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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 153 out of 715 RIA’s nationwide by total assets under management by [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CFO & Chairman of the Board of Pure Financial Advisors. He has been an executive leader of the Company for over a decade. As CFO he is responsible for the financial operations of the company as well as investor relations. Alan joined the firm in 2008, about one year after it [...]

Andi Last
ABOUT Andi

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

Published On
August 9, 2022

When you retire and when you actually stop working may be two different things. How can you get a raise when you’re working for a startup in retirement? Should you do Roth conversions before or after you quit working? Plus, find out what Joe and Big Al think about a 529 and series I bond gifting strategy, and using whole life insurance to transfer wealth to the kids. 

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Show Notes

  • (01:17) How to Get a Pay Raise at a Start-Up: Ideas for an Early Retiree Sucked Back Into Work? (Kevin, Raleigh, NC)
  • (05:48) Convert to Roth Now in Spite of High Tax Bracket, or Stop Working First? (Allen, New Braunfels, TX)
  • (13:56) Does This 529 Plan and Series I Bonds Gift Strategy Work? (Malcolm, Lewisburg, PA)
  • (26:52) Should We Use Whole Life Insurance to Transfer Wealth to Our Kids? (Elizabeth, Oakland, CA)
  • (33:38) Five Stars from Joe’s Pebble Beach caddie and fellow podcast host (ProJockLooper)
  • (36:00) The Derails

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Transcription

Your chance at a $100 Amazon gift card is waiting for you in the podcast show notes at YourMoneyYourWealth.com! Answer 17 questions in the 5th annual YMYW Podcast Survey and you’re entered to win! Click the link in the description of today’s episode in your podcast app to go to the show notes and access the survey and the secret password. Legitimate, complete entries with honest opinions about what would make Your Money, Your Wealth your favorite, funniest, top, best personal finance podcast will be in the running for the hundred bucks. US residents only, no purchase necessary, survey and giveaway close and winner chosen at 4pm Pacific time on August 31st, 2022. 

Today on Your Money, Your Wealth® podcast 390, when you retire and when you actually stop working may be two different things. How can you get a raise when you’re working for a startup in retirement, and should you do Roth conversions before or after you quit working? Plus, find out what Joe and Big Al think about a 529 and I bond gifting strategy, and using whole life insurance to transfer wealth to the kids. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

How to Get a Pay Raise at a Start-Up: Ideas for an Early Retiree Sucked Back in to Work? (Kevin, Raleigh, NC)

Joe: “Hi, Joe, Al, Andi. Why is Andi always last?”

Andi: Ba-dum-tss.

Al: A little play on words. That’s Andi’s last name, by the way. Andi Last.

Joe: Andi Last. That’s why she’s last. “Second time in a long time. Drive a 2022 Outback and a 2016 Class B, drink wine and fruity brews. Sold our San Diego place in 2020 before the big run up, ouch, and moved east. Still getting used to the humidity and the bugs after 35 years in California. Don’t anyone move here. Different kind of problem for your consideration today. We are living on 3.3% of 401(k) and still doing small Roth conversions. I’m 61, wife is 57. Only debt is to the tax man on the 401(k) and some IRAs. But 52% of our investments are all in Roth accounts. I was doing some periodic part time work, but the small young company listed me as a lead manager on a new 5 to 7 year contract because my resume fit and we won. The contract requires mostly full-time effort. I really don’t want to be sucked back into full-time work. But we certainly need to do this effort for a couple of years until I can find a suitable replacement. The money will be a nice bump, though I am way underpaid given rates I was paid on previous contracts for similar other work. The lower rate wasn’t too bothersome when I was a part timer, but now the ego is bruised. Just curious if you have worked with clients who thought they retired early but then got stuck or sucked back into work. I haven’t been really retired long enough to get that bored.
And how do I get an appropriate pay bump to match expanded responsibilities without hanging the company out to dry? Any thoughts on how to approach this?”

Al: So this is Kevin. Raleigh, North Carolina.

Joe: That’s right.

Al: It’s a little humid there. That’s what I’ve heard. Especially in the Summer.

