RPF0612-QA-Pay_Off_Debt_or_Invest_529_Plan_Optimization_Financial_Planning_Fees_Tax_Issues_College

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00:00:30.360 | Today on Radical Personal Finance, it's live Q&A.

00:00:33.100 | ♪

00:00:49.100 | Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge, skills, insight,

00:00:53.100 | and encouragement you need to live a rich and meaningful life now,

00:00:56.100 | while building a plan for financial freedom in 10 years or less.

00:00:59.600 | Did you know that my wife and I talked a long time

00:01:02.600 | whether I should say 10 years or less because it's grammatically incorrect?

00:01:05.600 | And I hate the fact that it's grammatically incorrect, but hey, it sounds better than 10 years or fewer.

00:01:11.100 | So whether it's fewer or less, I am here to serve.

00:01:13.600 | ♪

00:01:21.100 | I tried it out on here one time. I was like, "Hey, here's the new tagline for this show."

00:01:25.100 | Live a better life. Hold on. I completely forgot it.

00:01:28.100 | In 10 years or fewer, we went over it again and again.

00:01:31.100 | 10 years or fewer, and even though that's correct, we both decided it didn't quite have the same ring to it.

00:01:35.100 | Today we do live Q&A. That means that we have a phone number, and I go to the phone calls,

00:01:40.100 | and I say hello, and I answer your questions.

00:01:43.100 | Basically, it's like a live radio show. You get it about an hour after I record it and publish it.

00:01:48.100 | We're doing a special series of shows here at the end of 2018.

00:01:53.100 | Recording a special series of live Q&A shows.

00:01:56.100 | These shows are still available to you.

00:01:58.100 | They will be each day from Monday, December 17th, all the way up through Friday, December 21.

00:02:05.100 | Each day at noon Eastern time, if you'd like to get on a live Q&A show, jump in and call.

00:02:09.100 | Just call 561-440-7362 at noon Eastern time, and you will be able to participate in that live Q&A.

00:02:16.100 | Ask me any question you want. Talk about any topic you want. That is available to you.

00:02:20.100 | 561-440-7362 at noon Eastern time each day this week, Monday through Friday.

00:02:26.100 | We begin with Mike in Kentucky. Welcome to the show, sir. How can I serve you today?

00:02:31.100 | Hi. Thanks, Josh. Thanks for taking my call.

00:02:34.100 | The question I've got, my wife and I gross about $180,000 a year, and we have about $30,000 going to retirement

00:02:42.100 | and $33,000 going to an after tax brokerage account, $8,000 going to 529s.

00:02:49.100 | My question is, my wife is planning on leaving her job in about three years.

00:02:53.100 | She's self-employed, and she's probably just going to be a stay-at-home wife and mother.

00:02:58.100 | I owe $96,000 on a mortgage, which is 3.6%.

00:03:03.100 | Should I focus on paying it off or building the brokerage account and delay making the decision for three years?

00:03:09.100 | Are those your two options? Is either you focus on paying off the mortgage or you focus on investing in the brokerage account?

00:03:18.100 | That's my two options at the moment.

00:03:20.100 | Okay. And how much money do you have available in your cash flow to put towards one of these two options each year?

00:03:32.100 | I can put the entire $33,000 to either the mortgage or to an investment account.

00:03:40.100 | Let me just clarify. You are considering stopping the $33,000 to the brokerage account and putting that towards the mortgage.

00:03:49.100 | You're not talking about any additional savings. Is that right?

00:03:53.100 | Correct.

00:03:54.100 | Okay. 3.6% is fixed. Is that right?

00:03:59.100 | Yes.

00:04:00.100 | And how much of the $180,000 is represented by your wife's earnings?

00:04:07.100 | $45,000.

00:04:13.100 | Man, it's hard to answer that question because in absence, there's not a super compelling technical answer that I can see just in those simple facts that you've given me.

00:04:26.100 | It's going to come down to what do you feel better about. In my observation, it's probably going to come down to what do you feel better about.

00:04:32.100 | So 3.6% fixed rate mortgage, it's hard to say that that's a very expensive problem.

00:04:38.100 | You obviously have plenty of cash flow and you have investments where this is not going to make a big difference in your overall financial situation one way or the other.

00:04:48.100 | It's not like you're teetering on the verge of bankruptcy and if you just had a paid off house, then you could accomplish things.

00:04:54.100 | But with the fact that you'll still have $135,000 household income, even if your wife stops earning income, that means that you're still going to be able to live fairly comfortably.

00:05:10.100 | So you're not going to go in the poor house and paying off the mortgage is not going to be a very compelling thing that's going to completely change your life.

00:05:19.100 | How old are you guys at this point?

00:05:22.100 | I'm 44 and she's 42.

00:05:26.100 | Am I missing something? If your house were paid off, would that change something dramatically for you?

00:05:33.100 | Not necessarily. It just means I wouldn't have a house payment.

00:05:39.100 | Would that benefit you in some way? For example, would you drop the insurance coverage because your mortgage company no longer requires it? Or would that somehow allow you to change your job and go to something that you've always wanted to do where you're going to earn $50,000 a year or anything dramatic like that?

00:05:57.100 | No, not really. I grew up listening to Dave Ramsey, so I got this thought process in my head of I'm supposed to pay the mortgage off, but I lean against that at this point.

00:06:12.100 | And that's where I've kind of come up with this strategy where it's like, "Well, I'll bank this money and three years from now, I'll either decide to pay it off or not pay it off or at that point, I'll owe another three years on the mortgage. So then I may just let it ride out."

00:06:27.100 | I kind of came up with the same, I guess, thought process you did. It's not really an easy answer.

00:06:35.100 | Yeah, you're right in kind of the middle zone. And for other listeners, let me just talk through how I'm thinking about the problem. When somebody is young in their life cycle, when if you're 30 years old or 35 years old, you have young children, things like that.

00:06:53.100 | Well, man, not having a mortgage payment is so helpful because that gives you flexibility. There are many families where mom could stay home with the children if they didn't have a mortgage payment. And so things like that could be very compelling and say, "Hey, let's get rid of this mortgage payment." That'd be really, really compelling.

00:07:09.100 | But you're 44. Now, on the flip side, which means that you're past that early stage of life, your lifestyle is fairly established and stable at this phase. Now, on the flip side, at 64 years old, if somebody is looking towards retirement, then we can do the analysis and say, "Is it of any value to have the house paid off or is it perfectly reasonable to have a mortgage payment on the house?"

00:07:32.100 | I generally discourage retirees from focusing first on paying off the house because by definition, if you're able to retire, you have enough money to pay for your expenses. And so having a paid off house is not that big of a deal for retirees as long as they have other cash.

00:07:48.100 | Well, that doesn't apply to you either because you are in that middle zone. Sometimes it comes into play with lifestyle factors, as I stated. Maybe if you didn't have a mortgage, you would be able to go and become a traveling artist.

00:08:03.100 | You haven't mentioned anything like that, so I don't see how your lifestyle is going to be impacted one way or the other. For some people, it comes down to financial calculations. If you had a 15% mortgage or a 12% mortgage or some other high interest rate or some bad loan, something like that, then in that consideration, we could say, "Well, you know what? Let's pay that off because it's a very high interest rate."

00:08:32.100 | And you've got 3.6% fixed. And at this point, from what I'm guessing, although I haven't confirmed it from your amortization schedule, you're near the end of that mortgage. So all your payments now are principal, so you're not even paying that much interest.

00:08:44.100 | That means that your potential for interest deductions, things like that, are not particularly valuable. So there's a mark in favor of paying it off.

00:08:53.100 | You're in the state of Kentucky, or at least that's what your area code says. In the state of Kentucky, you don't have an unlimited homestead exemption. You have about a $5,000 homestead exemption. So from a perspective of asset protection planning, we would lean in favor of keeping your home indebted because that way, you don't have any equity in it that's available to a creditor.

00:09:13.100 | But the problem is, if you're thinking about putting it in a brokerage account, that's also available to a creditor. So there's not any meaningful asset protection arguments that we're trying to make here. So after thinking all those things through, about the best I can give you is, if you're excited about having a debt-free house, go for it.

00:09:29.100 | I mean, there's nothing wrong with it. That's why I tried to say again and again, there's nothing wrong with the Dave Ramsey plan. There's nothing wrong with paying off your house. And I like the way that you're approaching it, where just set the money aside. That way, if something comes up that you want it for, you've got it. You're not paying much interest at this point in your amortization schedule.

00:09:48.100 | And if two or three years from now, you decide, you know what, let's go ahead and wipe out that house payment, go ahead and do it. So just be careful that you don't have the money invested all in stocks, if you're thinking about that, lest there be some significant market downturn. But I don't have a logically correct answer for you. I think it comes down to what makes you and your wife feel better. That's how I would answer it.

00:10:08.100 | Thanks for your advice.

00:10:10.100 | I don't know if it was worth anything, but at least that's honestly what I thought it was. We go now to Wayne in Arkansas. Wayne, welcome to the show. How can I serve you today?

00:10:20.100 | I really appreciate you taking my call. Kind of an interesting question, something I'm kicking around here into the year. But we have a seven-year-old daughter and this year had a second daughter. And my question is, I have a Coverdell savings account for college for each daughter that I've opened up.

00:10:42.100 | And I'm putting the max in, which is $2,000 per year, which is going to be a benefit at some point, but is realistically not going to pay for a full four years of college.

