I like it.

Andi: Then you guys sound like chipmunks.

Al: I wonder how we sound at two times? Probably not great.

Joe: “So my question is, my expenses over 10 years are estimated to be a million dollars. If I have $2.5 million dollars in assets, then for a 60/40 portfolio. 1.5 is equities, $1 million cash, in bonds. However, if my assets are $10 million, then a 60/40 portfolio would result in $6 million in equities, $40 million in cash.

Andi: $4 million.

Joe: $4 million. I’m sorry. “Would I be crazy to keep $9 million in equities and $1 million in cash in a 90/10 mix for a $10 million portfolio. This strategy would be to maintain 10 years of expenses in cash all the time. Goal, is to leave some bucks to charity and kids. Three kids who are doctors, so well-settled would love to hear your thoughts. Keep up the good work. Best regards, Sunny D”. OK, I’m a little confused on Sunny D’s question here.

Al: I think he’s got $10 million but he’s just trying to get there by saying, that it’s 10 years and safety, but what if he has a lot of money? Can he do a 90/10 allocation?

Joe: Okay, so if he’s spending $100,000 a year, right? Or no…

Al: No, that’s right. 10 years, $100,000 a year.

Joe: OK, so he wants to spend $100,000 a year. How we would look at that is to say, well, you might want to have 10 years of very safe money. So 10 times $100,000 is $1 million bucks.

Al: You want to have at least $1 million, but that’s only one way to figure out what the allocation should be.

Joe: He’s got $2.5 million in assets. So if you look at $2.5 million, $1 million and $2.5 million that’s kind of a 60/40 split.

Al: Yeah, that looks good. But what if it grows to $10 million, then what? I think that’s the question.

Joe: If you want to have that same rule of thumb, it seems the thought process, then you would want $1 million dollars sitting in cash that would cover your living expenses for the next 10 years. The other $9 million would grow. There’s never been a time where a globally diversified portfolio went down in value over 10 years. That’s not saying it can’t happen. But as history looks, it’s it’s pretty hard unless we go through a really bad 10 year period.

Al: I would add a couple things to that. One way to figure out your allocation is to look at your goals and figure out what rate of return you need for the portfolio and then you can sort of work backwards to figure out how much you should have in stocks versus bonds. Let’s just say stocks earned over time 8 or 9% and bonds earned 2 or 3%. Kind of just do the math to figure it out. And of course, those numbers change. So don’t take that as gospel, but that would be one approach. But I might say Sunny… I would ask you, how did you respond during the Great Recession? Because the stock market went down about 50%. So if you had 90%, so $9 million, just to say an example and if that $9 million got cut in half. If you lost $4.5 million, are you okay with that? Could you ride out the storm? Some people can. I would say most can’t. That’s a tough question to ask. You kind of have to figure out your risks, that’s another way to think about this is risk tolerance. I’m not saying the market’s going to drop 50%, but it did in 2008, so it could happen again.

Joe: Let me see if I got this right. You can look at what expected rate of return does Sunny need to make? Well, he’s spending $100,000 a year, so that’s 1% of the portfolio that he needs to make to outpace inflation and taxes. Maybe 2.5% is what his rate of return needs to be. So that’s probably what, 90% bonds and 10% stocks?

Al: Yeah, maybe 100% bonds if you think of it that way. So there is an argument. If you don’t need to take the risk, why take it? But the problem with that is you may not even keep up with inflation and if your goal is to pass more to the kids and charity, you probably want some growth.

Joe: Then on the total other side of that. You can look at it and say, you know what? I want $100,000 a year plus tax, plus the cost of living, so maybe I need $1 million dollars, just sitting in cash. I could care less what happens in the market over the next 10 years. I know for certain that I have a guaranteed income over the next 10 years and we’ll see what happens to the market.

Al: As long as you can stomach that. Some people can, many cannot. Right?

Joe: Right. I agree. But if you could say, I know, I’m fine. I can ride this thing out. I think that helps if you have a plan, if you have a strategy.

Al: It helps a lot.

Joe: And if you’re tax managing the portfolio, if you’re rebalancing the portfolio and when that market does come back, you’re going to own a lot more shares. You’re going to have some tax benefits along the way. Where, a down market could actually help you quite a bit long term. If you stayed the course and manage the portfolio correctly.

Al: Here’s another thought.

Joe: You are feeling a little older today Al. You’re so conservative.

Al: Yeah, I am. Right! So, Sunny is married and you may be risk averse, is your wife? Is she willing to do this?

Joe: Or your husband?