Joe: Raleigh. Never been.

Al: Yeah, neither have I. I’ve just heard people that have lived there. Anyway, Kevin, this is an easy one. Just ask for equity, right? That’s all you have to do. You get equity, so you get paid a low salary. Sure, whatever. But you get equity. So if the company succeeds, you’ll make a whole bunch of money. So that’s how you solve that problem.

Joe: Yeah. Easier said than done.

Al: Or you just quit, right? Because you don’t want to work anyway.

Joe: Well, Kevin is a good guy. He doesn’t want to keep hanging the company out to dry.

Al: I understand.

Joe: He wants a couple of extra bones here.

Al: I understand. However, here’s how I would approach it.
Then your transition plan will be much accelerated. I’ll put it that way, if you don’t get equity. If you do get equity, maybe you’ll stay on longer.

Joe: It’s a small company, it’s a start-up. Is there- Yeah, I guess that’s a good way to approach it.

Al: That’s what I’d do.

Joe: Yeah. Just say, hey, give me-

Al: On the other hand, if you don’t think the company is going anywhere, then-

Joe: Well, they got a nice contract, 5 to 7 years.

Al: They do, for whatever that’s worth.

Joe: Kevin’s grinding. He’s severely underpaid. Because they probably can’t cash flow.

Al: They don’t have money. That’s what startups do. They give you equity or they give you stock options or they give you restricted stock or something.

Joe: Some other equity or compensation.

Al: Yeah, they give you profit. Profit sharing.

Joe: Interest.

Al: Yes, profit interest. There are lots of ways to get equity, but that’s what you would generally ask for in this case.

Joe: Okay. Yeah. I think a lot of our clients actually get sucked back in.

Al: It happens all the time.

Joe: And then you have some clients that retire early, and then they say, oh, I’m going to be a consultant.

A: Those clients, they never get called. No way.

Joe: They are yeah, well, I’m going to get a job making $250,000 a year consulting.

Al: That’s right. I’m making $250,000 now. I’m going to at least cover that with my consulting. And then they wait by the phone. Nothing happens.

Joe: Nothing. Just crickets. And then they have to go back to work because they don’t have enough money.

Joe: And then it’s Walmart. They’re waving to us when we walk in there. All right, good luck with that, Kevin. Let us know if you get a little equity, and then we can do some equity compensation planning for you.

Convert to Roth Now in Spite of High Tax Bracket, or Stop Working First? (Allen, New Braunfels, TX)

Joe: Let’s see. We got Allen from New Brownsfield, Texas.

Andi: New Braunfels. I actually looked it up. There’s a ridiculous video on YouTube about it, and apparently in German it means ‘the brown rock’. New Braunfels. There you go.

Al: For what it’s worth. I would have had trouble with that, too.

Joe: Braunfels. Okay. “Currently partially retired, 59 years young after 35 years in the energy industry as a chemical engineer. Drive a 2013 Mazda- 2013 Mazda3, about 100,000 miles on it. Live-in girlfriend is 13 years younger than me and is an RN.” He’s pretty happy about that. There’s a smiley face. It’s like yeah baby.

Al: Yeah, he put that right at the start of the comment.

Joe: Just right there.

Al: I’m gonna say it.

Joe: He’s like, I’m the king of New Braunfels.

Al: It’s like I’m a great dude. Look at this.

Joe: Look at this. Was killing it in the energy industry-

Al: -and now look at me.

Joe: -and now look at me now. “Drink of choice is any craft beer, and I’m always in search of the next great beer that I haven’t tried.” All right.

Al: You got a suggestion?

Joe: Yeah, a little Spotted Cow from New Glaris.

Al: Here’s my suggestion. Latitude 33 Blood Orange.

Joe: Okay. Or Coors Light.

Al: That’s not a new craft beer.

Joe: Got it. Okay. We already did that. “I always enjoy a spicy Muchala. I think that’s right, isn’t it? Muchala?

Al: Michaela? Machala?

Andi: Okay, so I think it’s actually supposed to be a spicy Michelada, which is a Mexican beer cocktail.

Joe: I know what a Michelada is.

