RPF0426-Friday_Q_and_A
00:00:00.000 | It's Friday here at Radical Personal Finance. On Fridays, we do Q&A. Let's get started.
00:00:23.720 | Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge,
00:00:27.520 | skills, insight, and encouragement you need to live a rich and meaningful life now while
00:00:32.920 | building a plan for financial freedom in 10 years or less. My name is Joshua Sheets and
00:00:36.600 | I'm your host. Today it's Friday, so we do live Friday Q&A, although this promises to
00:00:42.440 | be interesting, doing some things I've never done before. So time to learn and grow, right?
00:00:46.920 | That's the whole point. One of the things, last couple of weeks I've been getting the
00:00:58.400 | results back from your surveys. Some of the results to me were pretty astonishing, but
00:01:06.000 | a couple of the things were very nice and very gratifying. I learned a lot about who
00:01:09.920 | you are as a listening audience. I learned some of the demographics, which have been
00:01:13.880 | super, super helpful, and some of it has been a little bit surprising.
00:01:18.600 | Now a couple of the things that I learned, I don't know if it was surprising or not,
00:01:21.720 | but one of the things that I learned was just simply that the majority of you who are listening
00:01:26.760 | are right in that 25 to 54 age bracket. Most of you make a lot of money and most of you
00:01:32.960 | have college educations. The challenge of that scenario of you all making a lot of money
00:01:38.000 | and having college educations means that I'm not achieving one of the goals that I have
00:01:43.200 | set for myself, which is I've been trying to reach people who are just getting started.
00:01:47.080 | I've been trying to reach people who are younger, who are poor, et cetera.
00:01:52.960 | Now I know I'm not going to talk long about that, but as I've been considering that, I
00:01:57.360 | realized, well, I don't know that younger people are listening to long format podcasts,
00:02:01.600 | but they are watching videos. So I'm going to determine to learn how to do video. I've
00:02:06.600 | put it off for a long time to simply choosing to focus on audio primarily, but I've decided,
00:02:13.600 | okay, it's time to do what I can. So of course I'm a minimalist. I try to do as much as I
00:02:19.320 | can with minimum equipment and make it work. So I have been putting together a video setup
00:02:24.040 | and at the moment I am live streaming. Finally, after threatening it some months ago, I'm
00:02:29.280 | live streaming the recording of the show here. I'm live streaming it in the Radical Personal
00:02:33.000 | Finance Facebook group. So if you'd like to see this, I intend to do this more often.
00:02:37.520 | Sometimes I think I'll do it on the page. So if you haven't done it, come on by and
00:02:40.200 | like the Radical Personal Finance Facebook page. And sometimes I think that I will do
00:02:44.900 | it in the Facebook group. So come on by and join. If you'd like to do the chat with us,
00:02:50.600 | come on by and join the Radical Personal Finance Facebook group. For those of you who are watching
00:02:54.640 | online, thank you. Feel free to interact in the comments and contribute your commentary.
00:03:00.960 | But all of that said, it obviously makes me very nervous. I get very nervous being on
00:03:05.160 | video and when you've got to produce a show and hopefully make sense, give proper financial
00:03:11.840 | answers on technical complex topics, do it in an interesting and concise way while recording
00:03:17.960 | video and audio, I'm feeling the pressure at the moment. So you'll have to bear with
00:03:22.040 | me if we make mistakes. So let's see. Let's go first to... I see Greg is here on my screen.
00:03:29.000 | Greg from PA. Greg, go ahead and introduce yourself and let me know what you'd like to
00:03:33.120 | talk about today, please.
00:03:34.120 | Hi, Joshua. Can you hear me?
00:03:37.360 | I can hear you well. Yes, sir. Go ahead.
00:03:39.880 | That's funny because I'm looking at your face on the computer and your voice here. It's
00:03:45.560 | funny. No, I just saw you were doing the live feed, so I jumped right in. I wasn't even
00:03:51.200 | thinking about it. So I'm just excited to be here.
00:03:52.920 | Do you have a question or a topic of conversation?
00:03:56.280 | Yeah, I can come up with a question. I've got 10 million questions. You know what I've
00:04:05.960 | been thinking about lately? Okay, I have three cars and I keep wondering why do I have three
00:04:12.680 | cars and one's a good family mover. It's a Toyota 4Runner. One is an electric car that
00:04:18.320 | I love and the other is an Acura that's about 10 years old or a little over 10 years old
00:04:23.800 | and it gets great glass mileage. I keep thinking, "Boy, each of these cars fits a different
00:04:28.760 | need in my life." I could save some money if I got rid of one of them, but then I'm
00:04:33.360 | like, "Do I get rid of the 12-year-old Acura?" I don't know. It's something I keep thinking
00:04:39.440 | about. Would I save money if I didn't have these three cars, even though I save a lot
00:04:43.640 | of money with the Nissan Leaf?
00:04:46.320 | So you had two and then you bought the Leaf in order to get the benefit of the cheaper
00:04:51.920 | running it with electricity. Is that right?
00:04:54.320 | Yeah, that's about right. I found it down the street. I was just kind of interested
00:04:59.880 | in it and I love that car. It's a lot of fun to drive, but it's just limited on the miles.