Al: Yeah, or husband? Either one. I think make sure both of you are on the same page. In my particular case, I’m willing to take more risks than my lovely wife and that’s just the reality of it. How many times have we seen couples come in and husband or wife made a poor decision and they get hit over the head by the other one? What happened was the market cratered. The one spouse got panicked and they sold, so they locked in their losses, they didn’t ride it out.

Joe: Well, yeah, I think one spouse typically deals with the finances while the other spouse maybe doesn’t necessarily care for it. Until the market blows up.

Al: You lose half of your nest.

Joe, Yeah and then it’s like, what are you doing? You know, we got to stop this now, then you sell and you’re sitting on the sidelines. So it could be a happy medium for Sunny.

Al: It could be. But 90/10. 90% stocks, 10% bonds is fine. As long as you understand there’s going to be periods of extreme volatility where you’re not going to be happy.

Joe: Sure, you could go through the last decade. And what was that 2000 through 2010 ish where the S&P 500 was flat?

Al: Yeah, even down by 9%. Right?

Joe: Well, it wasn’t down 9%. Was it down that much?

Al: Yeah, it was a $1 million portfolio for a total return. 1% per year on an annualized basis.

Joe: So, if you had $10 million. It’s going to be worth $9 million,10 years from now.

Al: Yeah, that’s what happened in 2000 to 2010.

Joe: Right, because if you remember, we had the dot com bust, you had 9/11, you had the Great Recession…

Al: But I think this is an important point. That’s what happened if you only owned the S&P 500. If you had a globally diversified portfolio with international funds, emerging markets, you actually did 6%.

Joe: Quite well, you doubled your money. So then that $9 million is now worth $18 million.

Al: Yeah, almost. So that’s that’s one of the benefits of diversifying. The great thing about not diversifying is if you pick the right fund at the right time but it’s hard to do.

Joe: Exactly and the more money that you have, it’s really difficult to do this because if the market corrects 10% on $10 million… that’s a big number versus if you correct 10% on $100,000.

Al: I could just see that already with Annie. Honey, you just lost us a million.

Joe: Look at me, you got $10 million?

Al: I said, IF I had that.

Joe: Oh, wow! So anyway, great question. Thanks Sunny D.

Learn more about asset allocation by taking advantage of all the free resources I’ve posted in the podcast show notes at YourMoneyYourWealth.com. The Retirement Readiness Guide contains eight strategies, one of which focuses on asset allocation, to help you prepare for retirement. YMYW podcast episode 262 was about asset allocation, that’s in the podcast show notes too, and there’s also an in-depth blog post that fleshes out asset allocation in much more more detail and shows how it has the potential to lower your risk while giving you the same expected return. There are a lot of moving parts to constructing a properly allocated retirement portfolio. A financial assessment with a CERTIFIED FINANCIAL PLANNER™ professional on Joe and Big Al’s team at Pure Financial Advisors can help. It’s free, just like the podcast and those financial resources, and you can schedule yours right in the podcast show notes. Just click the link in the description of today’s episode in your podcast app to get to those free resources, and to schedule your free financial assessment.

Should Pension and Social Security Be Considered Part of My Fixed Income Allocation? (James, AZ)

Joe: We got James. He writes from Arizona. “Hello, Joe, Al, and Andi. Thanks for the podcast and the valuable information you share with us listeners. I would like to get your thoughts on how to incorporate a pension and Social Security within the fixed income portion of my portfolio. Do you recommend this approach? Or do you keep those separate from the allocation percentages?” So James is asking Al, is that I got a pension and Social Security, can I just count that as, like, my bond allocation of my portfolio?

Al: So in other words, I don’t need any bonds. Because I got plenty of fixed income.

Joe: Correct. I guess another way to look at that is like- what was the name of the book that- he was all into human capital and he kind of looked at it that way. If you have fixed income sources coming in from Social Security and pensions and so on, you have to look at that present value allocation into your overall asset allocation, right?

Al: Yes, I do remember that. I forget the name of the book, too. We interviewed him, the author. I remember.

Joe: Yeah, yeah, yeah. He’s a good guy. “As an example, we have $1,500,000 in retirement in taxable accounts. So we want to take 4% each year or $60,000. My pension is $20,000 per year. Our Social Security will be $40,000 per year. That provides $120,000 in total income with half coming from pension and Social Security. If we want to have a 50/50 equity and fixed income allocation and the 50% fixed income is covered with pension and Social Security, can we invest 100% of what is in the retirement taxable accounts into equities to cover the 50% of the portfolio? If you do not agree with this approach, I would appreciate hearing your thoughts and how you incorporate pensions and Social Security into the equity and fixed income portfolio mix. Much appreciate it.” And James, that’s a very good question. And Al, I guess I’ll let you kind of take a crack at that.