Al: But there’s no ada.

Joe/Al: Michela-

Andi: When I google spicy michela I get spicy Micheladas.

Joe: Well, that’s what I was- it’s just like a bloody beer. That’s what spicy muchala is.

Al: Okay.

Andi: A Muchala. He’s got a new term for it.

Joe: Mochella. Mochella is how he’s spelling it.

Al: Maybe it’s spelled wrong. I don’t know. Maybe it’s just like spicy Michelle.

Andi: Maybe that’s the RN.

Joe: Yeah. “Being originally from New Orleans, currently living in sunny New Braunfels, Texas.” Okay?

Al: So far, so good.

Joe: Quick high level numbers- $40,000 in a Roth IRA that got funded early in my career before I reached the salary limit, $2,500,000 in a rollover IRA, $30,000 in an HSA, which I continue to fund with my part time income, $4,300,000 in a post-tax brokerage account. All of these assets are in accounts at Vanguard. Being the cheap ass that I am, being managed by a low-cost financial adviser, I got a 60/40 split and 40% of the stocks are in international stocks.”

Al: So far, so good.

Joe: “My adviser tells me that I can easily spend what I budgeted for retirement and not run out of money by age 100. And I’m not currently working-“

Al: -worrying-

Joe: “- worrying about leaving any money to my heirs. With dividends from my brokerage account and my part time income, I find myself at the top of the 24% tax bracket, even after the standard deduction, business expenses, et cetera.
I intended to start doing Roth conversions once I retired to fill up the 24% tax bracket before Social Security kicks in at age 70 and RMDs at 72. However, this part time gig has generated more income than planned.” Another little back to worker. Another little side hustle.

Al: Partially retired, working, making a lot of money.

Joe: Just killing it. “Question- with federal income tax rates going up in 2025 due to the expiration of the tax cuts, would it make sense to do some amount of Roth conversions, which would put me in the 32% tax bracket between now and then in order to reduce the amount of potential RMDs that would be subject to the new 33% tax rate? I realize one potential answer would be to stop working, thus making more room in the 24% tax bracket. Long term, this is my intention if my friends would stop calling me to come work for them. I would appreciate some spitball banter, any ideas concerning my good problem to have. You guys need to give Andi a big raise for putting up with you two. Love the show and humor. Keep up the good work.”

Andi: Oh, thank you, Allen. I’ll mention that to the bosses.

Al: Did you write that PS yourself, Andi?

Joe: Yes, exactly.

Andi: That’s always the answer, right?

Joe: Oh boy. All right. Well, gotta go to the compensation committee.

Al: We do. Let’s see. Who’s the chairman of that? Oh, it’s me.

Joe: There you go. Chairman of the compensation committee. Big Al.

Al: All right.

Joe: So what does he do here? Do we go to the 33%? Well, he kind of answered his own question. Do I want to pay tax at 32% or 33%? What do you think, Alan?

Al: Yeah, 32%. And plus, it’s kind of a no brainer right now because the market is down this year compared to where it was at the start of the year. So think of it this way, if you do the conversion now and the market goes up a bunch, your effective tax rate is actually lower when you think about it. Because the way I think about it is by the time your income or even the time you pay your tax next year, it’s like, well, what’s in the account? And so you pay the amount of tax that you pay divided by what it’s worth at the end of the year, it’s like, well, that’s actually really your effective rate, right. Even though it’s not what shows up on your tax return.

Joe: So let’s say if he converts out $100,000, but at the end of the year, it’s $110,000. So your effective rate is the amount of tax by $110,000 not necessarily what he paid, because he’s only going to pay tax on $100,000.

Al: That’s right. $30,000 tax, that’s 30%. But $30,000 to $110,000 is probably 27%. That’s one way to think about it. Anytime the market is down, that’s a good answer to go ahead and do that.

Joe: Yeah. And especially with the amount of money that he has in retirement accounts that he’s continuing to work, they’re only going to continue to compound and build. He’s got a lot of money in a non-qualified account. He’s going to have pretty high Social Security, I would imagine. So if he’s going to be in the 32%, I don’t know. And if he passes away, then the kids get or the heirs gets hammered with tax, tax rates are probably only going to go up. I think- just go in with kit feet here, right?