00:05:08.600 | We take off on the weekends and to get to the weekend location sometimes, I just can't
00:05:13.320 | do it with that car. For my work as well, I might travel to the next state over and
00:05:19.280 | I can't use that car. So I've been holding on to the Acura. It really doesn't owe me
00:05:23.960 | any money because I bought it brand new and it's still kicking really well. I don't
00:05:30.280 | know.
00:05:31.280 | So it sounds like this is just kind of a little minor tweak that you're trying to think
00:05:34.140 | about making. Is this a small little optimization in your approach and you're trying to figure
00:05:41.080 | out how much it's costing you and if it's worth the hassle. Is that right?
00:05:44.560 | Yeah, I think so. Because for instance, I just did a job and I drove, I don't know,
00:05:50.600 | let's say an hour and a half away. And the Acura gets about 38 miles to the gallon when
00:05:55.760 | I'm on the highway. So it runs really, really well. But I'm paying the insurance. I'm
00:06:01.120 | paying the registration. I just had it inspected just now. So I guess it costs that up. And
00:06:07.400 | the one other thing I keep thinking about it, I don't know if you're familiar with
00:06:11.360 | this, but in our state, Pennsylvania has insurance that is stacked. So I have it stacked on three
00:06:16.040 | cars. So I kind of think I get this benefit from that as well. You know what I'm talking
00:06:21.560 | about with that?
00:06:22.560 | Where, you mean your coverage is increased or a reduction in rates? How do you mean?
00:06:29.880 | So I guess in Pennsylvania, you can opt to have your insurance stacked on the multiple
00:06:36.200 | vehicles. So if you had say $100,000 in liability insurance, if you stack it and you have three
00:06:42.800 | cars now I have $300,000.
00:06:44.200 | Right. Got it.
00:06:45.200 | For instance. So I think that's got a great benefit to it as well.
00:06:51.320 | Well, I mean, obviously this sounds like just more of a fun question than something that
00:06:58.480 | you're really struggling with. It's not obviously a huge financial issue for you. I would just
00:07:05.680 | calculate the cost. It doesn't sound like any of these cars are worth a lot of money
00:07:10.640 | if you sold them, right? Is that accurate?
00:07:13.720 | I would say you're correct on there. Yes.
00:07:16.600 | Okay. So if cars are cheap and they're not worth a lot of money if you sold them, then
00:07:22.880 | you're in a situation where it doesn't cost you that much to keep them around in terms
00:07:25.660 | of depreciation. So your basic calculation is the gasoline that you put through them,
00:07:32.400 | but in the calculation of whether to keep them or not, that's not relevant because you're
00:07:36.160 | going to be driving one of them. So we're not talking about driving less. And it comes
00:07:39.560 | down to repair expenses and cost of insurance. If the cost of insurance is small, which probably
00:07:47.300 | sounds like it probably is. So cost of insurance is small. And then also the brands that you
00:07:52.720 | have, a Toyota 4Runner and an Acura, which is an Acura is a Honda. These are reliable,
00:07:59.160 | consistent brands that aren't going to cost all that much money to keep around. In my
00:08:02.800 | mind, they're not costing you a ton. The electric car is obviously for fun and to save a little
00:08:07.200 | bit of money on gasoline. If you don't need the money and you like having the extra car,
00:08:12.520 | keep it around until you get in the situation where you are frustrated with having to make
00:08:20.120 | the repair bills. That's what I would do.
00:08:23.120 | At the moment, I own four cars. I own too many vans. I own a camper van and I have this
00:08:27.720 | little Toyota Corolla that I bought for $500 back in the day. It's just nice to have an
00:08:32.640 | extra car. I like it because it allows me to help people who are in need in an easier
00:08:39.180 | way than other people. It's a little hard to say, "Hey, somebody needs a car and I'm
00:08:43.120 | going to give them my primary car." But for me, one of the big reasons I have the Corolla
00:08:47.560 | is I can keep that car around. It costs me almost nothing. I've not had to repair anything.
00:08:52.400 | It's super basic, super simple. The insurance practically doesn't cost anything. Then I
00:08:58.360 | can have a car that's easy to lend out and allows me to help other people when they need
00:09:02.120 | to.
00:09:03.120 | If I were you, and absent some compelling reason to get rid of them, and unless you're
00:09:07.360 | sure that you just don't want to own one of them, I would keep them around myself.
00:09:12.040 | All right, let's go on here. Greg, I can come back to you in a little bit if you got another
00:09:17.400 | question. I've got a 703 phone number here on my screen. Who's that calling in? Go ahead,
00:09:22.120 | raise your hand, and introduce yourself.
00:09:24.120 | That's me. That's Frank.
00:09:26.120 | Okay, Frank. Yeah, I can hear you great. Go ahead and tell me what's going on. Let's see
00:09:29.200 | how I can serve you today.
00:09:32.200 | I recently met with my insurance person, and he is proposing that I invest in something
00:09:40.440 | called a modified endowment contract. I don't even know what that is. It's from a company
00:09:49.640 | that he used to work for. I'm hoping you can tell me something about it.