Al: It’s my turn, OK good. See what you think. I like to separate it, Joe. So in other words, I like to say, what is your need? What is your shortfall? You take your spending need of $120,000 and your fixed income is $60,000, so you still need $60,000. So I like to look at that compared to your overall portfolio. And of course, that’s 4%. But then a couple of things that I would say. One is we kind of want to make sure you have enough safety in your portfolio to ride out a long-term market downturn. So if you need $60,000 a year, you can multiply that by 5 years. You could multiply by 10 years, let’s say 10 years to be ultra-safe. So that’s $600,000. So if you agree with that, then you would want $600,000 in fixed income divided by $1,500,000, which comes out to be 40%. 40% bonds, 60% stocks. Now, that’s just- that’s one way to look at it. A second way to look at it is, what rate of return do you need to be able to generate a 4% cash flow distribution? And interestingly enough, the 4% rule came from somebody investing in a 60/40 portfolio, 60% stocks, 40% bonds for a 25-year period. That doesn’t guarantee that’s going to work. But over the likelihood, that’s probably a 90% plus chance that you’ll have enough money over your retirement, which is- when the study was done years ago- was over 25 years. So anyway, in both analyses, 60/40 to get a 4% distribution, 60/40 to have $600,000 in fixed income, I think that’s the number.

Joe: I agree with both those statements because how I would look, you have to look at it, what is the demand for the portfolio? What is the portfolio meant to do? In the portfolio, in this particular scenario for James, is that it needs to create $40,000 dollars of income. No, $60,000 of income from the portfolio, he’ll be pulling 4% of the portfolio. So he’s like can I keep that 100% equity? Because my true income need is $120,000. So $60,000 is going to come from the portfolio. $60,000 is going to come from pensions and Social Security. So half of my income is already met by other fixed income sources other than my portfolio. So can’t I just keep that 100% stocks because half of my income is already covered and that’s my fixed income? I like his thinking, but I think it’s flawed just a little bit because he has to look at what the demand is for the portfolio because if he’s got 100% stocks and he’s pulling 4% out-  do we know how old James is? No, no idea.

Al: We don’t.

Joe: I don’t know. Maybe if he was 75, I’d be fine with it.

Al: I think that to me, Joe, that the lower the demand on the portfolio now it’s- now you’ve got a little more flexibility. You can take more risk if that’s what you want to do to save for charity or your kids. Or you can take less risk because you don’t need to take as much risk. But I think the 4% rule was originally designed as 60% stocks, 40% bonds. And that’s kind of what he’s wanting to do.

Joe: No, I agree. He needs a little bit more safety because if he had 100% equities within that portfolio and he’s pulling 4% out, and the market drops, let’s say 20%. And so now he doesn’t have- that 4%, just went up to 7% or 8% and he could go into asset depletion mode. If he’s fine at the end of the day, just living off of $60,000 from his fixed income sources, by all means, just keep it in equities. Because he could eventually live off of $200,000 a year if he has a really good bull run. But if he hits a bear market at the wrong time, it could blow up his entire plan. So we’re fairly conservative. So we look at constructing the portfolio, what it needs. If you’re taking that big of a distribution, I like Al’s idea.

Should I Rebalance Dad’s Portfolio From 90% Stocks to 60/40 Stocks and Bonds? (Craig, Chicago)

Joe: Craig from Chicago writes in “You’ll be glad to know that the word, Roth-” oh, he put it-

Al: – like a swear word.

Andi: – like it’s a bad word.

Joe:  “- is nowhere in this question.” Thanks, Craig.

Al: Craig, we like you already.

Joe: Craig. Love you buddy. “I took over my father’s finances from a friend broker of his who- my dad was in questionable investments, MLPs, non-traded, etc.-” So. OK. He’s taking over the family finances. I guess he looked at his dad’s brokerage account. He’s got some questionable investment choices in there. “It’s going to be difficult to get out of these so I’m dealing with the IRA and brokerage accounts first. The IRA is manageable as I can get out of those bad risky investments without the tax consequences, right?” Yes. Anything inside a retirement account you’re good to go. You can buy, sell, trade, day-trade, do whatever in the retirement accounts, IRAs, Roth IRAs, whatever because they grow tax-deferred. Just make sure that you’re doing it correctly as you transfer that money into another IRA that you’re not taking distributions. We’ve seen that in the past. “So my plan there is just to rebalance to the 3-fund portfolio 60/40.” Three fund portfolio- I think it’s like Vanguard Total Stock Market Index, total international index, and a bond fund?

