The following is a transcript from the Radio Show "Decker Talk Radio - Protect Your Retirement. The following comments are of the opinion of Brian Decker and Mike Decker.
MIKE: Good morning KVI listeners, this is Mike Decker.
BRIAN: And Brian Decker.
MIKE: And we're excited for another show today on protect your environment. This is KVI 570, Sunday mornings, nine AM, and this is Decker Talk Radio, and we're with Brian Decker, who is a financial planner. Retirement planner is really what he does as a specialty, but he worked for Decker Retirement Planning out of Kirkland, Washington. So, we're very glad to have him on this show, and today we've got some wonderful things to talk about on inheritance.
BRIAN: On inheritance, providing inheritance, giving inheritance, receiving inheritance, taxes on inheritance, what to do when you’ve got a spouse that married your son or daughter that you know is going to spend your inheritance if they get it, tangible assets, part or your will, dynasties, trusts, stretch IRAs. We're gonna go-oh, and my favorite, the beach bum trust.
MIKE: So, we're gonna cover a lot here on both sides, the receiver, the giver, and every which way that we can fit in this show today. So Brian, let's get started at the top of our list.
BRIAN: Okay, so let’s start with the planning side, and whether you should use a will or a trust. So, we're not attorneys. We work with the team that has a legal representative, legal relationship, but typically a trust is needed if one of three things. At least in Washington State if one of three things is in place. One is if you’ve got children through separate marriages. If you do, we would strongly recommend that you have a trust. Why is that?
BRIAN: Because, typically, well, actually my wife and I have children through different marriages, what if, Mike, Diane, my wife, said, Brian, I promised that when you pass away, if you pre-decease me, I will make sure that your children are split equally with my children, and then, so I get hit by a bus, and then someone on my side of the family, my children, 'cause I've got three and she's got three.
BRIAN: So, let's say that one of my children makes her upset, and she decides in her fit of rage that she's going to cut all my children out, and take the assets that I've transferred to her, and just distribute those to her children. Did you know, Mike, that that happens all the time?
MIKE: Well, I've been in these meetings, so I hear it, and the big thing I hope our listeners understand is, right now you might have great relationships with all of your kids, step, half, whole, doesn’t matter.
MIKE: Things change, and you wanna be able to do the best that you can to make sure things happen.
BRIAN: Let me say it differently, you want to be able to control from the grave, and so, trusts, these are revocable family trusts. We strongly recommend that they're used to make sure that the wills, and the intent of both sides are honored after they are deceased.
MIKE: Makes sense.
BRIAN: So, in a revocable living trust you’ve got, in this case, myself and Diane, we've got three children, separate marriages [CLEARS THROAT] and that way that when I die the trust becomes irrevocable.
BRIAN: That means that it can't be changed. So, even if Diane gets upset with my children, she cannot change the language in the trust, and the rules of distribution when she dies. So, that's one item, will versus trust. The second reason to have a trust is if you’ve got children-I'm sorry, if you’ve got real estate outside of Washington State. Washington State is one of the top five probate friendly states.
BRIAN: So, when it comes to moving assets it's very inexpensive, and comparatively easy, quick process as opposed to California, many of the other high probate, horribly high cost probate states. In the state of California, probate is actually a commissioned experience where they take a piece, a percentage of the estate. It's a horrible, high cost experience where if you have any assets in California, hard assets like real estate, that asset we would advise to be owned in a trust.
BRIAN: Okay, [CLEARS THROAT] any assets that are in Washington state we would advise are just really not so necessary to have probate protection.
MIKE: It sounds like Washington State is a good place to die. Is that what you're saying? [LAUGHS]
BRIAN: Washington’s a good place to die. Okay, the third reason to have a trust is to control distribution. Let’s say that you are very successful, you’ve got a 10 million dollar estate, and you're gonna pass that to one or two children.
BRIAN: There’s something called the lottery effect. The lottery effect is you receive a large amount of money, and by the way, you can Google this, typically, you receive the money, you spend through it in five years. You quit your job, your spouse divorces you and takes half. Your friends find out that you’ve got money. They ask you to loan money to them. You turn them down. At the end of five years you’ve spent through it, your wife’s gone, your job’s gone, and you're worse off, body, mind, and spirit than you were before the lottery was received.