00:10:53.100 | I've also got a 529 on my oldest daughter that we have put considerable money in that by the time she's 18, if she needs to tap into it, will be quite a bit of money, I feel like, if things continue.

00:11:08.100 | My question is this, is it worth opening a second 529 for the second daughter or pump the first 529, given that my oldest daughter will be out of college by the time the second daughter needs it, or it might look better with her not having any money to her name other than the Coverdell, and then change the name on the 529 to the younger daughter. Does that make sense?

00:11:35.100 | It does. Interesting wrinkle on it. Short answer is I don't know, but let me try to think it through with you. How much money are you investing? So you're maxing out the ESAs each year, the Coverdells, for $2,000 for each child. Is that correct?

00:11:54.100 | Yes, which I feel like is a great benefit. I don't get any tax benefit on it, but I've got better investment choices, and it's got more flexibility down the road. But in reality, $2,000 a year is not going to pay for a college degree 20 years from now.

00:12:08.100 | Right.

00:12:23.100 | So I'm comfortable with that.

00:12:41.100 | Okay. So the reason I asked that question is the 529 accounts recently were opened up for one of the changes that happened under the, what do they call it, the Tax Cut and Jobs Act or something of 2017. All these stupid names that they come up with. The Trump tax reform was passed in late 2017.

00:13:02.100 | One of the significant changes that happened in the tax code related to that law was that now 529 funds can be used for K-12 private education or religious schools, of any kind of private or religious schools, up to $10,000 per year.

00:13:21.100 | And so, the reason I'm pointing it out to you is there's now an additional increased reason for many parents to consider funding 529 accounts more heavily if they think that they can make use of those funds for private school tuition.

00:13:46.100 | And if they think that they can make the investments grow in such a point where it's available.

00:13:52.100 | Now, your question is specifically, if you put additional contributions into a 529 account with your younger daughter as the beneficiary, then that could make your older daughter look more impoverished for the purpose of financial aid applications.

00:14:12.100 | And so, therefore, she might be eligible for more need-based aid because she is not the beneficiary of a large 529 account.

00:14:20.100 | Is that an accurate of the plan that you're trying to get at?

00:14:24.100 | Well, I may be somewhat backwards from that. I have a 529 for my older daughter. I have not yet opened one up for the younger daughter.

00:14:35.100 | And I'm just wondering if that's a wise move or not down the road, where given that you can switch the beneficiary. Two ways to look at it. I don't know if I try and get one daughter through college and if there's any money left, switch it to the younger one after she starts college.

00:14:52.100 | Or if the older one gets an academic scholarship, just keep putting money into it and then switch it to the younger one after it looks like she has no money to her name type of a deal.

00:15:03.100 | Or flip it now and put it all on the younger one and let the older one solve that problem when we get there in, you know, ten years.

00:15:11.100 | I just didn't know if there was a 529 strategy for multiple children that was known and a way to structure it now or it would work better in the future.

00:15:22.100 | I love the question. It's a question I have never thought of and never researched and never worked through.

00:15:28.100 | So I don't know the answer to it. And I would think that in general, the only principles I could give you and then just point you towards further research with somebody who would be more qualified in that area.

00:15:44.100 | And the best people to look for. I'm forgetting the name right now, but there is an organization of college financial aid planners.

00:15:54.100 | Back when I was a financial advisor, I met with a couple of these guys and I was super impressed with that all they basically do is help parents plan their financial aid strategy for college.

00:16:04.100 | And if I were you, I would search them out, somebody in that organization, and I would talk with them because you are in an ideal situation for such a consultation.

00:16:16.100 | The major problem that many parents, the major error they commit is they wait until their child is heading into college to make that call.

00:16:24.100 | But with you, with a one-year-old and a seven-year-old and the fact that you have clarity around your school strategy, you're planning to keep your kids in the government school until graduation, that means you don't need to spend money there.

00:16:35.100 | And with the fact that during those college years, you are already saving for that, you can do some cool plans.

00:16:41.100 | Now, I think that probably the biggest thing is who's the owner and who's the beneficiary.

00:16:47.100 | So if you are the, in both cases of the 529 account, you are the owner of the account.

00:16:54.100 | And so it doesn't really matter who is the beneficiary of the account, you're the owner.

00:16:59.100 | And so if you complete the Free Application for Federal Student Aid, the FAFSA form, if you complete that form, that asset is going to be listed as one of your assets.

00:17:09.100 | And it's going to be understood that, and it'll come in under your consideration, not so much other people.

00:17:16.100 | So that's the key.

00:17:19.100 | Now, the only way you get around those owner rules, in my knowledge, is if you change the owner to somebody that's not reflected on that basic form, the FAFSA form.

00:17:29.100 | So the most obvious example here would be things like grandparents.

00:17:33.100 | But the challenge is, if the student is receiving the distribution during those college years, then that's going to be counted as their income.

00:17:44.100 | So all I've done is muddy the waters. I have to simply say, I don't know the answer.

00:17:50.100 | Look for an organization that has financial advisors that specifically around college, there's a certification and designation on this industry.

00:17:58.100 | Sorry, I don't know it off the top of my head.

00:18:00.100 | But I will put a note, and at the end of the show, after I record the Q&A show, I'll pause and I'll try to put that info in at the end of today's Q&A show.

00:18:09.100 | So that I can give you the proper referral to that organization.

00:18:12.100 | And if I were you, I would pay for a consultation, get an hour of advice from somebody from that organization.

00:18:16.100 | That's the best I got for you, Wayne.

00:18:18.100 | Okay. I really appreciate it very much.

00:18:21.100 | Absolutely. And good for you for, I guess, being so proactive with your daughter's schooling.

00:18:25.100 | Now, my big challenge to you is make sure they're ready to make a good decision about college.

00:18:30.100 | And then make sure that there are big opportunities that they're prepared for.

00:18:36.100 | Because unfortunately, I think we've all seen so many people who they had all the financial aid figured out, but they didn't have everything else figured out.

00:18:46.100 | So the best is to have their character developed, have their, you know, what they're going to college for, et cetera, all that stuff.

00:18:53.100 | And then many ways, in my opinion, that's harder than the financial aid.

00:18:56.100 | Financial aid, those advisors will have a clear answer.

00:18:59.100 | We go now to Florida. Welcome to the show. How can I serve you today?

00:19:02.100 | Hey, Joshua. Alan in Florida here.

00:19:07.100 | I just first want to say thank you for the show. I've been listening for three years.

00:19:12.100 | That's my pleasure. Thank you for being here.

00:19:16.100 | My question is about what's fair and reasonable.

00:19:21.100 | What is a reasonable compensation for an advisor serving a woman in her 60s living on Social Security and pension, stocks and bonds and IRA accounts over $1 million, no business, no complicated planning needs, no budget issues,

00:19:39.100 | something what I would call a plain vanilla financial planning situation as it can be.

00:19:46.100 | Is it unreasonable for me to expect that such a service on the advisory side should not exceed over, say, $5,000 a year?

00:20:02.100 | It's not unreasonable for you to think anything that you want.

00:20:05.100 | So if you are the if you are the client or this woman is the client, it's the client's job to go and choose whatever they think is going to best serve them.

00:20:16.100 | So you in the circumstances that you described, a woman in her 60s receiving some Social Security payouts and a pension payouts with a million dollars in retirement accounts.

00:20:28.100 | There's no shouldn't have to pay anybody.

00:20:31.100 | You can she can just simply put her Social Security checks and her pension checks in the bank.

00:20:36.100 | There are so many discount brokerages that will sell her a mutual fund portfolio without any expenses associated with it.

00:20:43.100 | She doesn't have to pay anybody.

00:20:45.100 | So the question comes down into what kind of service is she looking for and how can she best get that service?

00:20:53.100 | So why does she want financial advice in the first place?

00:20:58.100 | Well, she's somebody that cannot be a DIY investor.

00:21:02.100 | She needs an advisor to keep her comfortable of staying invested in the market long term.

00:21:11.100 | Currently, she has a Dave Ramsey ELP or what they call I guess their local recommended advisor who charges 1.7% asset management fee and has her invested in DFA conservative model with dimensional fund advisors portfolio solution.

00:21:38.100 | Right.

00:21:40.100 | And based on what based on my analysis, this portfolio basically it hasn't changed for 10 years for her that she was invested in.

00:21:49.100 | And so there was no changes from conservative to moderate or to defensive.

00:21:56.100 | So she was in this model all this time.

00:21:59.100 | She had her four quarterly meetings a year.

00:22:03.100 | So based on the appearance, it seems that the advisor has done well on quantity and quality of the touches, checking in with the client and overall was professional.

00:22:16.100 | But just looking at the portfolio, it looks like it's on the expensive side and easily quantifying the potential savings from say going to Vanguard over next 20 years.

00:22:31.100 | I mean, we're talking about over a million dollars here.

00:22:35.100 | So I was basically asked to give an opinion on the portfolio.

00:22:41.100 | She was conscious herself about the cost now that Vanguard and a lot of other platform advisors that are lower fee are advertising everywhere.

00:22:54.100 | So that's basically where this all started.

00:23:01.100 | And I reviewed the portfolio.

00:23:03.100 | I mean, it looks like this DFA portfolio actually underperform any every comparative or similar portfolio in the industry out there, even before the fees.