00:09:53.600 | Sure. Let's start with just what is a modified endowment contract. Let me explain that first,
00:09:59.480 | and then we'll come back to your specifics and see if we can give you any useful advice
00:10:04.160 | on it. A modified endowment contract is simply a term that means ... It's a technical IRS
00:10:11.840 | term that applies to a life insurance policy. When you own a whole life insurance policy,
00:10:18.960 | you have as a component of that life insurance policy, you have a death benefit, and you
00:10:24.320 | also have what's called the inside buildup of cash values. These cash values in the account
00:10:32.000 | in the life insurance policy equate to a portion of the reserves that the insurance company
00:10:38.080 | has set aside to pay your benefit when you die.
00:10:41.080 | In times past, one of the great benefits of life insurance is there's no cap on who can
00:10:46.800 | buy insurance based upon income. Anybody who wants to buy life insurance, if you make $10
00:10:53.120 | million a year, you can buy in and you can buy as much as you want. You can put $1 million
00:10:58.920 | a year into the insurance contract. In addition to that, you have the benefit of the fact
00:11:05.400 | that these cash values inside the policy build up without being taxed year by year. Cash
00:11:12.320 | values inside the policy, you don't pay income tax as those values grow. You don't pay capital
00:11:16.560 | gains tax and you don't pay ordinary income tax. This is really valuable, especially because
00:11:22.400 | some of the contracts can grow at a pretty decent rate. Generally, life insurance is
00:11:28.400 | very stable, but they can grow at a pretty decent rate.
00:11:31.720 | Now, when you put these two things together, you have an opportunity for people who are
00:11:35.480 | wealthy to say, "Hey, I've got something of a tax shelter here and I can buy a lot of
00:11:41.080 | it." You have the possibility that wealthy people will take advantage of this tax shelter.
00:11:48.800 | That's what traditionally has happened in the life insurance marketplace. Lots of people
00:11:53.160 | would put lots of money into these life insurance contracts.
00:11:57.960 | I forget when it was. Was it during the '80s? That's what my guess would be, but I'm not
00:12:01.800 | very confident in that date. A few decades ago, the IRS changed the rules and they created
00:12:07.360 | something called a modified endowment contract. They said that if you were in a situation
00:12:16.720 | where you put too much money into this contract, you're obviously just using it as a tax shelter.
00:12:20.760 | It's not actually a life insurance policy. The whole point of the tax code was that they
00:12:24.880 | wanted it to be for a life insurance policy, not as a tax shelter.
00:12:31.120 | They have a rule. The rule is that you can't put more money into the premium than is required
00:12:36.600 | to buy a certain type of policy in under seven years. You have to fund the policy for at
00:12:41.800 | least seven years. The way this gets applied in the world of life insurance is if you buy
00:12:48.400 | a life insurance contract wherein the premiums are paid off in fewer than seven years, so
00:12:53.280 | examples here would be if you buy a single premium life insurance policy, you give the
00:12:59.040 | insurance company $100,000 and they say, "Hey, here's a $400,000 policy," that would become
00:13:04.880 | a modified endowment contract. If you pay the policy in anything less than seven years,
00:13:10.400 | so you pay it for premiums for five years and then you quit paying, that would be a
00:13:13.720 | modified endowment contract.
00:13:16.400 | If you put yourself in a situation where you put too much money into it and you pay more
00:13:23.240 | premiums than what would be required to pay the policy off in seven years, under that
00:13:27.720 | situation, you turn the policy into a modified endowment contract. The problem with a modified
00:13:32.520 | endowment contract is it loses the ability to get the money out without paying taxes.
00:13:39.040 | Let me explain that. You don't lose any tax benefits on the death benefit. All life insurance
00:13:44.360 | policies are always received by the beneficiary without paying any income taxes of any kind.
00:13:53.320 | That's the same no matter what. All life insurance policies are always received, proceeds are
00:13:57.420 | always received by the beneficiary without any income taxes. But the owner of a contract
00:14:03.520 | has the ability to take money out of the contract as a loan, an advance of cash values. When
00:14:09.720 | the owner of the contract takes money out of the policy as a loan, an advance of cash
00:14:13.000 | values, they can take that money out under what's technically considered to be an advance
00:14:16.920 | of death benefit. They can take that money out and they can receive it without paying
00:14:22.560 | income taxes in the current year.
00:14:25.160 | What a modified endowment contract does is it cancels that benefit and it cancels also
00:14:30.400 | the benefit of what's called FIFO, first in, first out, which is another benefit of a life
00:14:36.140 | insurance contract. You can put in premiums into a life insurance policy and let's say
00:14:41.940 | you've contributed $50,000 of premiums and then you now have $100,000 of cash value in
00:14:47.220 | the contract and let's say your death benefit is $250,000. Well, under the terms of the
00:14:52.300 | tax code, you can always take out the premiums that you've put in and you don't incur any
00:14:56.940 | tax. So you could take out 50 grand. It's not a loan. It's just a distribution and that
00:15:01.100 | comes to you tax-free under the first in, first out rules. Well, when the policy becomes
00:15:06.420 | a modified endowment contract, that goes away.
00:15:09.420 | So all of that to say, that's what a modified endowment contract is and it's not necessarily
00:15:14.740 | a problem. It just might be a problem in application. It's not a problem if you're buying a policy
00:15:21.080 | for death benefit. It might not be a problem depending on the application of the policy.