Al: That’s exactly what he’s referring to.

Joe: OK.

Al: Or Fidelity or whoever. It doesn’t matter. Which is not a bad, very simple way to go.

Joe: I agree. “But the brokerage account is large and 90% invested in individual stocks. I’d like to sell the bulk of the stocks and rebalance into Fidelity, no-fee mutual funds ending up at a 60/40 split. But I understand that he will have to pay taxes, at least 15%, on any gains. Do I understand this right? And is there some strategy to lessen the tax impact of a radical rebalance like this? I drive a Tesla. Thanks.”

Al: That’s good.

Joe: Yes. Tax-loss harvesting comes to mind. But make sure that you’re rebalancing just- I guess- if you’re going to take over the family finances you don’t want to blow them up in taxes, just to make your life easier. He’s got good investments. Keep the ones that are good and then get rid of the ones that are bad.

Al: I think that the way I would think about it is that some of the individual stocks probably have a bunch of gains, maybe you use those as proxies for an S&P 500 Fund, which is not ideal. I understand it’s not as diversified as you would like. But if it avoids causing a whole bunch of taxation. We don’t know how old your dad is. And right now under current law when someone passes away the next generation gets a full step-up in basis so there is no tax problem. So if your dad is 70 and his dad lived to 95 then that’s probably not going to be a great strategy. On the other hand, if your dad’s like my dad who’s 87, you hate to think about it but-

Joe: Wow. Morbid.

Al:  – we don’t live forever. And even he said it, I don’t know if I want to get to 90.

Joe: So yeah Craig, if your dad’s a-tippin’ the toe…

Andi: What does that mean!?

Al: Well, I gotta be realistic here, right?

Joe: Yeah. If he can barely fog a mirror, then don’t do anything. Just hold on.

Al: Otherwise, do your best. Just create some proxies on some of these stocks and try to backfill the best you can.

Joe: Yes. Hopefully, that helps. But you know we’ve seen that in the past. Like- I’m taking over the family finances, dad’s 90 and all of a sudden they’re selling all this stuff and capital gains happens and they re-balance it. But then the old man dies like a couple of weeks later, they could have got a full step-up in basis, no taxes due.

Al: Or mom’s about to pass away, she sells all her real estate so it’s simpler for the kids and pays a bunch of tax that they wouldn’t have paid.

Yikes. Yes, planning for what happens when you or your parents are gone can be morbid but these are important conversations to have and decisions to make. We have a free resource that makes it a little easier for everyone involved. Our Estate Plan Organizer is packed with information to get your estate in order, like a list of documents to provide to your loved ones, and a convenient place to record all of the important information your family will need in the event of your passing. Download the organizer, fill out everything from your financial account details and insurance policies to your contacts and your final wishes, then put it in a safe place and give a copy to your family. Don’t forget to update it regularly. You can download the Estate Plan Organizer for free from the podcast show notes at YourMoneyYourWealth.com, just click the link in the description of today’s episode in your podcast app and you’ll see it there under “Free Resources”.

Legacy Tax Planning: How Can We Avoid Confiscatory Estate Taxes? (George, Ledbetter, TX)

Joe: “A big Texas howdy to the YMYW team. Big Al, Andi, Andi’s mom, and Joe, the excitable intern”. 

Andi & Al: Wow! 

Al: How about that!

Joe: It’s just water off a duck’s back Al. 

Al: You got thick skin, right? 

Andi: He’s building it. 

Al: Sometimes. 

Joe: Where’s ninja? The crazy ninja that wants me to retire and just give up. The abuse I get from our listeners! “This is George emailing again from Ledbetter, Texas. Still living my best retired live with Cletus the Wonder Dog, and I wanted to reach out with y’all to pose another question. I’m looking at legacy planning and find myself stumped. My wife and I each retired at 61 years old. We have a combined $13 million net worth. We know that the united gift and estate tax exemption is currently $22 million for a married couple, and that is scheduled to get cut in half by the end of 2025, if not sooner. That puts us in a 40% estate tax crosshairs. Obviously, we’re trying to avoid confiscatory estate taxes so we can pass along our estate to our children and important charities. We’ve already established an irrevocable life insurance trust that holds $3 million Second-To-Die policy that pays our three children upon both our deaths by law that’s not included in our estate. Grantor trust appear to be on the chopping block and proposed legislation. Anything else we can do? Can the islet hold assets other than life insurance? Should we consider an additional Second-To-Die policy? Thanks for your barstool conversation. Oh, and I was looking through my old baseball cards and stumbled on to one Iron Mike Schmidt of the Phillies. I’ll be honest, he does look a lot like Big Al. Do you agree, Andi”? 