00:23:16.100 | So it seems like Vanguard is a no brainer. They're like advisor solution that can be all in under point four percent compared to one point seven and potentially maybe even better performance over time.

00:23:30.100 | So I'm just trying to check myself. Is it like unreasonable for me to think that somebody with a simple situation like that with assets where they are and nothing complicated that they should be paying like this much for the service.

00:23:58.100 | Right. So it is the thorniest problem in the financial world and the solutions will largely be driven by your background.

00:24:11.100 | So there are there is a whole swath of listeners to this show who are right now absolutely shocked that anybody in their right mind would pay almost two percent per year to own a bunch of index funds.

00:24:28.100 | They can't believe that they don't understand why anybody could pay two percent per year for index funds.

00:24:34.100 | And there are a whole bunch of this swath of listeners, their whole bunch of bogey heads who would say that is absolutely the most ridiculous thing ever conceived of.

00:24:44.100 | And in fact, not only should this this client leave, but that advisor should probably be tarred and feathered and run out of town on a rail, because how could they in good conscience charge this person one point seven percent.

00:24:57.100 | There are a whole lot of other people who look at that and say, well, you know, I'm not sure. And but it's probably pretty normal, because to pay one point seven percent on a portfolio of a million dollars of assets is not entirely is not at all abnormal.

00:25:12.100 | And with regard to industry norms, she's paying a total lower cost because of the DFA approach. She's paying a total lower cost of than many other people who are who are paying one point seven percent plus active mutual fund management, et cetera.

00:25:29.100 | The problem with a million bucks is this. It gets you in to a lot of advisors in terms of their minimum asset size, but it doesn't give you any deep discounts on that.

00:25:40.100 | It doesn't give you any deep discounts on the value of the services. So if she had five million dollars, she could get easily get those fees with that advisor down to a lower level.

00:25:51.100 | But with this with one million dollars, it's hard to do that. So here would be the first recommendation that I would give that I would give. I would not be one who would say to somebody, you should leave or you should not leave purely based upon the money.

00:26:05.100 | And I would caution you from giving her that advice. I have seen and worked with enough investors who are very good at blowing themselves up to be convinced that there is a tremendous value of a good financial advisor.

00:26:18.100 | There are some people, most of whom do things like listen to personal finance podcasts who are thrilled with the concept of sitting down and looking at their investments every month.

00:26:27.100 | They are thrilled with studying what's happening in the market. They love to read books on investing, which keep them insulated against their fears.

00:26:35.100 | And for these people, they are really in a good they love it. And so they don't want to pay anybody else. But that's not the norm. Most people, I think, do find value from a good advisor.

00:26:47.100 | I don't know if this advisor is a good advisor or not. And the only way that I would know to do that is, is she making good decisions and is she proving herself to be a good decision maker?

00:27:00.100 | Nothing that you have described raises a red flag about this advisor in terms of what they've done. If they've chosen a portfolio of investments, if those investments are properly chosen, then things can be good.

00:27:13.100 | I'm very nervous about I've not gone out and shopped dimensional funds, but I'm very eager to see what their performance is compared to other classes.

00:27:24.100 | The problem with doing that in any particular phase, it needs to be analyzed carefully. But the problem is what phase in a market are you?

00:27:31.100 | So sometimes value outperforms growth. Sometimes growth outperforms value. Sometimes you just get unfortunate timing.

00:27:37.100 | But I would be very nervous about your making a decision there without having had those conversations with her advisor.

00:27:43.100 | A good advisor will spend a lot of time just keeping making a good investment and helping people stay comfortable with it.

00:27:49.100 | Now, if this woman is to the point where she doesn't need that kind of handholding, she doesn't need that kind of help, then she should go get things cheaper.

00:27:59.100 | If she does need that kind of handholding, if she does need that kind of help, then she should keep paying the advisor their fees.

00:28:05.100 | But it comes down to does she need that? Does she value that? Is she a nervous Nellie who's going to bail when all of a sudden next month the market declines by 15 percent, by 20 percent?

00:28:18.100 | Is that going to put her plan in jeopardy?

00:28:20.100 | And then the other thing is you have to assess the advisor's value with regard to other financial planning services.

00:28:25.100 | It may be at this point in time that she doesn't need any other significant financial planning services.

00:28:30.100 | Perhaps her tax plan is buttoned up, her estate plan is buttoned up, her retirement distribution plan is buttoned up, and she doesn't really need it.

00:28:37.100 | And so in that case, yeah, she can go and pay less money.

00:28:41.100 | What I would recommend is that she, and possibly with you if you have a close relationship, that she go and meet with the advisor and that she express her concern and give the advisor a chance to demonstrate his value.

00:28:56.100 | What has he done?

00:28:57.100 | And if he's not giving value and he's not delivering value, and if he can't point that out, then she should leave.

00:29:03.100 | Go shop. Fire him. Go find someone else.

00:29:06.100 | If he is demonstrating value, if he is showing what's done, and if she appreciates that value, then she can stay.

00:29:16.100 | It's her right to do that, and she needs to find something that she's comfortable with.

00:29:21.100 | So I think it's good for her to be soliciting your opinion.

00:29:24.100 | It's always helpful to get information from knowledgeable people.

00:29:27.100 | I would just caution you from assuming that your understanding of life is the same as her understanding of life, because her advisor, if they're doing a good job giving her the annual service, things like that, it's tough.

00:29:48.100 | Now, here would be my best recommendation of a potential solution.

00:29:52.100 | If her situation is that simple, then considering asking the advisor to discount their services.

00:29:58.100 | Some advisors refuse to discount on principle, but most will discount if requested.

00:30:05.100 | So if she doesn't seem like she's going to have any major changes, she has a simple situation, her investment plan is well established, and if she just needs to talk quarterly, then ask the advisor if they'll discount.

00:30:23.100 | And maybe they'll discount her by 30%, and that would bring her fees down to 1.2 or 1.3.

00:30:29.100 | And now you can compare that against the Vanguard advisor option.

00:30:32.100 | Now you can compare that against other competing advisors and see.

00:30:35.100 | So in summary, it's a hard question to answer because these things are a little fluffy.

00:30:42.100 | You can run the math all day long and prove that if she will pay 40 basis points instead of 170 basis points of direct fees on the investments, you can run that math and you can prove that in 30 years, she will have more money with the only 40 basis points of the investment.

00:31:01.100 | But now your question is, why should she pay 40 basis points to any advisor when she could just go and buy a fund?

00:31:09.100 | You know, my friend Jim Collins would say, listen, it's crazy to even pay Vanguard advisors.

00:31:13.100 | Just go and buy the total stock market index fund, put all the money in that, maybe 25% in a bond fund and get 15 basis points of expenses instead of 15 plus 40.

00:31:24.100 | So you have to at every point along the way, you have to say, what's the value that I'm getting for this?

00:31:31.100 | And the same thing applies everywhere in life.

00:31:33.100 | So, you know, I don't own a Mercedes Benz, but lots of people own Mercedes Benz and they're thrilled with it.

00:31:39.100 | So why don't I own one?

00:31:41.100 | Well, it's not the right fit for me.

00:31:42.100 | It's not what I'm looking for.

00:31:43.100 | It's not what I want.

00:31:44.100 | And that's the world that we're that we're dealing with here.

00:31:48.100 | The only difference is there is a possibility, I would say there is a possibility that financial advisor can make a big difference in her life and in her long term returns.

00:31:59.100 | Because what has been shown many times is for some people, the handholding that a financial advisor brings, the good financial planning that a financial advisor brings will keep them invested through the difficult times, thus assuring them of their investment outcomes, thus being worth their fee.

00:32:17.100 | I don't know an intellectually honest, better answer than that.

00:32:21.100 | That's the best I can do to be fair to the arguments from all sides, to be fair to Jack Bogle and his arguments, to be fair to the financial arguments.

00:32:32.100 | I have a bias given my former involvement in the financial advice industry.

00:32:37.100 | I have a bias considering I used to manage money for fees similar to this.

00:32:41.100 | And so with that bias, it's very evident I have that bias.

00:32:47.100 | But in hindsight, I wouldn't send my mother and say, you don't need a financial advisor.

00:32:52.100 | I would say you need a good financial advisor.

00:32:55.100 | And that advice should be fairly priced.

00:32:57.100 | And there are a couple different ways you get it.

00:32:59.100 | But I wouldn't be scared of my mother working with a good advisor in this kind of circumstance, even knowing that there is a substantial fee associated with it, because for my mom, I would be convinced she was getting -- if the advisor is good and if I could prove the advisor is good, I'd be happy for her to get that because of the other value.

00:33:18.100 | But your situation and this woman's situation might be different.

00:33:22.100 | Any follow-up questions to that?

00:33:24.100 | I hope that's fair to everyone involved, but I don't know a better honest answer than that.

00:33:32.100 | Yeah, I think that's a pretty good answer.

00:33:35.100 | In this situation, however, the underlying investment, the DFA funds underperformed by so much that I doubt that any discounting on the advisor's fees would make up for that.

00:33:53.100 | And being a conservative -- I mean, it's a tricky thing for the advisor.

00:33:58.100 | Her being in the conservative allocation model, the expected returns are not high.

00:34:05.100 | So if she has over the last 10 years earned 4% per year and advisor fees were 1.7, it's like, well, why wouldn't she be in the treasury bonds instead of --

00:34:22.100 | I'm going to interrupt you to say --

00:34:23.100 | -- forgot it all.