BRIAN: That's called the lottery effect. To make sure that in distribution of your inheritance that you don’t, keyword, destroy your children, you have to-we recommend, at least-that you love them enough to distribute the assets over time. So, that’s another reason to have a trust, just to make sure that assets are distributed over a five year period, or a ten year period, or a reasonable period, not all at once. So, this is very, very important.
BRIAN: In fact, there's different ways to distribute assets, and this is exercising control beyond the grave. It is a blank chalkboard. You can distribute assets however you want. So, one is based on time. I just talked about it. Over five years, or ten years to equally distribute that. The second is based on incenting responsible life experiences. If you’ve got Johnny and Susie, and they're in their teens, and tragedy strikes, and you’ve got a 10 million dollar estate that is coming to them, it would destroy their lives to have it come lump sum all at once.
BRIAN: So what do you do? There's some options. You can have health, maintenance, and welfare, a stream of income coming from a trustee who will not pay for all of Johnny and Sally’s education, so that they have some skin in the game, so that they work for it, but the trust will distribute some income to allow them to go to school, finish college, and that's written in there.
BRIAN: It's written in a certain amount that can be paid for, social life, things like that. Cars, a certain amount, not blank check. The first home, a certain amount, and by the way, not cash. There’s a mortgage there. When they marry there's another incentive. When they have children there's another kick of income, etcetera, etcetera. You describe the points in life which income is contributed, and how much. So, this is the incentive lifestyle distribution strategy from a trust.
MIKE: Yeah, Okay.
BRIAN: Okay, now my favorite distribution strategy from a trust is called the beach bum trust. The beach bum trust is an incentive where you pay out, and you match three dollars to one for every dollar of W-2 or 1099 income, you match with three dollars. So, the harder they work, the more money they get. It keeps your children from becoming trust babies.
BRIAN: What's a trust baby? A trust baby is someone who kicks his feet up, sleeps in, there's no incentive to go to work, because they’ve got millions for the rest of their life. We hope that you love your children enough so that you don’t lump sum inherited assets onto your children, that you exercise incentive distribution strategies from either your trust, or you will. Okay, now I'm gonna talk about the will.
MIKE: Real quick, you said incentives. That was the list you were talking about, going to college, doing things that progress in your life, if you do this, you get this. Is that right, just to clarify?
BRIAN: Correct, right.
MIKE: Okay, wonderful.
BRIAN: Right, all right, Mike, we should write a book about this.
MIKE: [LAUGHS] Yeah, we should. This conversation, well, just to clarify, Brian this is something you talk with every one of your clients that goes through your normal Decker approach, because it's so important.
BRIAN: Right, okay, so now let's talk about your will. Again, we're not attorneys. We would with your team, your CPA, your attorney, and yourselves on your retirement plan, but on your will of all your documents, you will, power of attorney, living will, and whether or not you have or should have a trust, of all your documents, the most destructive is your will. At the bottom of page one is a sentence on tangible assets that typically destroys children, sibling relationships.
BRIAN: Here's what it says, by the way, tangible assets, Mike, or KVI listeners, are your car, your house, your artwork, your jewelry, your things. It's your bling, it's everything. It's your tangible non-cash assets, and without any logic at all, these tangible assets are said to be equally divided. How in the world, when you have three piano players, and one Steinway, can you equally divide the Steinway?
BRIAN: So, this is something that when we talk to clients about their planning, and their financial plan, and putting it together, and we have our meetings, everyone's happy, we're bubbly, we're going through stuff, when we get to this point, we watch their countenance turn dark almost to a person, and say, yeah, the way that my mom and dad distributed assets to me, it wasn’t fair. I got shafted. So, this can be avoided.
MIKE: Well, it's avoided. They didn’t know what they were doing. In what you see, Brian, I'm probably gonna ask this question wrong, when you experience these situations, it's because the lawyer did not bring up these topics in a right way. They're using some sort of template?
BRIAN: It's a template. It's a boilerplate template that says something that's ridiculous. Now, by the way, let's solve this. It’s easily solved. What you do, there’s a reference to appendix A in your tangible asset paragraph.