Al: Kit feet?

Joe: Yeah. He doesn’t have to blow the load and convert a whole bunch. Just convert $10,000, $20,000, $30,000, $40,000 because he’s only got $20,000 in the Roth. And then see how that feels.

Al: Start building that baby up.

Joe: Yeah. Because what you can think about, too, is he’s making a ton of money doing the side gig, right. His best buddies are hiring them and making all this money, and he’s like, damn. Well, just think, all right, well, how about if- you could play all sorts of mind games with yourself, right?
You could say, all right, well, man, stop paying me or stop working. You don’t want to do that. If you like it, and it’s cash-

Al: If you like it, sure. Take it.

Joe: -keep the cash. But then take that cash and use some of that to pay the tax to do the conversions so you have tax-free growth later.

Al: Easy enough. And maybe if you like the idea of doing a small amount now, maybe do a little bit more of this year because the market is down. But on a go-forward, go back to $40,000, $50,000, $60,000, whatever the numbers that you’re comfortable with, and stay there. And then when you start working less, you’ll be able to convert more.

One of the most powerful retirement tools that Congress has ever given taxpayers is the Roth account, and, Joe & Big Al empower you with the information you need to rock your retirement with Roth in the latest episode of the Your Money, Your Wealth TV show. Watch it, download the companion Ultimate Guide to Roth IRAs, and other free financial resources from the podcast show notes – just click the link in the description of today’s episode in your podcast app to get there. Subscribe to our YouTube channel from the show notes too, and see daily videos of the fellas answering your questions from the YMYW podcast.

Does This 529 Plan and Series I Bonds Gift Strategy Work? (Malcolm, Lewisburg, PA)

Joe: We got Malcolm writes in from Louisburg, Pennsylvania. “Context if needed, my wife and I are 39 and 40 years old, W2 AGI about $750,000, much less after taxes.” $750,000.

Al: That’s pretty good.

Joe: That’s healthy.

Al: I wish I had that.

Joe: Oh Big Al. You’re double that. On a monthly basis.

Al: That’s my monthly income?

Joe: That is.

Al: I didn’t realize that.

Joe: Got it. Well, you spend too much. “Every year we have maximized our 401(k)s, not after-tax contributions, unfortunately, backdoor Roths and personal IRAs, stealth stretch IRAs.” Oh God.

Andi: Stealth? That’s one I haven’t heard.

Joe: The stealth stretch IRA. It’s an HSA invested in the market.

Al: You’re right.

Joe: I wonder who came up with that one.

Al: First time I heard that. You?

Joe: Yeah, me too. I’ve never heard of the stealth stretch. It’s a health savings account. You can just call it what it is.

Al: You have to have a high deductible health savings plan to qualify.

Joe: Yeah, to get the Stealth.

Al: And I think it’s a little under $4000 you can put in per year. $3500 maybe? Something like that?

Joe: Yep. Get a tax deductible, grows tax-deferred. Pull it out tax-free for health insurance.

Al: As long as you use it for health, yep.

Joe: Or you could roll it into an IRA later. So that’s why maybe he’s calling it the stealth stretch.

Al: Maybe.

Joe: Stretch Stealth. Okay, cool. Sounds good. I like it. Okay. “And I have a taxable account as well. Continuing to contribute about $10,000 a month, 90/10 stock/bond. We don’t panic sell. We paid off our student loans, $500,000. But do carry mortgages on our primary home and properties on our rental LLC that houses over 30 tenants.”

Al: Wow. That’s a heavy hitter.

Joe: I wonder how big that house is. 4 bedroom, 6 bath.

Al: Yeah, they’re maximizing the rent. I’m trying to think- my max was a little over 20. I never made it to 30.

Joe: Wow. “30 doors, commercial and residential, net worth, excluding the rental properties, is about $1,750,000.” Congratulations there, Malcolm. Very nice. “The rental business net worth is about another $1,000,000 with a cash flow, not income, of at least $10,000 a month. We drive a 2009 Ford Fusion and a 2011 Honda CRV. Both top of the line, of course.” Little Ford Fusion. You feed that with, like, vegetable oil. Is that a gas car? Is that like a- ?