00:34:24.100 | I'm going to interrupt you to say I agree with you on that.

00:34:27.100 | And if this advisor, in my opinion, one of the duties that a financial advisor has is to help their concerned, usually elderly clients who are living on a retirement portfolio, one of the duties that a financial advisor has is to help that client be educated enough that they could get good returns.

00:34:47.100 | If this client is investing and she's got her money in a very conservative bond portfolio and she's paying 1.7% for that, no, I'm a little offended about that.

00:34:58.100 | She would be better served to go buy a fixed annuity guaranteed by an insurance company and do away with the whole advisor fee in the first place.

00:35:06.100 | I'm not happy with that at all.

00:35:08.100 | And that's one of the things that when I talk about behavior modification, a good financial advisor should be working diligently with her to keep her invested in things that are going to make a big difference because this is the number one biggest thing.

00:35:20.100 | You said she's 60 years old.

00:35:21.100 | Is that how old she is?

00:35:23.100 | Yeah, about that.

00:35:24.100 | Okay.

00:35:25.100 | So let's point this out.

00:35:26.100 | Okay.

00:35:27.100 | So let's assume that we're talking about a net number.

00:35:29.100 | If she's investing in a portfolio with an expected return of 4% and let's just use 2% as a net return, which incorporates the 1.7% fee that she's being charged plus any other expenses that are internal to the funds.

00:35:42.100 | So let's just say on a million dollars, $1 million present value, is she going to spend the money for herself or is she going to leave it for others as an inheritance in terms of her own profile?

00:35:56.100 | Likely leave as inheritance.

00:35:59.100 | She's very frugal and has social security pension income over $60,000.

00:36:04.100 | So she's not really spending it on that.

00:36:07.100 | Okay.

00:36:08.100 | So of everything you've said, this to me is the most offensive.

00:36:11.100 | And let me show you why.

00:36:12.100 | So we've got a million dollar portfolio today.

00:36:15.100 | And we're going to invest that portfolio for the benefit of her beneficiaries, her children, grandchildren, charities, whatever, whoever she wants to leave the money for.

00:36:26.100 | So let's say a 35 year time horizon.

00:36:29.100 | Let's do a 30 year time horizon.

00:36:30.100 | Take her to age 90, which would be a statistically normal life expectancy for a woman in her 30s.

00:36:36.100 | So let's do 30 years.

00:36:37.100 | Now at a 2% investment return with no money going in or coming out, that means that in 30 years she would have $1.8 million.

00:36:45.100 | Now let's say that in the same situation, then at that point in time, this woman can be encouraged to invest her money into a portfolio that has a much higher expected rate of return.

00:36:59.100 | Let's say that she can invest it into a portfolio that has an expected return of 6% net of fees, if that were possible, 6%.

00:37:08.100 | Now, instead of $1.8 million, there's $5.7 million when she dies at age 90 and leaves the money behind to her beneficiaries.

00:37:19.100 | If her advisor is not pushing her diligently in that direction with good education and good financial planning, I don't think they're a good advisor.

00:37:28.100 | So that to me is deeply offensive that any 60 year old woman who has enough income to maintain a comfortable lifestyle with social security and pension income and who has appropriate insurances, appropriate, you know, she's not in debt, et cetera, and has this portfolio.

00:37:46.100 | I want her invested in such a way that that $5.7 million goes to her children and her grandchildren and whatever charity she wants to support or whoever she wants to give it to.

00:37:56.100 | I want that money to be $5.7 million, not $1.8 million.

00:38:00.100 | So if I were working with her and you came to my office with her and said, Joshua, why are you charging this woman 1.7%? I would say, because I've gotten her to move out of a stupid portfolio with an expected return net of fees of 2% into this portfolio with an expected return net of fees of 6%.

00:38:18.100 | Well, how do I get there?

00:38:19.100 | I've got to do a lot of education.

00:38:21.100 | I've got to do a lot of handholding, and I've got to do some really good financial planning to solve that fear that she has of the money going down in value.

00:38:29.100 | So that she can stay invested through the topsy-turvy market conditions, et cetera.

00:38:33.100 | And I've got to figure out how to do that for her so that she's comfortable.

00:38:37.100 | So of everything you've said, I'm not offended by a 1.7% fee if the advisor is good.

00:38:44.100 | But one of the personal definitions that I use for being good is not letting the client drive and just being an order taker.

00:39:05.100 | Let's say you're a conservative investor and you're going to invest in a conservative portfolio.

00:39:28.100 | You've got to get somebody to a point where they're clear on their goals so that they become no longer a conservative investor.

00:39:35.100 | And then figure out how to solve their financial planning needs so that they're comfortable with the decisions they're making.

00:39:40.100 | Not that they're hoodwinked.

00:39:42.100 | Hopefully that's coming through loud and clear.

00:39:44.100 | I wouldn't work with a 60-year-old woman and say, "Oh, by the way, you need to have-- yeah, you're a conservative investor, but I'm just sticking you over here."

00:39:50.100 | No, it's the client's money, and the advisor has the responsibility to help the client do the right thing with their money.

00:39:56.100 | But that can be done in a way that moves her heirs from receiving $1.8 million to $5.7 million.

00:40:03.100 | And that's the value of a financial advisor if they're good.

00:40:06.100 | Based on that, I don't like this advisor anymore.

00:40:09.100 | I think she should shop carefully and she should do that.

00:40:12.100 | Because for an advisor to let her sit like that for 10 years, I think is not appropriate.

00:40:17.100 | But talk with them, ask them the questions, and give them a chance to defend themselves.

00:40:22.100 | But hold their feet to the fire.

00:40:24.100 | Here's what happens.

00:40:27.100 | Most people don't know how to talk to their advisors, and they're scared to talk to their advisors because they don't know what they're doing.

00:40:33.100 | Advisor knows these problems, and so she should go to him directly and say, "Listen, last year on a million-dollar portfolio, your fee of 1.7% meant that my portfolio was deducted $17,000.

00:40:48.100 | That is a lot of money for a woman who is living on less than 60.

00:40:53.100 | That is a huge amount of money.

00:40:55.100 | Now, Mr. Advisor, show me what we got for that money spent."

00:41:03.100 | And then think about it, shop, go around, look for other advisors, interview Vanguard, interview other people.

00:41:08.100 | And if there's a change needed, I'm fine with that.

00:41:11.100 | Just do it for the right reasons, not just because there's a gut reaction against, "Oh, it's 1.7%."

00:41:18.100 | Do it for the right reasons.

00:41:20.100 | Is that helpful?

00:41:22.100 | That was helpful.

00:41:23.100 | Follow-up question to shopping, if it comes to that, for advisors.

00:41:28.100 | I did check out Taladin Registry.

00:41:30.100 | It seemed like there were three people in the area or in the whole state that fit the description.

00:41:36.100 | Are you aware of any maybe Christian-based networks that are non-Dave Ramsey that deal with Vanguard solutions and charge reasonable fees?

00:41:55.100 | Short answer, not necessarily.

00:41:58.100 | So first, I'm always deeply suspicious of anything labeled Christian.

00:42:03.100 | I don't care for most of that marketing because what happens is a lot of people will latch on to that because they know it's where the money is.

00:42:15.100 | And so depending on where you are, depending on what culture, what town, what city, etc., this culture will vary.

00:42:22.100 | It's kind of like best advice for somebody who's starting a new network marketing or a direct sales business is go find the biggest megachurch in town and identify – label yourself as Christian and then go and find the megachurch because that's where you find all your prospects.

00:42:36.100 | So I'm usually very suspicious of anything that's labeled Christian.

00:42:41.100 | And I would prefer if Christians never labeled their stuff Christian and never kind of led with that as an idea unless it was specifically required and just simply started with actually doing things that are good because what happens is when stuff gets labeled Christian, then you get mediocre results that are all defended in the name of religion.

00:43:03.100 | And that's terrible. I would rather work with a deeply competent and ethical financial advisor who didn't care two wits about Christianity than some uneducated, bad performing, unknowledgeable person who says, "But I'm a Christian so you should work with me."

00:43:23.100 | The fact that you're a Christian does not give you any – it doesn't give you anything in the marketplace. You shouldn't be competing on that basis.

00:43:34.100 | I'm not interested – I would not be interested in working with people who are Christian just because they're Christian because Christian doesn't mean competent.

00:43:42.100 | And unfortunately to Christian shame, to the shame of Christians everywhere, many times we have a reputation for incompetence and that is not a good thing.

00:43:55.100 | So as you can tell, I'm not that keen on Christian organizations.

00:43:58.100 | Now, with that in mind, there are organizations that I think have tried because there is a difference. There are important differences in worldview that will come through.

00:44:08.100 | And there are many organizations that have tried to reflect that.

00:44:12.100 | And usually a Christian who is trying to plan their finances will have a different method of analysis than somebody who is not a Christian. Not in everything, but in many things.

00:44:26.100 | And that does need to come through.

00:44:28.100 | There are organizations that have done a good job.

00:44:31.100 | I think probably the most prominent one would be Ron Blue's organization. Ron Blue took over for Larry Burkett in Crown Financial Ministries and he came from an accounting background.

00:44:44.100 | They developed a financial advice firm and I think they've done that.