BRIAN: Invariably, I turn to appendix A, and I see that it's blank. 99 percent of the time it's blank. So, that's when I look at you, KVI listeners, and say, what do you want to do with your coin collection, your stuff, your artwork, your piano, your car, your house. So, here's what we do. We recommend that while you're still alive, that you either have your children over at Thanksgiving, or at Christmas, and you tell them that you're not always gonna be around.
BRIAN: Now is the time to speak up or forever hold your piece, and go around the house, and put a sticky, you give them each different colors on what they want. When there's more than one sticky on a painting, or a wedding ring, or whatever it is, then you have to have the discussion, and let them work it out. When they have, you write down on appendix A how assets are going to be divided. Now, when they have all the tangible assets worked out you also tell them that as far as the cars and the house go, those are in a sell provision. Sell, S-E-L-L provision.
BRIAN: That means that, no, you can't put a sticky on the front door. No, you can’t do that. No, you can't put a sticky on the BMW. No, you can't do that. We're talking about tangible assets in the house. So, after all the children, eyes wide open, divide the assets that they want, then you put a sell provision for all the rest. This is where you call estate auctions, people like that. They come in after the death of your mom or your dad, the last to die, you have them come in, and they liquidate all your belongings. I know, it's ten or fifteen cents on the dollar, but they take care of everything, they clean out your house, and then the cash is divided.
BRIAN: It protects the relationship of your children. So, as far as inheritance goes, there's three very important things that we want to accomplish. One is we want to appropriately, and correctly transfer assets, number one. Number two, we want to do it with the least tax possible, and number three, we want to do it in a way that preserves the relationship of your children.
MIKE: Now, for those listeners just tuning in, this is Decker Talk Radio's protect your retirement, and we're talking about inheritances. How to give them, how to receive them, how to protect them, and maintain the relationships, because when we say protect your retirement, we really mean, protect all aspects that we can, not just your finances.
MIKE: So, this is great, though Brian. On the sticky note game-can we call it a sticky note game?
BRIAN: Yeah, and let's go even one step further, let's say you have the great idea to keep the vacation home, and equally divide it among your three children. Sounds like a great idea. Let's talk about what we see a lot of the time. Your three children don’t have equal economic situations.
BRIAN: One, your daughter, she married a teacher. Second, your son is a doctor, and third, your other son is an engineer. There's a wide range of income there, so when you equally divide you're gonna keep the vacation home, and equally divide it. Guess what happens? After five years, ten years, of equally dividing the expenses the sons that are doing very well have no problem with paying their fare share of the vacation home.
BRIAN: In fact, they use it quite often. They can afford to fly out, but your daughter is gaining a lot of resentment toward her siblings, because she cannot afford to fly out there, and she's paying equally for something that she's not able to use. So, this is something that we want to talk about, and make sure that if you do this, that you also put sell provisions in the equal division of assets.
BRIAN: So, in this vacation home experience, the daughter should be able to say, you know, I'm just not using this much. I could use the money, and be able to see her third of the vacation home, and get rid of the cost of it, and not feel bad, and know that she's not causing mom or dad to roll over in the grave, but that there's a sell provision that's available to sell her third equally to the other two brothers.
BRIAN: All right, I'm gonna continue to move on. We’ve talked about the lottery effect, we've talked about the use of wills and trusts, we talked about distribution strategies over time, over incentives of life experiences, and also over income using the beach bum trust. So, these are all very, very important parts of planning your inheritance. Now, one of the things that you think-this cracks me up-KVI listeners, you think that your children are gonna honor your provision that says to stretch your IRA. Stretch, S-T-R-E-T-C-H.
BRIAN: Stretch the IRA to save taxes. I've got some news for you, let's say that you have 100,000 dollar IRA, and Johnny’s going to receive that inheritance, and in your will you're gonna say that it's your recommendation to stretch that IRA to avoid taxes, or to shrink taxes. Johnny, instead of taking 20,000 each year over the next five years, guess what's Johnny gonna do?
BRIAN: He's gonna look at that 100,000 dollar IRA, and he's fine taking 80 grand. He'll pay the tax, lump sum it out, and take the 80. We see that all the time. There are very, very few times that Johnny or Susie has instructions on a stretch IRA that actually observe and follow your instructions to receive an IRA and stretch it out. I'm just saying, it just rarely ever happens.