Andi: And then he says, “I’ve dug even deeper”. He’s got a picture of Joe Anderson looking just like Tom Arnold, and I believe that there is some Photoshop involved in both of these.

Al: Well, I would agree because that’s me in the Phillies uniform, but it’s cool. You did a great job. 

Joe: I don’t know. I don’t get the whole Tom Arnold thing. 

Andi: One listener said you look like him and I don’t see it myself either. 

Al: If you cover up the eyes and just look at the nose and below…

Joe:  And the face because that is my nose. 

Al: Yeah, I know, that’s what I’m saying. It’s definitely you. 

Andi: I think it’s his whole face. I think it’s Tom Arnold’s head and his glasses on. But yeah, I think it’s Joe’s face and I think it’s Al Clopine with Mike Schmidt’s mustache. 

Al: Well, no. That’s what my mustache looks like. 

Joe: Anyway, let’s move on because people can’t see what the hell we’re talking about. 

Andi: We’re going to put this in the podcast show notes. What are you talking about? 

Joe: Please don’t. Alright. So, okay a couple things…

Al: My picture is more flattering than yours.

Joe: We need to understand here, George is already giving, right? To charity?

Al: Yep and he’s got a Second-To-Die policy, so he’s probably already doing the gifts to the kids through the Crummey Trust, right? 

Joe: Yeah. So he’s got a $13 million net worth. First of all, I would want to know how much of that is in a retirement account? How much of that is in the non-qualified account? From there, how much are you giving to charity? Because you can give to charity at your death, that would avoid the exemption. You’re not going to get stuck with taxes there. So I think at a $13 million net worth, I would not be overly concerned. That’s my opinion. I don’t think you’ve got to start doing grants and Crummey’s. He’s already got a Second-To-Die. Someone probably sold him that. Should he do some more life insurance? I don’t think so. 

Al: I don’t think so either. 

Joe: Can he gift while he’s living? Probably. Can you wait until you pass and take a look at what do you want to give to charity versus what do you want to give to your family? Because it’s going to go three ways. It’s going to go to either taxes, your family or charity and then you’ve got to decide what percentage do you want to go to charity versus your family? Then that would create your overall estate plan in my humble opinion. 

Al: Yeah, because right now we’ve got almost a $12 million exemption per person, so it’s not a problem today. However, in the bill that just came out with the House Ways and Means Committee on September 13th, they’re wanting to chop it back to $5 million plus inflation. So call it five and a half per person. So that’s 11. So currently and you’re right Joe, let’s just say, George, if you want to give away $2 million to charity right now, you’re fine. Even if they go back to the $5.5 million, roughly because that comes right off the top, but at age 61 with a $13 million estate, depending upon what you’re spending, could that be double by the time you pass away or more? Sure and there are lots of strategies besides what you’ve mentioned. There’s a qualified personal residence trusts or QPRT. There’s family limited partnerships. There’s charitable lead trusts. There’s charitable remainder trusts. There is estate phrases, you just do an outright gift right now to the kids or at some point later. And so, it gets credited against your estate tax exemption, but it freezes the value so any future growth is outside your estate. There’s lots you can do but I guess, Joe, I agree with you. I wouldn’t worry about it too much. 

Joe: At age 61, would you do advanced estate planning?

Al: Not with this scenario.

Joe: Unless George is in bad health. Then you might want to take a look but it doesn’t sound like he is. He’s already got a $3 million Second-To-Die policy. So what that means is that it’s outside of his taxable estate. Why people set those up is that, let’s say George passes and then his kids are stuck with $3 million of estate tax. Instead of selling assets or the family farm or whatever that George has, he can use the life insurance proceeds to give it to Uncle Sam. It’s just using leverage and time in that the benefit is tax free to the kids and it’s not subject to estate tax because it’s outside the taxable estate. 

Al: And often, like you say, it’s done to pay the estate taxes. But when you can use strategies to eliminate the taxes, I even like that better. 

Joe: Sure but you lose control by doing that. 

Al: Well you do. I always like to say these estate planning techniques, they’re sort of like taking medicine. There’s side effects and you have to understand what those are. There’s issues with every single strategy that you may not like.

Joe: Right. So if you want full control, I guess the ILIT’s probably the easiest. 

Al: It is because then you maintain control of everything you have.

Joe: Right and you’re just using the life insurance contract at both of the deaths to pay the heirs.

Al: So more importantly, I like how I would have looked as a Philly. That looks cool.


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