00:15:26.140 | It is a problem if you're trying to buy the life insurance policy for the death benefit,
00:15:31.460 | but you're also hoping to get the benefit of the tax favored distribution of cash values.
00:15:38.760 | So Frank, that's the technical answer. Hopefully I didn't make you go to sleep. Tell me more
00:15:42.900 | about the actual situation and why you're considering purchasing such a contract intentionally.
00:15:47.780 | Well, I'm not. I'm wondering why he proposed it. I'm going to meet with him again and try
00:15:54.020 | to find out, but I first wanted to know what it was.
00:15:57.340 | Are you sure that he proposed a modified endowment contract as a good solution for you?
00:16:02.940 | Yeah, he emailed me the form and the illustration and the whole bit.
00:16:09.420 | So hold on one second though, because sometimes, did he say in the contract, did he say that
00:16:15.540 | it's a modified endowment contract, or was that just written on the illustration?
00:16:18.660 | Oh no, it's written. I mean, I open it up and it says, "Modified endowment contract."
00:16:25.340 | What is it and why should I purchase one? And then it's followed by an illustration.
00:16:31.740 | So what you're telling me is it sounds like it is essentially a whole life policy, but
00:16:38.260 | without some of the tax benefits that such a policy would ordinarily qualify for if it
00:16:45.820 | was done in a certain way.
00:16:47.940 | No, I don't think that's what's happening here. Let me explain. If this life insurance
00:16:54.580 | agent is proposing to you the purchase of a whole life insurance policy, they are probably
00:16:59.540 | proposing it to you for the death benefit, but also as a place for you to accumulate
00:17:07.040 | some cash within the cash values.
00:17:10.380 | So when you're proposing that and you're designing a life insurance contract, one of the key
00:17:16.120 | things that the agent is trying to do is they're trying to make that policy accumulate cash
00:17:20.540 | very efficiently. One of the problems with life insurance policies for the purpose of
00:17:25.180 | cash accumulation is that you have to deal with large costs of insurance. After all,
00:17:31.620 | there's a death benefit, and that's the cost of insurance. That's a feature that a straight
00:17:36.420 | up investment doesn't have. When you go and you buy a mutual fund, you don't have to also
00:17:40.660 | pay for the proceeds of a life insurance policy out of it, but in a whole life insurance policy
00:17:44.820 | you do.
00:17:45.940 | So in order to increase the cash values, what is common in the life insurance business is
00:17:51.620 | to add what are called additional premiums to the contract. So if you were to look at
00:17:56.220 | that life insurance illustration from the insurance company, you would find on there
00:17:59.820 | most likely, let's say, about how much of annual premiums is the proposal for?
00:18:06.180 | This is, let's see, insurance $1 million, annual premium out like $40,000. Yeah, that's
00:18:13.180 | what it is.
00:18:18.100 | So he's proposing, or the illustration is for a $40,000 annual premium. Now on that
00:18:24.380 | contract, when you look at that, if you look down somewhere on it, it'll tell you what
00:18:28.380 | the base amount of the insurance is. Depending on your age, let's just say this base amount
00:18:32.540 | of insurance, the cost of that is $15,000 or $20,000.
00:18:36.940 | Let's just say $20,000.
00:18:38.740 | It's $800,000 in the upper right hand corner. So the base amount, $800,000, additional protection,
00:18:45.740 | $200,000.
00:18:46.900 | But what's the premium? It'll be down at the bottom of the page usually.
00:18:52.140 | Annual premium?
00:18:52.900 | Yes, down at the bottom. So let me just talk you through it because I don't want to get
00:18:56.060 | on the show here, I don't want to publicly get into too much of an illustration, but
00:18:59.140 | I'll just tell you what's on a page like that. Down at the bottom, underneath the rows of
00:19:02.520 | numbers, you'll see at the bottom where it'll show you somewhere, it'll show you the base
00:19:06.180 | premium. And so the base, it might be at the top or it might be at the bottom, but it'll
00:19:09.940 | show you the base premium. And the base premium is probably in the range of $20,000 for some
00:19:15.940 | amount might be whole life insurance, some amount might be a term insurance component
00:19:20.420 | of that. And if you add all that together, let's just say for sake of illustration here
00:19:24.000 | that it's $20,000 per year.
00:19:26.260 | But what the agent...
00:19:27.480 | Maybe this will help. It says the contract premium is $40,000 including 16,864 additional
00:19:34.080 | premium.
00:19:35.080 | Exactly. So that's exactly what it is. So under your situation, the annual contract
00:19:40.160 | premium is $40,000 and $16,000, I'm just going to use round numbers for the sake of audio,
00:19:46.320 | $16,000 of that is additional premium. Now under whole life insurance, which is different
00:19:51.920 | than universal life insurance, those are optional dollars. That's money that is optional, it
00:19:57.580 | doesn't have to go into the contract. The reason it's there is because that money goes
00:20:02.420 | directly to the cash values of the contract and it bypasses the cost of insurance. And
00:20:07.140 | so the agent is putting that on there in order to help the cash value and the policy grow
00:20:12.300 | more quickly in the early years and also to grow more quickly, hopefully over the long
00:20:17.140 | term. And so the base premium of the contract is $24,000 per year. That's the actual cost
00:20:24.540 | of the insurance. That's the minimum that you can pay for that size of insurance policy
00:20:29.580 | at your age. But they have in there an extra $16,000 of additional premiums. And so that
00:20:35.760 | additional premiums that bypasses agent commissions, it bypasses cost of insurance and it goes
00:20:39.780 | right to the cash values.