BRIAN: Okay, now, let's talk about something where you want to distribute income, but you also wanna leave a legacy. If you have two children, and you've got a, let's say, a sizeable estate. Let's say you have a five million dollar estate, and Johnny, and Sally are your two children. Johnny and Sally are both doing pretty well. They both come to you and said, hey mom, dad, I don’t need your money.
BRIAN: Then what you can do instead of dividing it in half, 50/50, you could divide 25 percent to Johnny, 25 percent to Sally, and have 50 percent of your estate become a legacy to you. What's a legacy? A legacy is where you would fund something called a dynasty trust. A dynasty trust is a trust that goes on for 100 years in some states, in perpetuity in other states.
BRIAN: It's a trust that's funded with half of your, in this example, half of your estate is liquidated, and funds your dynasty trust, and it is a per stirpes account, meaning bloodline only, and it flows to your children who don’t use it, 'cause they said, mom, dad, I have enough, and it goes to your grandchildren, and their children, and their children, and their children, and it's typically used for education.
BRIAN: So now, you have created a legacy that for generations will honor you and thank you for creating a dynasty trust that gives your bloodline access to funds to help pay and defray the costs of education. Per stirpes is an important description because that means bloodline. So, if you have your children, grandchildren, great-grandchildren marry, and one of those children divorce, the spouse, which is not bloodline cannot take half.
BRIAN: These assets are reserved for bloodline only. They're protected from divorce.
MIKE: Now, quick question, Brian, when you say bloodline, what about adopted kids? If they're adopted in do they count as bloodline?
BRIAN: They count as bloodline, right.
MIKE: Okay, great.
BRIAN: Okay, so that’s a dynasty trust. It's also known as a generation skipping trust, and it's an important way that we're able to provide a legacy, and shrink the taxes, because if you tried to skip a generation, and just send assets to your children, there's a generation skipping tax that you'll face, which is pretty stiff.
BRIAN: Right, so the subject for this hour is inheritance. We've talked about it from the planning side, the parents making sure that they do the proper planning, whether or not they have a will, whether or not they should have a trust, making sure that strategies are there to distribute assets, that you avoid the lottery effect, that you don’t lump sum assets on your children, that you love them enough to spread that out so they don’t become trust babies, and they have some skin in the game of life.
BRIAN: We talked about avoiding the major problem in your will of the typical boilerplate language that says tangible assets are to be equally divided. We also talked about dynasty trusts, creating a legacy so that you can fund that trust upon your death, and have assets last for many, many generations as you help your bloodline enjoy some assistance for educational cost defrayment.
BRIAN: And then we talked about how, by the way, your children are not gonna stretch your IRA, they're just gonna lump sum it. Okay, so that catches you up, KVI listeners, if you're coming in. This is Brian Decker, and Mike Decker from Decker Retirement Planning, and now I wanna go into what happens if there's a husband and wife and the wife’s parents die, and she receives a lump sum of assets, let's just say it's a couple hundred thousand dollars, and she was told that those assets are for her and her children.
BRIAN: It's not to go to the husband, it's supposed to be separate. What do you do? ‘Cause we live in Washington State, which is a community property state. This is very, very important instructions. You cannot comingle those assets. It remains independent, if you have a community property agreement-I'm sorry, if you have a community property agreement, we agree on separate property, and you never comingle those assets. What does that mean? That means that that 200,000 dollars needs to stay in an individual account in the name of the single spouse, and it never be comingled with a joint account.
BRIAN: Once you do that it becomes community property. So, you’ve got to receive it into a single account to make sure it stays separate property, and not the assumption of community property in Washington State. Okay, next thing I wanna talk about has to do with a situation that we see a lot. Let's say, Mike, that you and your wife have five children, and you love all your children’s spouses, you love them very much, but you know that they're all spendthrifts. I'm gonna take an extreme example here to make a point.
BRIAN: What I'm saying is, if your children die, those spouses are gonna spend your inheritance. The children, which is your grandchildren aren’t gonna see a dime. What do you do? Well, you can create a trust so that for those children, if your son or daughter, which is your son or daughter predeceases your in laws, then those funds stay and remain for the children, and don’t provide access to the in law spouse that’s a spendthrift.