00:44:48.100 | They've done a lot of that in that world.

00:44:51.100 | That's probably the biggest one that I'm aware of.

00:44:54.100 | Paladin certainly has no affiliation with anything Christian.

00:44:58.100 | And again, that's not necessarily a problem.

00:45:00.100 | What I would be looking for is I would be looking for somebody who is competent, who can have a good relationship with her.

00:45:08.100 | And if that person is a Christian, awesome.

00:45:10.100 | But that needs to be proved out in reality, not in terms of just somebody saying, "I'm a Christian."

00:45:18.100 | If anybody's gone to any church for about two minutes, you know there is plenty of hypocrisy inside the doors of Christian churches.

00:45:27.100 | And there is plenty of sin, there is plenty of scandal that's allowed to continue.

00:45:34.100 | And so just the labeling Christian doesn't bring me a whole lot of confidence in anything.

00:45:39.100 | I want to see somebody who's competent.

00:45:41.100 | And if that person is a Christian, great.

00:45:44.100 | But let's start with competence first versus the other.

00:45:49.100 | Now, this is a hard problem to solve.

00:45:51.100 | The best thing is there are, in every area, there are advisors.

00:45:54.100 | So first, if a kind of a national firm is not appropriate, what I would start by doing is what you can do is work in the Christian community and ask for referrals.

00:46:04.100 | So in any decently sized community, then the people who are the leaders in that community will know one another.

00:46:12.100 | And they'll know how to filter people out.

00:46:15.100 | And so if you go to somebody who is a competent insurance broker, I'm thinking of the community, you know, here in South Florida.

00:46:23.100 | Here in South Florida where I live, I knew who all of the competent people were.

00:46:27.100 | And I was friendly with the competent people at all the different firms who were actually serious and who were actually legitimate, you know, that they're, they didn't just say Christian because that was the cool thing to do.

00:46:40.100 | It was a real, real thing.

00:46:42.100 | And I could list several advisors that I would be happy to have referred business to who came in under that rubric.

00:46:48.100 | And the best solution that you have there is network around in the community, ask some of the local attorneys who you might know from the Christian community, and ask for referrals from those people to who is, who would be a good person to interview for the job.

00:47:02.100 | That would be my recommendation.

00:47:03.100 | That was great.

00:47:05.100 | Both supported my beliefs about Christian marketing and gave some ideas.

00:47:11.100 | In case you didn't hear it, you want to set Joshua off, just, you know, label your business Christian.

00:47:18.100 | And that really bothers me very, very much because it's a scandal and it's a shame to Christians anywhere that that stuff is allowed to go on.

00:47:30.100 | It should not be allowed to go on.

00:47:32.100 | And unfortunately, what has happened is the idea of Christianity has become this basic concept that if you just say you're Christian, everything's great instead of actually demonstrating things in a real way.

00:47:45.100 | And the same thing applies in business.

00:47:47.100 | It's very, very shameful.

00:47:49.100 | Another caller from Florida.

00:47:50.100 | Welcome to the show.

00:47:51.100 | How can I serve you today?

00:47:54.100 | Hello, Joshua.

00:47:55.100 | Yes, sir.

00:47:56.100 | Go ahead.

00:47:57.100 | I want to thank you, first of all, for everything you've done, not only for me, but for like my family and friends.

00:48:03.100 | I've saved a lot of money, especially with all your advice for investing in my Roth IRA and everything else.

00:48:12.100 | Well, my question is this.

00:48:14.100 | Me and my dad have the same name.

00:48:16.100 | And I kind of did one really big mistake before knowing you.

00:48:21.100 | I was a cosigner for his second house.

00:48:25.100 | At the same time, he left me his first house, which I started putting into my taxes.

00:48:32.100 | You know, the what do you call that for?

00:48:36.100 | Homestead exemption?

00:48:39.100 | No, no, no, not homestead exemption.

00:48:41.100 | Interest deduction.

00:48:43.100 | Exactly.

00:48:44.100 | Interest deduction.

00:48:46.100 | Now, the house is not in my name.

00:48:48.100 | It's on my parents' name.

00:48:49.100 | Both of my parents' names.

00:48:51.100 | I have the same name as my dad, except my middle initial.

00:48:54.100 | Now, I don't know how to transfer this house over to me legally so I could homestead exemption it and have the cloud over my head that I might possibly get allotted by the IRS, which I don't think I'm doing anything illegal, which, well, I'm not.

00:49:12.100 | I'm not sure if I'm in a gray area.

00:49:14.100 | How's that?

00:49:15.100 | Okay, so first, are you in a gray area with regard to your actual actions?

00:49:21.100 | Have you done something where if somebody knew the complete facts, they would say, "Nah, this was kind of shady," or are you just worried about it because of the confusion over the name?

00:49:32.100 | No, the only—well, first of all, I want to sleep at night, and second of all, like, you have that rule about not having anything—

00:49:39.100 | Not going to jail.

00:49:41.100 | Right.

00:49:42.100 | Exactly.

00:49:46.100 | Uh-oh, we lost you.

00:49:48.100 | Let me pause for a moment and see if he comes back on the line.

00:49:50.100 | All right, you're back.

00:49:51.100 | So go ahead.

00:49:52.100 | So the rule is we want to stay out of jail.

00:49:53.100 | Keep going.

00:49:54.100 | Yes, I want to stay out of jail.

00:49:57.100 | At the same time, I want to go ahead and I'm leaving a lot of money because my dad's second house, which is under my dad's name, and me as being a cosigner, he put that house in homestead exemption.

00:50:10.100 | So the house that my mom and my dad left me, which I haven't done any kind of paperwork on it, it's not homestead exemption, so I'm paying a lot of taxes, as we speak, right now.

00:50:21.100 | Right, right.

00:50:22.100 | So my only point was let's start with the facts because facts matter.

00:50:27.100 | Okay.

00:50:28.100 | If the facts are that you haven't done anything questionable, then let's proceed on that basis and let's give whatever defense we need to give as appropriate to get people off your back.

00:50:39.100 | But you are in a place where the facts are on your side.

00:50:42.100 | So as long as you haven't done anything shady, the facts are on your side.

00:50:45.100 | Now, second question.

00:50:47.100 | Is there currently anything that has happened that is making you concerned?

00:50:51.100 | Are you currently under audit?

00:50:53.100 | Is somebody currently denying something that you're trying to do because of this potential confusion?

00:50:58.100 | No.

00:51:00.100 | Okay.

00:51:01.100 | So I just want to have a clean slate.

00:51:03.100 | Right, right.

00:51:04.100 | So with those two questions being answered the way that you've done, you haven't done anything wrong, and there's nobody even knowing that you're concerned about confusion.

00:51:15.100 | Don't get yourself worked up in a knot about something that hasn't happened yet because the chances are nothing's going to happen.

00:51:24.100 | First of all, you haven't done anything wrong, and if you have done anything wrong, you have a very simple explanation.

00:51:29.100 | You and your dad have the same name with the exception of a middle initial, and so therefore there is this little confusion.

00:51:35.100 | But anybody who needed to see the records if they had a question about something, you would say, "Look, this was my dad's house.

00:51:40.100 | Here's what happened."

00:51:41.100 | So my recommendation is don't worry about it.

00:51:45.100 | Good chance.

00:51:46.100 | If you do have middle initials, then he'll be listed as so-and-so with middle initial A, and you'll be listed as so-and-so with middle initial B.

00:51:54.100 | And so I would just ignore the whole potential confusion, keep the records, and file the paperwork as appropriate, and then if anybody asks the question, you just simply clarify,

00:52:04.100 | "This was my dad's house.

00:52:05.100 | It was left to me.

00:52:06.100 | Here is what happened, and this is what we're doing."

00:52:09.100 | I don't think you have a problem.

00:52:12.100 | Okay.

00:52:13.100 | So the most concern I have is with the IRS.

00:52:19.100 | So the IRS would not -- if I get into a solution, they would go ahead and see that it's not some sort of fraudulent action?

00:52:27.100 | Right, right.

00:52:28.100 | Right.

00:52:29.100 | So you get a phone -- sorry, you get a letter.

00:52:31.100 | You don't get phone calls from the IRS.

00:52:32.100 | You get a letter, and they say -- what's your first name?

00:52:36.100 | Jonathan.

00:52:37.100 | Dear Jonathan, we noticed that you have filed for this Homestead interest tax deduction here, but we think this is wrong because you actually did it on this other house here.

00:52:50.100 | Now, what would you do in that circumstance?

00:52:55.100 | Well, I have no idea.

00:52:57.100 | Well, they wrote you a letter, so you sit down and you write them a letter.

00:53:00.100 | You say, "Dear IRS person."

00:53:01.100 | Yeah, which IRS or bank?

00:53:02.100 | Yeah, you say, "Dear IRS person, here's what you don't know.

00:53:05.100 | My dad's name is Jonathan.

00:53:07.100 | My name is Jonathan, and so he owned this property previously.

00:53:11.100 | We separately had this other transaction we co-signed, and so here's why you're confused.

00:53:16.100 | But this is what I've done, and it's entirely right."

00:53:18.100 | It's simple.

00:53:19.100 | The IRS would look at the records, and probably your middle initials are on the records, on the property records.

00:53:25.100 | Usually somebody will use a full legal name, which is not usually just first and last name.

00:53:29.100 | There's usually at least a middle initial with these kinds of things.