00:20:42.020 | The problem is this, you can't do that forever. So on your policy illustration, it will show
00:20:47.140 | you a year that it becomes a modified endowment contract. So it'll say somewhere, "This policy
00:20:52.040 | will become a modified endowment contract in year," probably something like year 15,
00:20:56.900 | year 20. Do you see a number or a statement like that anywhere in the illustration?
00:21:00.620 | Let's see here. Would it be in the rows of years?
00:21:04.460 | Probably be at the top. Depends on the company.
00:21:08.340 | Yeah, modified endowment as a policy year 17.
00:21:11.820 | Okay, right. So now what they're saying is that this contract becomes a modified endowment
00:21:16.740 | contract at year 17. But anytime before that, it's not a modified endowment contract. And
00:21:23.100 | what the agent is going to propose to you is they're going to propose to you that you
00:21:26.500 | stop paying the premiums before year 17, or that you at least remove those additional
00:21:32.440 | premiums before year 17. Because the computer is calculating that at that point in time,
00:21:41.020 | you're going to reach that MEC limit, that line in the contract, at which point if you
00:21:48.020 | go beyond that, you're in a situation where you've put too much money into it.
00:21:52.940 | So what they will do is they'll give you, they sent you an illustration that shows you
00:21:56.420 | paying premiums for all of the years. But during your consultation or during the actual
00:22:01.580 | next stage of the sales process, they're going to give you an illustration that shows you
00:22:05.460 | stopping payments probably at year 15 or year 17, or reducing at least the additional premiums.
00:22:11.100 | And they're going to show you how that contract does it. The reason in the attachment it says
00:22:15.140 | this is what a modified endowment contract is, is because in order to cover themselves,
00:22:19.500 | the insurance company puts in the quoting software, it forces that disclosure page to
00:22:25.100 | be in there any time a proposal is run by the computer system. So that's why it's in
00:22:36.460 | there on that page.
00:22:38.060 | Now, probably the next question you're saying, is this a good thing or is this a bad thing?
00:22:44.320 | How old are you now, Frank?
00:22:45.820 | Frank - 50, how old am I? 52.
00:22:49.180 | Okay, so they're going to be proposing this that it ends at 65 or 67. That's why they've
00:22:54.780 | done it, is so that when you stop working, that you can schedule the life insurance premiums
00:22:59.940 | to stop being paid. And they're trying to build a policy that is big and that is efficient
00:23:04.900 | for your goals or for whatever you express to them or whatever they are identifying as
00:23:10.660 | saying, "Hey, we think Frank is going to like this." There's nothing wrong with that. All
00:23:14.980 | of my whole life insurance policies that I own are built in order for the premiums to
00:23:25.460 | be done. This is called in the insurance angle, this is called quick pay, where the goal is
00:23:30.060 | to quick pay the policy. So I want to put the money in pretty quickly up front, and
00:23:35.140 | then I want to be able to stop at a certain point in time. And depending on your age,
00:23:38.460 | this may or may not be a good thing. But for you, I'm sure this rep is thinking about,
00:23:44.660 | "Hey, when Frank retires, I want to tell him that he doesn't need to keep putting money
00:23:49.300 | into it." Make sense?
00:23:51.660 | Okay. Yeah, no, that does make sense. And I see, yeah, that they sent me multiple PDFs,
00:23:58.740 | and one of them does have a cutoff. The next one I'm looking at, the first one did not.
00:24:05.660 | Okay. No, I really, I literally opened this up and I said, "Why are you not interested
00:24:11.820 | in this?" Why do I have somebody who doesn't know what to do?
00:24:16.140 | Well, that's what I'm here. It's interesting. Life insurance is the worst. In some ways,
00:24:20.660 | it's the best sales process. In other ways, it's the worst sales process. And it's the
00:24:24.940 | worst because there's so much technical information. And the life insurance agent has to simplify
00:24:35.140 | it enough to really make sense. But then they also have to be thorough enough to cover the
00:24:40.060 | legal and the technical requirements for disclosure. And it's a real hassle because those illustrations
00:24:45.900 | that life insurance agents send out are the worst. And what you got in terms of an emailed
00:24:52.580 | thing when I was an agent, I used to hate sending those out because it's charts and
00:24:58.180 | charts and columns of numbers. And the problem is it's important. It's important disclosures
00:25:03.100 | for the prospective client because they need to know how things are going to work. That's
00:25:07.740 | the data that they need for analysis. But nobody understands how that stuff works. So
00:25:13.420 | hopefully you'll feel a little bit better equipped to understand what a modified endowment
00:25:16.900 | contract is and you can have a more productive conversation.
00:25:21.620 | Anything else before I go on to the next caller?
00:25:23.300 | No, no. Go ahead. Go to the next one.
00:25:26.300 | Awesome. Let's see here. I've got an 847 number from Illinois. Go ahead, please, and introduce
00:25:34.060 | yourself and let me know how I can serve you, please.