Al: That’s a gas car.

Joe: “Our child is one years old. And we also contribute the maximum for a couple to PA’s 529 for the last two years, which was $32,000 for 2022. With a high inflationary economy, we purchased $5000 in paper I bonds with our tax return. In our Treasury Direct, we bought electronic I bonds, $10,000 each for myself, my wife and our child. This means we will have to file a gift tax return for excess contribution for our child, $32,000 plus $10,000. But given the return- but given the return, we decided to do it. Do you agree?” All right, let me just understand what he’s doing here. So he’s got a 529 plan, then he contributes to the 529 plan of $32,000.

Al: Yeah. I’m presuming that’s husband and wife, $16,000 each.

Joe: Okay, so $16,000 for husband, $16,000 for wife was a gift to the child to put in the- because the child is the beneficiary of the 529 plan. Yeah, but that’s one year. You don’t necessarily have to file a gift tax return, but-

Al: Not for that.

Joe: But he said, all right, well, how can you buy- did he over-contribute to the I Bond? Because he’s got $5000 that he purchased, and then he went to Treasury Direct and bought another $10,000.

Al: No, you can do that. You can go to Treasury Direct and buy an electronic I Bond, $10,000 per person. And you can also buy a paper I Bond for $5000 a person if you have a tax refund. That’s how that works.

Joe: Ah. Got it, got it, got it. Okay. Thank you very much. Okay. So then he’s like, hey, because we put $10,000 for junior, the one year old, I got to file a gift tax return for the $10,000 over and above the $32,000 which is $16,000, the annual exclusion for per person.

Al: Right. And he’s asking, do we agree? And I do agree, except let me ask a question, and that is- because you can open up a 529 plan, and you can front load it 5 years of contribution, $16,000 per year. So you can do $80,000 into a 529 plan and not have a gift tax problem. And being married, your spouse can do $80,000 right up front, no problem. But if you give any additional gifts during that 5 years, you have to file a gift tax return, which I’ll get into in a second. Now, assuming that both husband and wife put the $16,000 in each, then you’re kind of stuck. That $10,000 would be- you’d have to file a gift tax return. However, if husband or wife individually put in $32,000, which they’re allowed to, they’re allowed to do up to $80,000, then they’re fine. And then the other spouse does the I Bond. So that would be a better way to do it.

Joe: This is only because there’s this 5-year rule with 529 plans to front load the 529 plans so that you can kind of jump start the college, get the time value of money working in your favor quicker. So the biggest caveat within this is because of that 5-year rule.

Al: That’s right. And so let me explain. No one understands what gift tax is but it’s actually not that complicated when you think about it. So the IRS says, you know what? I can give $16,000 to anyone I want. I can give it to you, Joe. I can give it to Andi. I can give it to Aaron, whoever I feel like, every single year. And my spouse, Annie, can do the same thing if she wants to. Right? No problem. Now, if I give more than $16,000, then it’s allowed. But what happens is then I have to take that dollar amount off my exclusion when I pass away, because here’s the concept-

Joe: But is that $16,000 per person?

Al: Yeah.

Joe: You could give $1,000,000 away per year, but you have to find all these different targets to give $16,000 to.

Al: You could. But if you give $1,000,000 to one person, then-

Joe: – then you’re over the $16,000.

Al: You’d have to file a gift tax return for $984,000. Right?

Joe: That’s pretty good.

Al: Pretty good math. And here’s the reason why. It’s because when you pass away right now, you have about $12,000,000 that goes to the next generation tax-free. And so then what people were doing years and years ago, they were just giving their assets before they died. It’s like, then you don’t have a gift tax, you don’t have an estate tax problem. So they had to say, no, you can’t do that, you’re limited to- it used to be $10,000 a year for a long time. Now it’s $16,000 a year. You’re limited. And if you give more than that, then here’s what happens. You just take that extra, that excess gift, and you subtract it from the $12,000,000. And I know you accountants out there, it’s a little more complicated than that, but that’s the exclusion. It’s a unified credit, blah, blah, blah. But don’t worry about that. That’s the concept. Basically, you’re giving some of your assets before you pass away, and then you have to subtract it off to your exclusion.