MIKE: Now, is this a dynasty trust you're talking about again, or is this a different kind of trust?
BRIAN: No, this is just a typical trust. It can be a revocable family trust that becomes irrevocable upon death, but it provides distribution instructions that keep the spendthrift spouse from accessing an inheritance for the children, and spending through those assets.
BRIAN: So that's a way that you can control assets if you know that the tendency of one of your in laws for your children is a spend-a-holic. Okay? All right, winding down to the last couple of things I want to talk about when it comes to inheritance. You can use family limited partnerships, and foundations in a fantastic way to divide up assets, strategically transfer assets, and keep taxes low as assets are growing inside the family limited partnership, or the foundation.
BRIAN: By the way, foundation's kind of a slimy word now, the Clinton Foundation…
MIKE: Well, let's not get political here, let's just talk about what a foundation is meant to do and meant to be.
BRIAN: It's meant to keep taxes down, control income, and be able to control access.
MIKE: The foundation I think of, just so viewers know, there's many out there, the Bill and Melinda Gates foundation is another big foundation that’s out there, and their mission is very straightforward.
MIKE: So, it could be a mission, it could be a purpose, there's a lot of ways to use a foundation, but for retirement planning, Brian, what's the most common thing you're seeing with a foundation purpose?
BRIAN: It's control. It's control and tax minimization as keys to make sure that we're accomplishing the objectives of those who created the assets. So, when mom and dad pass away we wanna make sure that their objectives are being honored in what they wanted done with their money.
BRIAN: All right, I'm gonna talk about some of the other documents. There's the will, there's the power of attorney documents, there's the living will, and Mike, I think we've got…
MIKE: 20 more minutes.
BRIAN: We've got 20? Okay, so let's talk about the power-well, one last thing on the will, make sure that if you have three children, it's not ideal, it should be the exception, not the rule, that you put all three children as contingent executors. So you're a husband and wife. When one spouse dies, the other spouse is the executor. That should be your primary choice for executor is the spouse.
BRIAN: However, once both spouses die, now the will needs to be executed through the executor. If you have three children, and you put all three children in there equally, sometimes-not sometimes, most of the time it damages relationships. You should pick Johnny or Sally, whoever the children know has the most financial acumen, they would be the choice. Whether it's oldest, middle, or youngest child is irrelevant.
BRIAN: Who is the one that you would ask would be the common sense choice of executing mom and dad's estate. Whoever that is, you would put them in there. Now, I've seen situations where all three are put in as equal co-executors and the parents wouldn’t have it any other way. I've also seen many, many times when they’ve done that when there's been bitter fighting-now, there's pros and cons on this, there's been bitter fighting on all kinds of situations with-in a will.
BRIAN: There's been bitter fighting and bad feelings when Johnny is in charge of executing the will, and provides no transparency to his siblings. That doesn’t work out very well either. So, it depends on the relationship that your three children have on how you structure who is going to execute the will as your contingent executor once both mom and dad are dead.
MIKE: Does that wrap it up for the basic parts of that section?
BRIAN: I'm gonna keep going, actually.
MIKE: We've got some clients that are currently in this right now trying to get things figured out. So, this is-we're constantly dealing with this, and we wish we could prevent these issues, and make it so simple for so many people.
BRIAN: Yup, all right, so we talked about making sure when you think of who to choose as your contingent executor that you look at your children and try to find the common sense example.
BRIAN: All right, now let's talk about your power of attorney documents. Power of attorney documents for health care and finance are typically separated, and again, we're not attorneys, we cannot give legal advice. We work with the team of attorneys, your CPAs and attorney as part of the financial planning team. I'm relaying what we typically see in the cases that we work with. So, power of attorney documents, KVI listeners is where, like, Monty Python, you're not quite dead yet, and so, the will, and the trust are not engaged.
BRIAN: Power of attorney documents are in force when you're not capable of handling your affairs. So, we look at three important things. One is who is your contingent agent. It's the same argument we just talked about when it comes to your will. If you have three children it should be whoever the common sense person is that would be the choice. It's very rare that it goes well when you put equal authority with all three children to be your contingent agent. It doesn’t work so well.