00:53:33.100 | They'll say, "Oh, we got mixed up because Jonathan and his dad had the same name."

00:53:36.100 | So no problem, no foul, everything's good.

00:53:38.100 | It's not a problem.

00:53:40.100 | Now, since the property I'm currently living in is the one that my parents left me, which is the one I'm declaring on taxes,

00:53:50.100 | could I, without having my name in the loan, could I still homestead it?

00:53:59.100 | So you are concerned about being able to take your homestead exemption on the property that you're living in for your Florida property taxes.

00:54:08.100 | Is that correct?

00:54:09.100 | Yes, that's correct.

00:54:11.100 | So for that purpose, your loan doesn't matter.

00:54:18.100 | You simply file the appropriate documents with the local county officials, and you establish your homestead is 123 Maple Street.

00:54:27.100 | I live here, and therefore, this is my homestead exemption.

00:54:31.100 | And as long as you're not simultaneously trying to claim your homestead exemption on another piece of property, that'll be fine.

00:54:38.100 | They don't know anything about the loan other than the fact that there's a loan recorded.

00:54:42.100 | If there's a loan on the property, the mortgage has been recorded down in the legal systems so that any buyer of the house would know that there's a lien on the property.

00:54:51.100 | But that doesn't matter for the purpose of your local property tax exemption.

00:54:55.100 | That only matters for that particular mortgage company and for that particular lien situation.

00:55:02.100 | But your mortgage company doesn't care whether you're putting a homestead exemption on the property for your local property taxes or not.

00:55:09.100 | These are disconnected systems.

00:55:11.100 | Oh, that's awesome.

00:55:13.100 | Yeah.

00:55:14.100 | Okay.

00:55:15.100 | Yeah.

00:55:16.100 | Should me and my dad make some sort of paperwork, like a legal?

00:55:19.100 | I don't even -- oh, should I put my name in the deed?

00:55:22.100 | Is your dad alive or dead?

00:55:24.100 | Alive.

00:55:25.100 | He's alive.

00:55:26.100 | Okay.

00:55:27.100 | So why is he giving you the house?

00:55:29.100 | Well, this is what happened.

00:55:31.100 | Back when, well, you know, the economy hit the tank, you know, maybe 2009, it was kind of a high price.

00:55:39.100 | My parents decided to move from a smaller house to, you know, to a nicer house, and then they bought it.

00:55:46.100 | But at the same time, they weren't looking to keep the second house.

00:55:49.100 | So the second house, they kind of, like, gave it away, like, you know, we're just going to give it back to the bank.

00:55:54.100 | They didn't really care about it.

00:55:56.100 | At the same time, I was going through, you know, a divorce and a lot of other issues, and I needed a place to stay.

00:56:02.100 | So I was talking to my dad, you know, let me stay in the second house, and it kind of fell on me, you know?

00:56:07.100 | And I kind of took it out of, you know, we were like three or four months.

00:56:12.100 | I took it out of almost close to foreclosure.

00:56:15.100 | I kept my parents' name on it.

00:56:17.100 | And I've been living ever since.

00:56:20.100 | Okay.

00:56:22.100 | All right, so let me, because I want to help you get this right from a bigger perspective than what you are asking, or at least let's get it as right as we can.

00:56:32.100 | Can you give me a name, make up something, but like a street name, so we can identify these two houses with a street name so that I can keep them straight?

00:56:39.100 | Okay.

00:56:40.100 | I live in Royal.

00:56:42.100 | Okay, so you live in Royal House.

00:56:44.100 | Next.

00:56:45.100 | And the other house is where?

00:56:47.100 | My parents live in Lake.

00:56:49.100 | Okay, so your parents live in the Lake house.

00:56:51.100 | You live in the Royal House.

00:56:53.100 | Now, the Royal House, who is the owner of the Royal House?

00:57:00.100 | Okay, well, the bank owns the house.

00:57:02.100 | The mortgage is under my dad's name and my mom's name.

00:57:05.100 | Okay.

00:57:06.100 | Dad and mom.

00:57:07.100 | So not the mortgage.

00:57:08.100 | Who is on the deed?

00:57:09.100 | Are your dad and mom owners of that house?

00:57:13.100 | They have joint ownership of that house?

00:57:15.100 | Yes, both of their names are on the deed.

00:57:18.100 | Okay.

00:57:19.100 | And you're living in the state of Florida, is that correct?

00:57:22.100 | That's correct.

00:57:23.100 | Okay.

00:57:24.100 | So in the state of Florida, the standard thing when they do that is they own an equal, undivisible interest in that property.

00:57:29.100 | It's called tenancy by the entireties, and they both equally own the full interest in that house.

00:57:34.100 | Now, you are living in the Royal House that they own right now, is that correct?

00:57:40.100 | That's correct.

00:57:42.100 | You are paying them rent for that, is that correct?

00:57:44.100 | Or you're paying the mortgage payment and they're considering that to be rent?

00:57:49.100 | Yeah, I'm paying the mortgage.

00:57:51.100 | I'm doing everything for the house.

00:57:52.100 | I'm paying the mortgage that you selected to me.

00:57:55.100 | I'm not paying them anything.

00:57:56.100 | Okay, but they didn't actually leave it to you because they own the house.

00:57:59.100 | They may have told you virtually that, "Hey, Jonathan, listen, our plan is that you own the house, but right now they own that house."

00:58:07.100 | Is that accurate?

00:58:09.100 | Yes, that's correct.

00:58:10.100 | Okay.

00:58:11.100 | Now, your parents live in the Lake House, is that right?

00:58:15.100 | That's correct.

00:58:16.100 | And who owns the Lake House?

00:58:20.100 | It's under my dad's name, and I'm the cosigner.

00:58:23.100 | Okay, so the cosigner doesn't matter because that's who owes money.

00:58:27.100 | Okay.

00:58:28.100 | So focus clearly on the words because you need to understand the words clearly.

00:58:32.100 | The owner of the house is your dad.

00:58:35.100 | You just simply owe a lot of money on an asset that you don't own.

00:58:39.100 | So that's your problem.

00:58:41.100 | Actually, you know what?

00:58:43.100 | The Lake House might be under my name.

00:58:46.100 | Under your name exclusively or under your dad's name and your name?

00:58:50.100 | Well, the loan is under my dad's name and my name, but I think the deed is under my name.

00:58:56.100 | Okay.

00:58:57.100 | So now this is good then because you own a house, but somebody else has a mortgage liability on it.

00:59:03.100 | So you need to be clear on these because this is what matters.

00:59:06.100 | It matters what the deed says.

00:59:08.100 | So first assignment for you is you better go and look at that deed and figure out.

00:59:11.100 | And you can just look it up in the county tax records online and look up the address for that house and see who is listed as the owner of that house.

00:59:20.100 | It doesn't matter who is indebted on the house.

00:59:23.100 | That's a separate thing than what we're trying to figure out here.

00:59:26.100 | What matters is the owner of the house.

00:59:29.100 | So currently you own the Lake House.

00:59:33.100 | Is that right?

00:59:34.100 | Yes.

00:59:35.100 | All right.

00:59:36.100 | But your parents live there and then your dad and mom own the Royal House, but you live there.

00:59:42.100 | Yes.

00:59:43.100 | All right.

00:59:44.100 | How much is the Royal House worth if you sold it in today's market?

00:59:50.100 | 230 maybe.

00:59:52.100 | Okay.

00:59:53.100 | $230,000.

00:59:54.100 | How much did your mom and dad pay for the house when they bought it?

00:59:59.100 | 80 grand.

01:00:01.100 | Okay.

01:00:02.100 | But they took some money out, so the total loan is like $147,000.

01:00:07.100 | So I repeat, the loan is not the question.

01:00:10.100 | And I'm not mad at you.

01:00:11.100 | I want you to get this right.

01:00:13.100 | Because what I'm trying to calculate, the reason I asked you those two questions, what is the house worth in today's dollars and what did they pay for it, is because they have a basis in the property.

01:00:24.100 | It's called a tax basis.

01:00:26.100 | And so right now, the $80,000 is their basis.

01:00:32.100 | It would have to be adjusted, but let's keep it simple.

01:00:34.100 | Let's just assume $80,000 is their basis.

01:00:36.100 | But if today the property were sold or given away, there's $150,000 of taxable gain here, which needs to be factored in.

01:00:48.100 | That's where the taxing authorities are going to get involved.

01:00:50.100 | The taxing authorities don't care how much you owe on the mortgage.

01:00:53.100 | Mortgage debt is not taxable income.

01:00:55.100 | So they could have borrowed $230,000 out of it.

01:00:57.100 | It doesn't matter.

01:00:58.100 | The point is when the house is sold, then that gain is recognized.

01:01:03.100 | So we need to know what the current value.

01:01:05.100 | The current value is $230,000.

01:01:07.100 | They paid $80,000 for it.

01:01:09.100 | Now I want to know the mortgage balance.

01:01:10.100 | What is the current mortgage balance on the Royal House?

01:01:13.100 | $147,000, $150,000.

01:01:17.100 | Okay.

01:01:18.100 | So let's call it $150,000.

01:01:20.100 | And that's enough for now.

01:01:23.100 | Now the Lake House, how much did you pay for the Lake House when you bought it?

01:01:31.100 | $206,000.

01:01:34.100 | How much is the Lake House currently worth if it were sold?