Joe: Gift tax return 706 or 709?

Al: 709.

Joe: 709. Okay, so he filed a 709.

Al: Well, he should, and I agree with that. Unless-

Joe: “- but given the return, we decided to do it.-

Al: Yeah.

Joe: “- given the return-“

Andi: On I Bonds.

Al: Like I said, husband could have done $32,000 in the 529 plan, and spouse could have done $10,000 I Bonds and they would have been just fine.

Joe: Just fine. All right. “Treasury Direct also allows you to buy I Bonds as gifts, up to $10,000 at a time. But you can buy as many gifts as you want for the same recipient in the same year.” I don’t know if that’s true.

Al: I don’t agree with that. I think you can buy as many $10,000 bonds for different recipients. I’ve never seen that you could buy more than one $10,000 I Bond for a recipient. So I don’t think that’s right.

Joe: “These gifts remain in your gift box until you send them to the recipient-” So, sure, you could buy a bunch of gifts, keep them in your little gift box, but then as soon as you give them to other recipients, and that’s when the gift is- Because I read or did you read it like if someone else gave- don’t they keep track of these gifts? Like your grandparents gave, let’s say his kid the $10,000- the kid could only get $10,000 a year.

Al: You couldn’t do it in the same year. Otherwise there’s another gift tax problem. That’s my understanding.

Joe: Yeah, I don’t know the whole gift box is all new to me. “-provided the recipient does not receive the gift. The gifts do not count toward the $10,000 limit, and an individual can purchase or receive as a gift. Acknowledging that we do not know how long inflation and I Bond returns will continue to beat the S&P 500, but what do you think about loading up a few years’ worth of I Bond gifts? This way, when inflation improves, we can stop purchasing individual I Bonds and instead deliver gifts of $10,000 of I Bonds every year until all the gifts are gone. There’s a penalty of 3 months interest if the I Bond is cashed out before 5 years, but that is okay, given the current interest rates if inflation suddenly goes away. However, we suspect we will hold for 5 years at least.”

Al: But also understand with I Bonds, there’s a fixed rate and there’s a variable rate. And the fixed rate, I believe, right now, is 0%. In other words, the fixed rate is nothing. So the variable rate, because inflation is high, is like 9.5%, something like that right now. What’s it going to be next year? Who knows? Right? The rate gets adjusted. So you may end up with these bonds if inflation turns the other way, that are paying almost nothing.

Joe: So I think what he’s doing is that or what he’s thinking he can do is that, all right, well, I Bonds are paying 9.5% or 9.7%, close to 10%-

Al: Yeah, close to 10%.

Joe: – so let’s just load up and buy hundreds of thousands of I Bonds and put them in my gift box. The gift box is going to gift me my I Bonds every year. And he’s thinking that because I bought them at this point and they’re my gift box, I get the 9.75%.

Al: See, I don’t think you can do that.

Joe: I don’t think so either. I don’t know 100%.

Al: We could be wrong.

Joe: We probably are. 50/50.

Al: Yes. 25% chance of being right.

Joe: All right, “Related to this, do we avoid taxes on I Bonds if we cash our daughter’s I Bonds when inflation is low and use the proceeds to fund the 529 in the future? Technically, it is being used for college.” He’s just trying to play games here. Just use the I Bond to pay for the college. Because he’s trying to do an ARB on the interest rate on the I Bond.

Al: He’s trying to cash out of the I Bonds when they go to a low rate.
No, that doesn’t work. Unless your daughter goes to college at age 5 or 6.

Joe: Yeah, because it’s like inflation is going to go down so the I Bond is going to go down-

Al: So I got a cash out. I don’t want to pay the tax because I got to put it in a 529 plan. Nah, good try.