BRIAN: So, pick the common sense contingent agent in your power of attorney documents, number one. Number two is the trigger clause. The trigger, or activation clause of your power of attorney health care, or your power of attorney finance documents is very important. Let me tell you what we recommend it say, and then give you a bunch of horrible examples. We recommend that it just say two doctors. Why?
BRIAN: Because you can go to a hospital anywhere and get two different doctors to give two separate opinions. Why not the on call doctor? Because it could be a guy at the emergency room at the local hospital that’s been awake for 30 hours, and his decision making skills aren't the best at the time. So, we like two doctors. Why not your local physician, or your primary care physician? Because you might be in Switzerland. So, we just prefer, or highly recommend two doctors.
BRIAN: Funny story, Mike, a couple were in for planning. They were fighting the whole dang time, just constantly bickering. We got through the planning, and at the very end, we were going through their documents, and found that their power of attorney finance documents were activated upon signature. I looked at them and had to inform them, because we're fiduciaries here, hey, your power of attorney document is in force right now, which gives you the power to go in, and be each other, and clear each other out.
BRIAN: We would recommend that you change this back to two doctors when they testify that you're not capable or competent of handling your affairs instead of having bazookas pointed at each other waiting for the other to pull the trigger. So, we don’t recommend on signature. We do recommend two doctors. So, now let's talk about another provision, and that's the final one that we review when it comes to your power of attorney health care, and power of attorney finance, and that is the compensation clause. The compensation clause of your document grants, quote, this is boilerplate language, reasonable compensation to your contingent agent that's going to execute your power of attorney.
MIKE: Now, I gotta ask the question, and I'm sure everyone’s thinking this, what does reasonable compensation actually mean?
BRIAN: It means a blank check. A blank check. There's no oversight to Johnny or Sally or whoever it is that you’ve picked to be your contingent agent, and many times we see 20, 30,000 dollar checks that are written to themselves while you're still alive in a vegetative state. No one's gonna know, and we see these checks written.
BRIAN: So, we recommend that you strike, or delete the compensation clause, but you keep the reimbursement clause. Johnny or Sally, if they have to fly out to help you as your agent in your power of attorney should be reimbursed costs, but it's an honor to act as agent for your parents. Now, if you do want to pay your children, then state a dollar amount. Don’t leave a blank check. So, if you do wanna have a compensation clause in there don’t say something so vague as the boilerplate compensation clause says, which is reasonable compensation. Say, compensation is due the agent for his or her efforts, but it's capped at X dollars a year, and Y dollar cumulative so that you're not taken advantage of.
BRIAN: Okay, so we talked about your will, your power of attorney health care, your power of attorney finance, we’ve talked about the trust documents. The last one that we're gonna talk about is your living will. This is also the pull the plug document. So, your living will states that if you're found to be of a vegetative state, and just kept alive artificially that you state that you want them to pull the plug, and not offer any artificial hydration, nutrition, things like that.
BRIAN: Here’s what we have as a problem with the living will. Again, we're not attorneys, I can't say that enough, we work with your team, which includes your CPA and your attorney. Here's a situation that we've seen before, husband goes into a coma, wife calls 911, wife rides with husband to the hospital, hospital asks for the living will, and wife says, I don’t have it, has to go back, grab it, brings it back to the hospital, and that's the last time she is consulted because the hospital now has marching orders signed and dated by the victim, the patient who's in a coma on how he wants his health care received.
BRIAN: So, what it says there is two doctors say to gather the family. Family’s gathered, and the two doctors say, hey we're gonna pull the plug, gather your family, she gathers the family, they pull the plug, and then 85 percent of the time or so, everything is fine, but this time it's not in the 85 percent. This time it's in the 15 percent where the husband lingers. Lips start to crack, she asks for water, ice chips, she’s denied, because the hospital says, hey it says right here in the living will, no artificial hydration.
BRIAN: A day later he goes fetal, starts to rock with pain, she asks for morphine, she's denied, because it says in his living will, clearly, no pain meds. So, how could you, KVI listeners, how could you avoid that scenario? You avoid it because you have the right to, when the hospital asks for a living will, you hand them your power of attorney health care. Your power of attorney health care places your spouse, or one of your children as your agent to be consulted in every point regarding your health care.