00:25:36.660 | Hi, Josh. It's David from St. Louis. I had to hang up earlier.
00:25:40.020 | No problem, David. Go ahead and let us know what your question is.
00:25:43.380 | All right. So I sit on a board at my church that manages trust, and a very nice member
00:25:49.140 | when they passed away left us $90,000 in cash and $320,000 in what I've been told before
00:25:56.540 | our first meeting is everything. Mutual funds, stocks, bonds, everything. So I'm not really
00:26:02.060 | sure how moving money around works for churches, and I know they're looking for this to be
00:26:07.380 | a long-term thing where they can kind of draw down 5% every year. That's their goal on paper
00:26:11.900 | right now. If Joshua Sheets joined my church, what would he do?
00:26:21.260 | So there's two answers to that. There's the philosophical answer of what would be an appropriate
00:26:26.800 | way for a church to handle money, which is kind of an interesting theological and philosophical
00:26:33.060 | question. Then there's the practical financial planning question, which is probably in some
00:26:39.040 | ways more straightforward. Let's try to tackle the technical one first, and then you can
00:26:42.860 | see if you want to talk about--let's go back to philosophical. Do you know what form the
00:26:47.600 | money is--so you received a bequest. The member died, and they left the money to the church.
00:26:56.140 | Was the money left in the context of a trust, or was the money just simply left in a beneficiary
00:27:01.380 | arrangement on these different accounts?
00:27:04.940 | I believe it is a trust. I know we're going to exit it through Charles Schwab, and then
00:27:10.180 | we're free to move the money around however we want. And we haven't met yet for the first
00:27:13.500 | time, so that's all I know at this point.
00:27:16.820 | So without your having more information, I can't give you much useful information in
00:27:21.300 | terms of what's actually going to happen. So let me give you the questions that you
00:27:26.260 | need to ask. With this person leaving the money as a trust doesn't tell us anything.
00:27:37.060 | There could be various types of trusts. For example, this could be a trust that they've
00:27:41.340 | established for the benefit of the trust, and it's a trust that they have an independent
00:27:46.260 | trustee who's going to handle. And what they've decided is that the trustee is going to distribute
00:27:51.280 | 5% of the assets to the church each year on an ongoing basis until the money is used up.
00:27:59.500 | And if that is how it's arranged, then you as a church, you have no decisions to make
00:28:04.060 | in the matter. There's nothing that you need to do. You can't make any investment decisions.
00:28:08.460 | There's not anything that you guys are going to be responsible for. If that's the actual
00:28:14.180 | situation, then you just simply cash the checks and put them into the general operating fund
00:28:20.340 | and move on with your life. It also could have been left with an actual trust that was
00:28:25.020 | set up for you to, let me just think for a moment, it could be set up as a trust where
00:28:33.260 | you take over as a participant in the trust in some way. Maybe you're a trustee. Well,
00:28:37.100 | if you take over as a trustee and you're a participant in the trust, then of course you
00:28:40.780 | would have to make those decisions. But you don't have any information to know that today
00:28:45.220 | is going to be relevant to your decision. I do know that we will be able to move the
00:28:53.060 | money around because there's one guy on the board who said, "Well, the stock market's
00:28:56.660 | an all-time high, a bunch of it in stocks. So the moment we assume control of it, sell
00:29:00.740 | everything and set it down somewhere." Okay. So, yeah, so it could just be left to you.
00:29:09.340 | Well, in that situation, then basically the technical answer doesn't matter. It goes down
00:29:14.660 | to the philosophy. What is the best use of it? And here you got to handle the investments
00:29:19.660 | of it. Is this particular member right? Is the stock market at an all-time high? And
00:29:25.780 | then you've got to answer the philosophical question of what's the best way to use money?
00:29:29.740 | Is it a good idea for a church to keep large sums of investment money aside, or is it good
00:29:39.420 | that that money be spent quickly? So let's skip the market answer because that answer
00:29:44.460 | will be highly dependent upon the advice that you get, the philosophy that you have. What
00:29:49.700 | do you think should be done with the money? Well, I do know we've been giving has been
00:29:58.060 | sort of down for the last few years. So there was a thought that this would almost plug
00:30:02.780 | in kind of the budget gap if we were drawing it down a little bit every year. So then in
00:30:07.180 | that sense, I understand and agree with, well, if we can hold this sum of money and use this
00:30:12.300 | to kind of fill in some of the gaps, you know, for maintenance around the church and for
00:30:15.460 | programs and things like that, that's not a terrible use of it for the life of the church.