If you’ve got money questions, comments, suggestions, requests or stories, go to YourMoneyYourWealth.com and click Ask Joe & Al On Air to send a priority voice message or an email and get your answer right here on YYMW. Better yet, schedule a free, comprehensive review of your entire financial situation with one of the financial professionals on Joe and Big Al’s team at Pure Financial Advisors Get ALL of your questions answered, and come away with an actionable plan for your retirement. Pure is a fee-only fiduciary, so they’re required by law to act in the clients best interest, you’ll never pay any commissions because they won’t sell you any investment products, and you can meet at one of our six offices in Southern California, Seattle or Chicago, or via Zoom right from your couch no matter where you are. Click the Get an Assessment button at YourMoneyYourWealth.com to get started.

Should We Use Whole Life Insurance to Transfer Wealth to Our Kids? (Elizabeth, Oakland, CA)

Joe: Elizabeth wrote in from Oakland, California. “Dear Joe and Big Al, I’m an early career doctor in California and I’m beginning to do some estate planning. I’d be interested to learn your thoughts on how you use or on the use of whole life insurance as a means of transferring wealth to our children. My husband inherited two whole life policies from Northwestern Mutual that his parents took out on him in 1988 and in 1991. And at this point, the total cash value of $52,000 and a death benefit of $214,000 aren’t significant enough that they may be worth keeping. We’re planning as if we’re going to max out the lifetime tax exemption on gifts and estates with the expectation that it may decrease. So far, we’ve been using our annual gift tax exclusion to fund our children’s 529 accounts, currently $16,000 each per year-” thank you for that, Elizabeth. “-but soon those accounts will have enough, and we’ll want to direct the gifts elsewhere. We are considering naming our children as the beneficiaries of these whole life policies and then increasing the death benefit so that the annual premiums is roughly the annual gift tax exclusion. It is my understanding that on our death, the money would pass outside of our estate and be tax-free to our heirs. Do you see this as a reasonable gifting strategy? Of course, there is a risk of defaulting on the payments due to unforeseen financial circumstances in the future or the insurance company going bankrupt. Thank you for your thoughts. Drive a Volvo XC 40 and a little dirty martini.” All right.

Al: Hopefully not the same time.

Joe: Who cares? She’s a doctor. She can fix herself.

Al: True. Good point.

Joe: Couple of things, Elizabeth. So, a couple of things I’m worried about. Early career doctor.

Al: Yeah. Sounds like just starting your career.

Joe: So she’s probably killing it, making a ton of money. She’s got some small kids, funding the 529 plans. I’m guessing she’s not in her 70s.

Al: No, it doesn’t seem like it.

Joe: Or even 80s.

Al: I’m gonna guess-

Joe: 30s?

Al: -30s. If I had to guess.

Joe: A little dirty martini, a little Volvo, I’m guessing like 36, 37.

Al: Yes, it could be 40, but I think you’re right on.

Joe: Do not do this at this age if you’re thinking about estate planning.

Al: We don’t even know what an estate plan is going to be in 50, 60 years.

Joe: – 60, 70 years.

Al: We don’t even know if we’ll have it.

Joe: So I would be careful with that. If you funded life insurance policies, the death benefit is included in your taxable estate for estate tax purposes. So let me repeat that. If you buy life insurance and you die with the death benefit, the death benefit is included, not excluded, in your taxable estate for estate planning purposes. So you have to get the life insurance outside of your estate by setting up an irrevocable trust. So some people call it an ILIT, Irrevocable life Insurance Trust. You set up the trust, the trust owns the life insurance, and then you’re gifting into Crummey letters and all these other complicated stuff that you may or may not even use if you’re in your 30s. We would look at advanced estate planning for people probably in their what- 70s?

Al: Yeah, I agree. It’s way too early. And so here’s the mathematics behind this. If you really want to set aside money for your kids, then either you buy life insurance in an ILIT- so here’s how that works is the $16,000 goes to this irrevocable life insurance trust. That trust then buys the insurance, right? The kids are the beneficiary. Now it’s outside of your estate because it was through a gift. The kids have to sign these Crummey letters so that-

Joe: -they don’t keep the money.