BRIAN: So, that nightmare could’ve been completely handled had the spouse submitted the power of attorney health care instead of the living will. This is not a matter of getting a better living will, it's not that at all. It's a matter of making sure that you know the difference between the two documents, and knowing that you have a choice to submit one or the other. Now, if you submit both the living will supersedes the power of attorney health care.
BRIAN: So, we want you to know that you have the choice to do what my wife and I did, not saying that this is right for you, but my wife and I shredded our living will after this situation, and we want to make sure that we have only the power of attorney health care. Now, there's situations where that's unfair. If you have religious, or cultural reasons that you can't pull the plug you should keep your living will, or quote-unquote, if you don’t want to put it on your spouse to pull the plug, and you don’t feel your spouse could pull the plug, in fact, this is kind of a joke, too many spouses would pull the plug too quickly, but if you don’t think that your spouse can handle it, then keep a living will, maybe on one spouse, but not on the other.
BRIAN: All right, KVI listeners, I want to switch it on you. I just read an article that said that driverless cars are already operating in Pittsburgh, did you know that?
MIKE: So, we're done with inheritance, is that correct?
BRIAN: Yeah, we're done with inheritance. Now I wanna talk about jobs.
MIKE: Oh, let's go with what's going on in your world today. So, they're actually happening?
BRIAN: Yeah, it's happening right now. Pittsburgh is a beta city for the driverless cars. It's happening right now. I want you to keep an eye on this, because there's something called creative destruction, and on the money management side this is gonna cost a couple million jobs.
BRIAN: Think about this. This is just the start to have a driverless Uber, because think of all the taxi jobs, number one. Number two, this of all the long haul trucker jobs. Think of all of those jobs, number one. Number two, what happens to jobs when there's immigration? There's a competition, an increased competition for those jobs.
BRIAN: So, watch the jobs numbers. We have had the most anemic, the most weakest recovery of any market cycle in this last round, and jobs are key, critically important to the GDP numbers, and the employment numbers, and it's very important to see that the productivity doesn’t collapse when we have a tremendous loss of jobs. So, I'll be watching that, I'm just saying.
MIKE: So, I don’t wanna sidebar too much, but would you trust a self driving car, or a sixteen year old fresh on the road if you're driving next to ‘em?
BRIAN: Oh, check this out, I read another interesting piece on that. The demographics of trusting driverless cars are mostly favorable to the millennials. Not so favorable to the greatest generation, and the older retirees, and then there's a transition in between. So, I think that's interesting.
MIKE: That makes sense. Millennials trust technology more.
BRIAN: Yup. Okay, now I'm gonna switch over to another thing that's been in the news quite a bit, and that’s the Federal Reserve. Janet Yellen was last week in Jackson Hole, Wyoming, made an announcement that we're gonna keep things on hold, and it's gonna be data dependent on whether or not they raise or lower interest rates. The news talks about how they're going to try to raise interest rates.
BRIAN: Why in the world would the Federal Reserve try to raise interest rates, which is a monetary tapping of the brakes on an economy that typically is growing too fast? Why in the world? I can think of two very important things, KVI listeners, that I want you to know about. Why in the world would the Fed wanna raise interest rates in an already weak economy? If, by the way, this administration ends very soon, and it looks like it's going to go down as the first ever administration, ever, that has come and gone without a three percent GDP growth rate.
BRIAN: It's never happened before. So, it's been the weakest recovery. Why in the world-it's not logical in monetary policy to raise interest rates in a weak economy? There's two important reasons KVI listeners. One is pensions. Right now, this is where I had out a little prize. So, KVI listeners, if I could I'd give you a prize, there's 49 out of 50 states that have signed onto pension obligations they cannot possibly be paid back, 49 out of 50 states.
BRIAN: What's the one state, Mike, I know you know, what's the one state that has pension obligations that are not a problem? There's only one.
MIKE: If I remember right it's North Dakota, right?
BRIAN: North Dakota is right, ding, ding, ding.
MIKE: And when you asked me this question the first time, I thought Alaska for the oil, but I guess North Dakota because…
BRIAN: North Dakota 'cause of the…
MIKE: The fracking.