00:30:19.220 | I agree with you overall in the greater scheme of things, yeah, it would be better to send
00:30:23.180 | a hundred missionaries somewhere or something like that. But for the day-to-day life of
00:30:26.900 | the church, I can kind of see where the majority of people say, yeah, we'd like to draw down
00:30:32.100 | over the period of years a certain amount of money to help plug in a budget gap. Are
00:30:37.220 | some people lobbying for the money to be kept as a fund, an endowment fund, that can be
00:30:43.420 | drawn down more slowly? Yeah, yeah, that is the initial thought before we go into the
00:30:49.900 | meeting, that it would be, yeah, 5% drawn down every year to kind of help with the church
00:30:53.660 | budgeting. And what benefit are they trying to get out of that? I'm sorry, I don't understand
00:31:01.700 | the question. So why are they wanting to do that? Why do they think it's a good idea,
00:31:06.460 | philosophically, for a church to have a sum of money that they're taking an investment
00:31:10.100 | return off of? Ah, I suspect that trustees are looking at, we've had a few years of red
00:31:15.100 | ink and they're thinking that this is, you know, literally, you know, a manna from heaven
00:31:19.060 | or a gift from God, and that this would kind of help sustain the church while we look at
00:31:27.660 | other priorities or budget problems, or we see, you know, maybe it was giving just down
00:31:30.900 | for a few years and then it picks back up and then we can do, this doesn't close all
00:31:34.180 | the doors, now we have options to disperse the money onto larger projects, scholarships,
00:31:37.660 | or things like that. Well, so that's a philosophical question that you've got to answer from scripture
00:31:48.740 | and in discussion. It's not a technical financial planning question. I'll tell you my opinion,
00:31:54.340 | just in case it sparks some discussion. If you put me in that boardroom, I would be lobbying
00:32:02.980 | against keeping any kind of endowment fund. I don't think it's a good idea for, especially
00:32:09.500 | a church institution, but even most institutions, to try to maintain the idea of keeping large
00:32:15.140 | amounts of money on an ongoing basis, and I'll tell you why. Especially with churches,
00:32:19.500 | and this is something that people who are involved in churches, assuming this is a Christian
00:32:24.060 | church, one of the basic understandings of a Christian church is that the Christian God
00:32:29.860 | is a God who is living and actively involved in the world. And so that means that he's
00:32:34.340 | living and actively involved in money. And you want to make sure that all of your actions
00:32:39.920 | and that your decisions actually reflect that. So, I wouldn't be seeking to try to set up
00:32:45.820 | an institution that can function without the active involvement of the people. And in a
00:32:52.580 | church environment, the church is not here for its own self-enrichment. The church is
00:32:57.700 | not here to say, "Look how great we are, look at how big, fancy buildings, look how wonderful
00:33:02.500 | we are." The church is a living organism. It's a body of people who are involved, and
00:33:10.140 | if you bring that together and you just say, "We've got an external sum of money," you
00:33:15.660 | miss that. And churches are going to grow, they're going to decline, and God's not scared
00:33:20.140 | to let a church die. And so you don't want to try to prop something up. I think what
00:33:24.380 | should be done with the money is you should look and say, "What are the biggest, most
00:33:27.900 | pressing needs that we see right now that we can use this money to contribute to?" That
00:33:33.220 | doesn't mean that you turn around and say, "This week and this month, we're going to
00:33:36.860 | try to get rid of it as quickly as we can and buy a bunch of useless stuff." That's
00:33:41.260 | not the point. But the church should have, "Here are the priorities, here are the opportunities
00:33:46.220 | for it." And the goal should be, "How can we steward the money over the short term and
00:33:53.580 | get rid of it into the biggest return?" And if a church doesn't have a better return for
00:34:01.860 | their money than the stock market, I've lost all confidence and faith in that church. I
00:34:07.780 | mean, the number of options that are available to multiply the money is so much bigger under
00:34:13.860 | the stewardship of a local church. I mean, it's incomprehensible to me that we wouldn't
00:34:20.300 | have a list of those things that we're focusing on. Why would we be considering the stock
00:34:25.500 | market? We should have so many more opportunities that are there to make exponential returns.
00:34:30.260 | And I'm talking about financial, but even just in terms of impact. $420,000 is a substantial
00:34:40.180 | sum of money that can make a dramatic difference in some local projects. But when you'd say
00:34:46.740 | $21,000 per year is a basically inconsequential amount of money that's not really going to
00:34:53.820 | make a big difference on an ongoing basis. So I personally wouldn't say, obviously, we
00:35:00.820 | don't want to be good stewards of it, not waste the money. But the goal should be over
00:35:05.300 | the coming years, as in fewer than five, we're going to invest this money and get rid of
00:35:10.580 | it back out into something that's going to be a much better return. I think it's a problem.
00:35:15.500 | It's a real, in terms of charitable giving, if I had given that money, I would actually
00:35:20.500 | stipulate that the money needs to be gone within a certain amount of time. Maybe it's
00:35:24.100 | a decade, maybe it's five years. But institutions, especially institutions that are arranged
00:35:30.460 | under a religious cause, under a religious banner, or under some sort of charitable philosophical
00:35:36.100 | banner, institutions run the risk of being hijacked by people down the road. And you
00:35:42.820 | can see this in every major institution I've ever studied, every large charitable organization,
00:35:46.940 | every large university. The universities and the institutions change over time. And the
00:35:51.500 | original founders to the Harvard endowment might or might not be very happy with what's
00:35:56.460 | going on at Harvard today. And so I think it's important to me, when I'm giving money,
00:36:03.140 | I want to make sure the money is gone in a relatively short period of time, because I
00:36:07.300 | don't want an institution to be created, especially a church. I don't want a church that can continue
00:36:12.500 | functioning without God. And that can happen when you pile up big coffers full of money.