Al: -they don’t keep the money. They’re accepting this as their gift. And then you got to look at, well, what if I just put in $16,000 in this trust? What’s that going to grow to in 50 years versus what the life insurance will be worth? That’s your calculations.

Joe: Because it’s leveraged. What you’re doing is leveraging life insurance. So you’re saying, hey, I want to give my kids a couple of million bucks or maybe it’s $10,000,000, I don’t know what you want to give them. But then you can look back and say, all right, well, what’s the future value of my $16,000 contributions in a mutual fund that gets 6%. And then you get a full step-up in basis at death. That’s where it is today. Maybe that changes. Then you don’t have to go through this rigmarole. But if you want to use leverage and like the life insurance and say, hey, if I paid $16,000 and bought a $10,000,000 life insurance policy, then you look at the internal rate of return on the death benefit given whatever life expectancy you think you’re going to live. If you’re in your 30s, that’s a long time.

Al: Yes, I agree. It’s just way too early. You see this strategy for someone that’s maybe in their 60s or 70s that has a huge estate, right? And then maybe instead of the $16,000 gift, maybe you do a large gift of $1,000,000 or whatever, and then yeah, you file a gift tax return for that. But now the trust has $1,000,000 and then buys a whole bunch of insurance with that. If you think that’s a good investment for the kids and you’re just looking at your life expectancy versus a life insurance company what they think, because truly they’re going to make money, right? So if you think that you can get a good policy and you have shortened life expectancy, it could be a great investment. But in your 30s, to me, way too early to think about it.

Joe: Yeah, for an estate planning play, but I don’t know. Of course they think they’re going to have an estate over $30,000,000 and maybe it decreases, what is it now, $12,000,000 something?

Al: Yeah, about $12,000,000. So married couple, $24,000,000-

Joe: – $25,000,000-

Al: $24,000,000, $25,000,000 goes to the next generation tax-free.

Joe: Estate tax-free.

Al: Estate tax-free, right.

Joe: I don’t know. I think there’s other strategies that you could do but if- I guess we gave you the math and there’s a due diligence that you need to kind of figure out to see if it makes sense for you.

Al: There’s all kinds of other strategies that you can do. It’s just premature right now.

Joe: All right. And we are not attorneys. We are not estate planners. We are just a couple of guys just chatting about emails that come in. This is not advice.

Five Stars from Joe’s Pebble Beach caddie and fellow podcast host (ProJockLooper)

Joe: We got another 5-star, Al.

Al: Did we?

Joe: Crazy. But I know who he is.

Al: Your cousin?

Joe: Pro Jock Looper. “I really like the chemistry between Joe and Big Al. The structure of their show is great, especially like, the spit ball approach. Highly recommend it.” I guarantee this guy does not talk like this. I’m surprised there wasn’t, like, 15 F-bombs in here.

Al: Got it. That’s how he normally talks.

Joe: He was my caddy-

Al: Got it.

Joe: -at Pebble Beach.

Al: Yeah, you mentioned him.

Joe: He’s awesome. He’s got a great podcast. I highly recommend any golfer out there that likes to talk about golf. It’s called The Real Life Caddy Podcast.

Al: Got it. Very cool.

Joe: Funny guy from Scotland.

Al: Oh, that’s even better. The accent is so good. If you can understand it.

Joe: It’s like, oh, yeah, Big Al. I listen to it. It doesn’t sound so big.

Al: Let’s see, I guess-

Joe: Yeah, he’s not, I guess Pro Jock- Jock Looper. You are correct. Joe is taller than I am.

Al: He’s got a big brain. Got a big brain. Big G. So check that out.

Joe: All right, that’s it for us. Thank you, Andi.

Andi: Thank you.

Joe: Appreciate everything you do. And we’ll bring your raise to the committee. We’ll see what happens there.

Andi: Good to hear.

The Derails

_______

We will see what happens indeed! Thanks again to Allen in the Brown Rock of Texas for planting the seed! Also, I’ve linked to the Real Life Caddie podcast in the show notes so you can check it out, and we’ve got Celcius, tea, and bootleg wine in the Derails at the end of the episode, so stick around.

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