BRIAN: The fracking is right. Okay, a couple years ago North Dakota tried to pass in referendum, a vote to get rid of their state income tax they were so flush with cash.
BRIAN: 49 out of the 50 states have pension obligations that are a mounting problem that also are on our radar. What does that have to do with the Fed raising or lowering interest rates? Pensions are tied into the investment rate that they're able to get. What happens when pensions obligations are tied into a four or five percent targeted payout? You’ve gotta have those funds grow at four or five percent.
BRIAN: The stock market isn't doing that, and the ten year treasury, right now, is trading at 1.5. So, there's a gap between the riskless rate, and the pension payouts that continue to balloon the liabilities that pensions are carrying forward year to year. So, this is a major problem. This is a balloon, if you will, that's going to pop. How do states handle the pension obligations they cannot possibly pay back?
BRIAN: Just like you or I that take on obligations that we can't possibly pay back that have to go through chapter eleven, or chapter seven reorganization, the states are gonna have to do the same thing. This involves your municipal bonds. By the way, Mike, we've been preaching for years, there's a very important way that your municipal bonds, that you can-gosh, we've only got a few minutes. I'm gonna end with this. I had other things I wanted to talk about, but here's a very important way, KVI listeners, if you have municipal bonds, what we're not saying is that all municipal bonds are going broke.
BRIAN: We're not saying that at all, but what we are saying is that the state's obligations include municipalities, and pensions are tied into that. They're all wound together, and when there's credit risk-credit risk is the risk of not being paid back all of your principal when your municipal bonds mature. There's a very important way for you to watch, and see, in a very low interest rate environment how to protect your municipal bond portfolio, and here it is.
BRIAN: Watch on your monthly statement, and when the price of your municipal bond with a coupon of three, four, five percent drops below par, I hope you pick up the phone and sell it. If you pick up the phone and ask your broker, or banker, why is my Seattle sewer bond, my four percent coupons that are due June 1 of 2022, why are those bonds trading below par? You need to know, KVI listeners, there's only one reason that a bond like that would trade below par when the ten year treasury is trading at one and a half percent, and that is, that the Seattle sewer bond district is bleeding red ink, and the ability for those bonds to be paid back is starting to erode.
BRIAN: Most everyone knows about it but you. Your broker doesn’t know, and you'll see the price of the bond start to drop below par. We've been telling people this for years, and a few years ago, the bond prices of Puerto Rican issues started to drop below par. Some of our clients did sell. Some that didn’t become clients have told us later they didn’t sell, and now those bonds are trading at 40 cents on the dollar.
BRIAN: Remember this is your safe money. This is your safe money, and it's trading-it's an unnecessary risk that you're taking. You’ve gotta be looking at your bond prices. If you own municipal bonds, you’ve gotta be checking these on a regular basis, because when the ten year treasury is at or near all time record lows, if your municipal bond with a two, three, or four percent coupon drops below 100.00, I hope you pick up the phone and sell it.
BRIAN: Another example, a couple years ago, the Detroit bonds started to trade below par. I hope that you sold. Another example is the Northeast. A lot of the New York revenue bonds, and the California, west coast, California revenue bonds, those started to trade below par, too. Please, please, please, I wanted to get to this today, but we didn’t. There's three bubbles that we're gonna talk about next time, the bond bubble, which is interest rates, the stock bubble, and real estate. Mike, you got it from here?
MIKE: Thanks Brian, and thanks KVI listeners for tuning in today for our show, Decker Talk Radio’s Protect Your Retirement. We’re excited for next week, but in the meantime, feel free to go to our website, and you can check out this show, and all of our other shows in the past at www.deckerretirementplanning.com. Also you can find the other articles, the graphs, all the content that we're referencing on this show so you can see it again, revisit it again. This-this show’s a bit of a fire hose at times, and so, we understand, and that's why we wanna put the content up there.
MIKE: This is Mike Decker, and Brian Decker, who is with Decker Retirement Planning. He's a licensed fiduciary, which is why this content is so crucial, and so important to listen to. Now, above all, we do love to hear from you, so keep the questions, and the requests coming at questions@deckertalk.com. Again, that's questions@deckertalk.com. Thank you so much for listening KVI. We'll see you, or hear from you, talk to you next week, Sunday morning, KVI 570. Take care.