01:01:38.100 | Close to $300,000.

01:01:41.100 | I'm guessing $280,000, maybe $290,000.

01:01:44.100 | Okay.

01:01:45.100 | All right.

01:01:46.100 | So let's call it $290,000 and let's put the difference.

01:01:48.100 | So it's worth $290,000.

01:01:50.100 | And what is the current mortgage balance on the Lake House?

01:01:55.100 | Around $190,000, maybe.

01:02:01.100 | Okay.

01:02:05.100 | All right.

01:02:06.100 | Now, you currently own the Lake House.

01:02:10.100 | And so you have been taking a homestead exemption on the property taxes that you owe for the Lake House.

01:02:18.100 | Is that correct?

01:02:20.100 | No, my dad is taking the homestead exemption and the taxes for the Lake House.

01:02:25.100 | Got it.

01:02:26.100 | But he doesn't own the house.

01:02:29.100 | No.

01:02:30.100 | Okay.

01:02:31.100 | Boy, I feel like I'm such a great area.

01:02:34.100 | Right.

01:02:35.100 | So this would be --

01:02:36.100 | You don't know my last name, right?

01:02:38.100 | Yeah, exactly.

01:02:40.100 | So this would be where you may have a problem because the owner of the house is the one

01:02:44.100 | who takes the homestead exemption -- is the one who can take the homestead exemption.

01:02:48.100 | Now, don't worry.

01:02:50.100 | If you do have a problem, you may have to go back and recalculate it.

01:02:52.100 | But the good news is your mom and dad own a house and you own a house, and so this should work out.

01:02:58.100 | And these houses are similar in value.

01:03:01.100 | There's $230,000 and $290,000.

01:03:03.100 | It's not a huge difference in value.

01:03:05.100 | And so your property taxes are probably somewhat similar.

01:03:07.100 | So this isn't the end of the world.

01:03:09.100 | Now, your challenge is -- and if you ever do this again, you need to be a little bit more careful here.

01:03:16.100 | You shouldn't just take over people's mortgage payments.

01:03:20.100 | That's a bad way to do this if you ever do this again.

01:03:22.100 | Don't take over people's mortgage payments because you're not legally entitled to the mortgage interest deduction if you pay their mortgage payments.

01:03:30.100 | You have no property rights if you don't own the house.

01:03:33.100 | You shouldn't do it this way.

01:03:35.100 | You should have a clear transaction, and if you are going to live in the royal house, then you should pay your dad rent on the royal house, and he should pay the mortgage payments himself.

01:03:47.100 | You should keep these things separate, even among family.

01:03:50.100 | Now, if you're doing it for financial reasons, let's say that you're going to pay your dad, you know, $1,200 of rent.

01:03:57.100 | Well, that's fine.

01:03:58.100 | Just pay your dad a $1,200 rent payment each month.

01:04:01.100 | And then once per year at Christmastime, your dad can give you a gift of a check for $14,400.

01:04:08.100 | But don't not pay him rent for a house that he owns.

01:04:12.100 | That's where we do start to get into some gray areas because if he is owning a house and he's renting it out at less than market rent, then you've got a problem.

01:04:21.100 | So you should pay him an appropriate market rent.

01:04:24.100 | He should pay for his expenses on the house.

01:04:27.100 | He should treat it as a rental property, and then if he wants to give you a gift each year, $14,400, that's fine.

01:04:35.100 | So this is a confusing situation that does need to be set right.

01:04:41.100 | Now, why are you trying to—what is your concern at this point, why you're trying to make these changes?

01:04:46.100 | What's the problem that you're trying to fix?

01:04:49.100 | Well, the thing has come up that my parents want to sell the lake house.

01:04:53.100 | Okay.

01:04:54.100 | So if that happens, I'm kind of like in a—no, I'm in the air, I guess you could say, because then I won't own a house.

01:05:06.100 | Right.

01:05:07.100 | And then I'm like, okay, and then the IRS could come in and say, "Okay, you know, how in the world is this going on and that going on, and what happened to the money from this house?"

01:05:19.100 | Do you know what I mean?

01:05:21.100 | I do, I do.

01:05:22.100 | Okay, so don't worry about the IRS, okay, because the chances of you being audited are pretty low.

01:05:25.100 | Now, if you do get audited, you will need help to straighten this out because you do have a problem, but don't worry about it prematurely.

01:05:31.100 | Only worry about it when you get the letter, and at that point in time, you'll do this.

01:05:34.100 | But you do want to clean things up.

01:05:36.100 | So your parents want to sell your house.

01:05:39.100 | No, no.

01:05:41.100 | Hold on, I'm being quick.

01:05:43.100 | Exactly.

01:05:44.100 | Your parents want to sell your house, which is the lake house.

01:05:47.100 | Do they want to buy another house?

01:05:50.100 | They want a down tax.

01:05:53.100 | Okay.

01:05:54.100 | So, yes, they're going to buy a little, like, an apartment or something small.

01:05:57.100 | Okay.

01:05:58.100 | Let me think for a moment about the situation here and try to understand.

01:06:05.100 | So here is your basic problem.

01:06:07.100 | When you sell your lake house, because that's legally what it is, when you sell your lake house, you are going to have a -- you're going to sell the house for $290,000.

01:06:22.100 | And you're going to have a tax basis in that property of about $84,000, the difference between $290,000 and $206,000.

01:06:32.100 | So you're going to have $84,000 of capital gains that you owe because you're selling your lake house.

01:06:40.100 | Wow.

01:06:41.100 | Okay.

01:06:42.100 | That's your real problem.

01:06:46.100 | Ordinarily, if your parents owned the house actually themselves, if they actually owned the house, then they could just sell the lake house, and then under the Section 121 exclusion, they would be able to exclude the $84,000 of gain from their income.

01:07:07.100 | And so they wouldn't have any tax considerations.

01:07:09.100 | But in your situation, you're going to owe tax on $84,000 of capital gains when you sell your lake house.

01:07:18.100 | Yes.

01:07:19.100 | So this is your problem.

01:07:21.100 | Now, do you have any intention of moving from the royal house that your parents own?

01:07:27.100 | No, actually, I'm happy where I'm at.

01:07:31.100 | Okay.

01:07:32.100 | That's a house where I lived most of my life.

01:07:37.100 | So I don't know.

01:07:40.100 | I kind of get attached to things.

01:07:42.100 | Maybe I should just go ahead and sell it too.

01:07:44.100 | So at this point in time, I need to refer you to an accountant.

01:07:48.100 | You need to sit down with a local accountant and go through and sort this problem out because here's the other problem that you own.

01:07:56.100 | Not only do you own a house that you're going to sell for $290,000 and you're going to have $84,000 of capital gain, but now your parents own a house, a rental house that has 230 minus 80, that has $150,000 of capital gain in it.

01:08:22.100 | So when they sell their rental house, they're going to have $150,000 of capital gains.

01:08:29.100 | So this is your big problem, not necessarily the homestead exclusion.

01:08:34.100 | And at this point, it's too thorny for me to give you any constructive advice in this format.

01:08:41.100 | But you do need to go.

01:08:42.100 | You need to pull together your records.

01:08:44.100 | You need to get a copy of your deeds, your tax records.

01:08:48.100 | You need to pull together whatever records you can find from the last 10 years of how much has been paid in taxes, mortgage balances, etc.

01:08:58.100 | And you've got to figure out how to make this problem go away.

01:09:06.100 | And you need to talk it through with your accountant to figure out how do we fix this problem.

01:09:11.100 | Now, chances are one of the simpler ways for you to solve it would be to figure out some way for you to move into the house that you own, which is the Lake House, for them to move into the house that they own, which is the Royal House, each of you to live there for a couple of years, each of you to sell your properties, and then you can claim the Section 121 exclusion.

01:09:34.100 | You may also look at – since now both of you own a rental house, you may also look at simply doing a like-kind exchange, doing a – I always get confused if it's 1035 or 1031.

01:09:48.100 | I think real estate is 1031 for physical property.

01:09:50.100 | Do a like-kind exchange of one property to another property.

01:09:53.100 | And so if your parents could do a like-kind – if you could do a like-kind exchange from your Lake House property into another house, then you can avoid the tax on – paying the tax on that gain.

01:10:06.100 | But you'll need to think through a couple of these strategies and try to figure out how do we fix up the financial problem that we face and then how do we fix up the living situation in terms of what we actually want to do.

01:10:16.100 | How do we actually work this out so that everyone who wants to downsize can downsize, so that everyone who wants to live somewhere can live somewhere.

01:10:22.100 | But you need to talk to a local accountant.

01:10:25.100 | What about if I – so if I stay in the Royal House, I still have a problem with the Lake House with the tax.

01:10:30.100 | Right. Because you paid $206,000 for a house that's going to sell for $290,000.

01:10:37.100 | So you're going to have $84,000 of long-term capital gains taxes that you will owe on the sale of that real estate.

01:10:43.100 | All righty.

01:10:45.100 | Right.

01:10:46.100 | Thank you, Joshua.

01:10:47.100 | My pleasure.

01:10:48.100 | Call an accountant and work it through, and you'll be able to figure out the best solution.

01:10:53.100 | Any other questions before I go?

01:10:55.100 | Yeah. For accountants, do you refer to like a service or –

01:10:59.100 | I don't.

01:11:00.100 | Okay. I appreciate it, Joshua.