00:36:17.500 | God left years ago, but yet the people keep going because there's money. And I think the
00:36:22.220 | same thing applies to other charitable institutions. So that's a pretty strong, and I don't know
00:36:26.340 | how usual or unusual philosophical opinion that is, but I think that plans should be
00:36:32.460 | relatively short term rather than longer term. What say you?
00:36:38.300 | That was part of the reason why I called, I love it, when you weave Scripture and theology
00:36:42.500 | into your talks, because I think that's very refreshing and something that's generally
00:36:45.780 | lacking, that's why I support the show. I think it would definitely be something that,
00:36:51.300 | yeah, in the next couple of weeks I'll look into, yeah, projects around the area that
00:36:56.940 | certainly, because it's north St. Louis County, we might have--may or may not have been in
00:37:00.380 | the news recently in years--that certainly we could do something better and, dare I say,
00:37:06.460 | kinder with the money than, yeah, just kind of drawing it down like a church's IRA, kind
00:37:10.740 | of symbolically. So, yeah, yeah, no, I appreciate that very much, and I think, yeah, maybe that's
00:37:17.220 | God's way of telling us, "Hey, the value's so high, why are you going to sit here and
00:37:21.420 | mess around it, pull all the cash out, and let's do something with it?"
00:37:24.260 | I think your most powerful way to compare this is going to be, what impact does $420,000
00:37:31.100 | of cash make versus what impact does $21,000 a year make? $21,000 a year, how many people
00:37:37.820 | are in this church?
00:37:38.820 | Oh, it's a good medium-sized church, 200, 250, somewhere around there.
00:37:44.220 | Okay, so with this size of church, I mean, $21,000 can be fritted away in health insurance
00:37:51.220 | and painting the buildings and stuff like that. This is not going to make an impact,
00:37:57.860 | and I think if the original member who left the money behind, if I were the member, I
00:38:01.940 | would have stipulated, or if I were advising the member, I would have stipulated that they
00:38:05.500 | specifically think through an actual project or an impact. $21,000 will quickly get lost
00:38:12.860 | in administration, and that's one of the major problems that churches face. I mean, even
00:38:17.500 | earlier you mentioned it in almost a kind of a reactionary defensive way of, "Well,
00:38:22.140 | we need these maintenance things done. We need to buy paint," et cetera. But this happens
00:38:26.220 | all the time, is that churches get together and they say, "Well, we've got to keep
00:38:29.420 | ourselves going," and they're concerned for their own self-preservation, and they're
00:38:32.860 | not concerned for their impact. And so, yes, maybe the buildings do need to be painted,
00:38:38.100 | and maybe the money should be used, some of it should be used for that. I'm not the
00:38:41.220 | one to say. You guys have to decide that together. But in terms of impact, $420,000 is enough
00:38:50.020 | to maybe launch a project, launch a ministry organization, support somebody who needs support.
00:38:58.340 | $420,000 is enough to make a major contribution to something specific, whereas $21,000 a year
00:39:08.140 | can quickly get swallowed up in a bloated budget. So I would approach it on that perspective,
00:39:14.260 | and if I were the donor, I would have stipulated that just in terms of impact. So you've got
00:39:18.340 | to take that and see what you actually think about it. But since you called my show, that's
00:39:23.060 | my opinion.
00:39:24.060 | Great, great. That's what I was looking for. Josh, I really appreciate you taking time
00:39:27.980 | to talk to me today. Love the show.
00:39:29.740 | For sure, man. Wasn't expecting to talk about my philosophy on churches and charitable giving,
00:39:36.980 | but I guess that's what you get when you do a show like this. Thank you all so much for
00:39:39.900 | listening, and for those of you who have called in. It's certainly a challenging situation
00:39:46.380 | for me, but we had several new callers who joined in from the Radical Personal Finance
00:39:50.820 | Facebook group. If you'd like to get on a call like this next week, jump on as a patron
00:39:55.860 | of the show. These calls, at the moment I've reserved them exclusively for patrons. Just
00:40:00.180 | decided as a special thing to go ahead and I just decided to include the Radical Personal
00:40:08.660 | Finance Facebook group today, so that was where a couple of the callers were. And for
00:40:11.460 | those of you who've been watching the live stream, thank you. We're starting to get to
00:40:15.860 | the size in terms of in the Facebook group. We have what, 750, 800 members now. We're
00:40:20.820 | starting to get to the size where I can do more interesting media things for you. And
00:40:26.500 | now that I am fixing my camera setup, I'll be doing more on the Radical Personal Finance
00:40:30.740 | Facebook page. So if you haven't found those, come on by Facebook, search Radical Personal
00:40:35.140 | Finance, like the page, and join the group. Free to do that. Lots of other great people
00:40:39.660 | there. If you'd like to support the show, if you appreciate content like this and like
00:40:42.820 | to keep it with minimal outside interference, minimal commercials, etc., please consider
00:40:48.020 | becoming a patron of the show. RadicalPersonalFinance.com/patron. You can support the show directly and that money
00:40:53.340 | goes directly from you into my pocket, which is very helpful and helps me do things like
00:40:58.140 | buy a camera and buy a light so that my face on the video screen looks okay. Thank you
00:41:04.020 | all so much for listening and I'll be back with you soon.
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