01:11:02.100 | I would ask around. Ask around. Good thing to do is ask around for people in your area.

01:11:05.100 | If you know anybody who you think is a qualified – especially since we're dealing with real estate here.

01:11:10.100 | If you know any friends of yours who own any real estate properties, ask them if they have an accountant that they use.

01:11:15.100 | But this is not complicated stuff. It's just complicated doing it verbally in a podcast.

01:11:21.100 | And a local accountant can sit down with you, write down the numbers properly, work through everything with you, and figure out those solutions.

01:11:28.100 | But let this be a lesson to the rest of us.

01:11:30.100 | Don't do what Jonathan and his parents did.

01:11:34.100 | Don't do it.

01:11:35.100 | Keep things clean and keep things appropriate and think about what's happening.

01:11:40.100 | You have two choices.

01:11:41.100 | You either don't record anything and you just live in one another's houses and don't record anything, which is not the right way to do it.

01:11:49.100 | But at least that avoids some of these thorny issues of Jonathan owing a mortgage –

01:11:55.100 | or Jonathan's dad owing mortgage payments on a house that he doesn't even own.

01:11:59.100 | Or do it right.

01:12:01.100 | And so if somebody moves into your house, charge them a proper fair market rent and then record everything properly.

01:12:09.100 | Bill it out as a rental property, charge them a fair market rent, keep your records, and then if you want to give them a gift each year, feel free to give them a gift.

01:12:18.100 | But don't do it the way that Jonathan and his parents did it.

01:12:22.100 | It's understandable why things like that work out.

01:12:26.100 | It's understandable in the sense of – it's understandable that when people are in crisis and the houses are going into foreclosure and we don't know how it's going to – it's understandable.

01:12:38.100 | But at that time, get good advice for how to structure it so that you can avoid these problems down the road.

01:12:45.100 | That's it for today's Q&A show.

01:12:46.100 | Thank you all so much for calling in.

01:12:48.100 | Thank you for listening.

01:12:49.100 | As we go, I remind you, check out my credit card course, RadicalPersonalFinance.com/creditcardcourse.

01:12:54.100 | I continue to get good feedback on that.

01:12:56.100 | More students signing up all the time.

01:12:58.100 | And I'd love to have many more of you participate in that.

01:13:02.100 | I think you'll find it really worth your time and your money.

01:13:06.100 | I think it's a good use of your time and your money, or at least that's what all my students have said, and that's how I designed it.

01:13:11.100 | Go to RadicalPersonalFinance.com/creditcardcourse.

01:13:14.100 | Sign up today.

01:13:15.100 | Join me on tomorrow's Q&A show if you would like.

01:13:17.100 | Call in at 561-440-7362 at noon Eastern time.

01:13:21.100 | Again, 561-440-7362.

01:13:25.100 | Noon Eastern time tomorrow.

01:13:28.100 | I almost forgot about looking up that college planning organization.

01:13:32.100 | I looked it up, but at the moment I am not confident to specifically recommend any one particular organization.

01:13:39.100 | There are a number of competitors, and it's unclear to me, I haven't done the research to be confident enough to say the name of any one of those organizations.

01:13:47.100 | Let me explain.

01:13:48.100 | In the financial industry, one of the major challenges of the financial industry is that anybody can create a credential or designation program and authorize people to use their marks.

01:14:01.100 | And most people don't know what the little numbers and letters and things are that are after people's names.

01:14:07.100 | So, for example, I have a, I don't know, what, half a dozen credentials or whatever that I am still actively enrolled in, and anybody who sees my name, Joshua Sheets, MSFS, SCHFC, CLU, CAP, RHU, REBC, I think that's it.

01:14:23.100 | Maybe there's, I don't remember which ones I'm enrolled in right now.

01:14:25.100 | But nobody knows what any of those things mean.

01:14:27.100 | There are just a few credentials that have a lot of brand equity that people do actually recognize.

01:14:33.100 | So, for example, the most commonly recognized one in the financial planner space is the certified financial planner credential.

01:14:38.100 | And the CFP board has worked hard to make that the case.

01:14:41.100 | So, what has happened over the years is financial advisors have learned that having credentials makes them seem more impressive.

01:14:48.100 | After all, if I have a long list of letters after my name, it makes me seem more impressive, kind of like the guy that you're used to talking to you for your legal work.

01:14:57.100 | So, if you work with somebody whose name is John Smith JD LLM, well, JD LLM means something, and most people who are involved in that world know about that.

01:15:06.100 | So, you can create credential programs, and people who are not involved in that credential program will usually not know very much about what those credentials mean.

01:15:14.100 | I don't know anything about the real estate credentials that are available.

01:15:17.100 | So, if I'm working with a real estate agent who has letters after their name, I don't know what those letters mean.

01:15:22.100 | And there's a broad difference in different programs to understand what's actually involved with these different programs.

01:15:29.100 | Give you a personal example.

01:15:31.100 | I used to maintain a credential that was called CLTC.

01:15:35.100 | It's called Certification in Long-Term Care Planning.

01:15:38.100 | And that credential was, I think, the first credential that I got.

01:15:41.100 | I used to, I like, really like doing long-term care planning.

01:15:44.100 | I sold a lot of long-term care insurance when I was in the insurance business.

01:15:47.100 | And it was a very useful class that I took.

01:15:51.100 | It was specifically focused on understanding the problem in long-term care planning and specifically focused on the tools and techniques of helping people plan for long-term care expenses.

01:16:01.100 | I can't remember. It was either a one or a two-day class followed by a fairly simple, you know, 30-minute or one-hour test.

01:16:09.100 | I don't remember the details on it.

01:16:11.100 | But it was a very useful credential for me because it enhanced my own knowledge and allowed me to more effectively serve people with regard to long-term care planning.

01:16:21.100 | But it was nothing in terms of its comparison to its academic competence with something like, you know, the Chartered Financial Consultant designation or a CFP designation.

01:16:34.100 | The CFP board requires eight, I think, seven, eight, nine different college classes.

01:16:38.100 | They require a fairly intense exam that you have to demonstrate competence in a broad array of subjects.

01:16:45.100 | The CFP course is certainly much more challenging and much – shows a much higher level of knowledge than does the CLTC designation.

01:16:55.100 | But it's in a different area.

01:16:57.100 | I knew way more – the long-term care planning, in my memory, at least when I took the test, was hardly even covered, if at all, on the CFP board exam.

01:17:04.100 | But it was the only focus of the class in CLTC and the CLTC world.

01:17:09.100 | So, that's the problem with different organizations that grant credentials is you never really know exactly what's behind it.

01:17:15.100 | So, in the world of the college planning, there are a number of different credential programs available.

01:17:19.100 | There seem to be some that are probably stronger than others.

01:17:22.100 | But some of them are just simply largely marketing organizations.

01:17:26.100 | And the thing that I find the most troubling is the heavy marketing of life insurance as a mechanism for college savings programs.

01:17:34.100 | And so, many life insurance agents say, "Well, I'm a certified so-and-so in college planning."

01:17:38.100 | But basically, it's a thinly veiled discussion of life insurance marketing.

01:17:43.100 | I love life insurance.

01:17:44.100 | I think it can be a useful tool.

01:17:45.100 | You get very uncomfortable if it's not approached carefully, very, very carefully, especially with that application for life insurance because I think it's very hard to do well.

01:17:53.100 | So, I don't want to commend any specific organization right now because I haven't done the research.

01:17:59.100 | I haven't spoken to anybody in those organizations.

01:18:01.100 | I don't understand what they mean.

01:18:02.100 | I'm not sure which organizations or just because something has been around the longest doesn't necessarily make me super confident in it.

01:18:09.100 | What I will say is this.

01:18:11.100 | There are enough college planners in your town.

01:18:12.100 | If you just do a search for a college planner, you'll find somebody marketing themselves as a college planner.

01:18:17.100 | And it's probably worth a consultation.

01:18:19.100 | Usually, I find that paying somebody a couple hundred bucks for their opinion is some of the cheapest money that you ever spend.

01:18:27.100 | So, pay a lawyer a couple hundred bucks for their opinion.

01:18:29.100 | Pay a financial advisor a couple hundred bucks for their opinion.

01:18:31.100 | Pay a college planner a couple hundred bucks for their opinion.

01:18:33.100 | A couple hundred bucks spent on an opinion that doesn't involve the purchase of any particular product goes a long, long way towards answering most of the questions.

01:18:43.100 | So, that's my recommendation to my caller earlier who was looking for information on the 529 account.

01:18:48.100 | Hope that helps.

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01:18:53.100 | Live it with Fiji Airways.

01:18:55.100 | Escape the ordinary with Fiji Airways Global Beat the Rush Sale.

01:18:59.100 | Immerse yourself in white sandy beaches or dive deep into coral reefs.

01:19:04.100 | Fiji Airways has flights to Nadi starting at just $748 for light and just $798 for value.

01:19:11.100 | Discover your tropical dreams at FijiAirways.com.

01:19:15.100 | That's FijiAirways.com.

01:19:17.100 | From here to happy.

01:19:19.100 | Flying direct with Fiji Airways.

01:19:21.100 | [BLANK_AUDIO]

RPF0612-QA-Pay_Off_Debt_or_Invest_529_Plan_Optimization_Financial_Planning_Fees_Tax_Issues_College_Planning