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Uncovering the Keys to Building and Sustaining Wealth

Published on June 26, 2023

John Hagensen

Growing wealth is undoubtably important, but equally crucial are the strategies and tactics you have in place to protect your wealth in the long term. If implemented correctly, you’ll be enjoying your hard-earned financial success for years to come. This week, discover what actions you can take to remove financial worry and safeguard your wealth. (1:04) Plus, find out what you should be doing to protect your cherished jewelry pieces. (8:44) Lastly, learn how can you help guide and support your family on their long-term wealth journey. (37:50) 

Episode Notes

Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!

John Hagensen:  Welcome to the Rethink Your Money Podcast, presented by Creative Planning. I’m John Hagensen, and ahead on today’s show, the foundational piece to any good investment plan, summer tax moves to make, with our director of tax services, Candace Varner, as well as the number one threat to your progress. Now, join me as I help you rethink your money.

Imagine this: You’ve been diligently working, saving, and investing over many years to secure your financial future. And just as you near the finish line, an unexpected hurdle appears. It might come in the form of a market crash, a legal dispute. Sometimes it’s a sudden health issue, or even a fraudster or a scam artist. And it completely negates the decades of solid money moves and progress.

You see, without proper protection, all your hard work can unravel. Growth is great. We all want growth. 8% to 12% a year, maybe even better, if we’re fortunate, and the markets behave. Transferring wealth when you’re gone, it’s fantastic. Leaving a legacy for future generations, or for causes that you care about, fantastic. But the foundation of your financial plan has to be to protect what you’ve already saved. If you don’t protect it, there’s nothing to pass on.

And I think this is intuitive, because we protect things that matter most to us in our life. This doesn’t just apply to our money. Take our children, for example. As a father to seven kids, I can relate to this. We childproof our homes. We’ve had stinking baby gates up all over our house for almost 15 years, car seats, or teaching our kids about stranger danger. “Look left, then right, then back left before crossing the street.”

If you had a winning lottery ticket, you wouldn’t just set it in the cup holder of your car until you could go get it validated. “Yes. The Mega Millions? Oh, I think it’s over there in the cup holder.” No. You’d guard it with your life until you turned it in.

When it comes to protecting our wealth, we don’t always live out what we say is important. And we’re all guilty of this. We sometimes simply don’t take advantage of the protections that are already available to us. It’s like having an alarm system. My wife forgets all the time to set it. Sorry, Brittany, but if it’s not armed, it doesn’t matter, does it? And while I don’t want you to live in a constant state of paranoia, right? We’ve all met the person who has gold bars in a safe, and no bank accounts, and tens of thousands of dollars hidden in the sheet rock of their homes because they trust no one.

I’m not saying you have to be that person, but an easy starting place, and a general rule for protecting your assets, is to automate it as much as possible. An example of this would be maybe you don’t want to have over $250,000 in cash at your bank. You want to stay underneath the FDIC limits. Have an auto transfer set up to your brokerage account on a monthly basis so that you remain insured. It’s difficult to monitor everything regarding identity theft, so maybe you have auto alerts set to notify you from LifeLock or a similar service so that you can easily track unusual behavior.

I personally knew an elderly couple who spent their entire lives purchasing rental properties. Came from absolutely nothing. They built up a net worth of over $5 million. Financially, they were invincible. They lived unbelievably frugal, in the same home for over 50 years. But then something terrible happened. They rear-ended someone in the airport pickup area, and faced a devastating blow due to a lack of proper insurance. By the way, they hit a young surgeon who had multiple kids and was unable to work following the accident. They lost almost everything. They maintained their primary residence and a little bit of cash. Everything else was gone, simply because they were not properly insured, and didn’t have the right protections from an estate planning standpoint as well.

How about the world of digital currencies? I had a friend who I was just speaking with last week who had his crypto wallet hacked and he lost $300 grand. The hackers, these guys were like cunning super villains, the way that they executed the fraud. They cashed him out, converted the currency, and now the FBI knows where it is. It’s in a Russian bank account, seemingly untouchable. He’ll likely never be recouped of that loss.

Let’s shift our focus to the world of real estate. In 2009, we all know what happened then during the financial crisis. I had a client who experienced a devastating loss. They had invested heavily in private, non-traded real estate, that paid ridiculously high commissions to the broker selling it. And by the way, at the time, this market seemed promising. Look how well real estate’s been doing. But ultimately, it crumbled. It was over-leveraged, illiquid, irresponsible in which types of properties they were buying. And so protecting your wealth means understanding all of the risks associated with these types of alternative investments. And also not sleeving over 50% of your portfolio to these types of risky assets, as this client had done.

Remember dot com bubble of 2001? Yeah. Well, of course you do. We all do. It was a time of euphoria. Soaring stock prices. Internet taking over the world. But many investors got caught up in a frenzy. They placed all their bets in the tech sector, and some investors found themselves down a whopping 80%. That’s how much the NASDAQ was down, and their portfolios lacked exposure to other sectors and asset categories. No international. No small cap. No value. And so protecting your wealth means diversifying your investments.

How about estate planning? I saw this about a year ago. Parents passed away. They left behind a sizeable estate, over seven figures. They had two kids. One of their children was going through a bankruptcy, and the other was entangled in a nasty divorce. The estate was settled, and a significant portion, about 30%, went to state and federal taxes. Of the remaining 70% of their estate, 50% was claimed by creditors of the one child, and 25% ended up in the hands of an ex-spouse. And so the result was one child ended up with basically nothing, and the other, about 18% of the estate.

So what can you learn from this? I’m not sharing these examples or prioritizing the start of the entire show to focus on protecting your wealth because I want you terrified. No. I want you to learn from these other mistakes, and understand that nothing else matters if your wealth isn’t protected.

I have two key takeaways from all these cautionary tales. Number one, have a solid financial plan in place. That’s the roadmap that will guide you through all the twists and turns of the financial landscape. You’re not going to avoid bad markets. You’re not going to avoid unforeseen circumstances. The plan is the plumb line that gets you back on track. And when I say a plan, I’m talking about a legitimate, written, documented, comprehensive financial plan that will address any holes that could leave you vulnerable and unprotected. And the second takeaway, have a team in place to ensure that you’re protected from single points of failure, bad advice, or simply blind spots.

And yeah, I’m going to talk my book here for a moment. Here at Creative Planning, we’ve been in business helping families for 40 years. We have over 50,000 clients in all 50 states and 75 countries around the world. We use the largest custodians in the world to hold our client’s assets. We have all sorts of checks and balances through a coordinated approach, and we manage your advice on a combined $210 billion of assets. You want to protect yourself? Be very diligent in who you have managing your life savings.

Is it a team like us, attorneys, CPAs, and certified financial planners? Or is it a guy you golf with, or a gal that you go to church with, or a person you’re in Rotary Club with? That’s not good enough, because this is your life savings that needs to be protected. You need to know that your team of experienced advisors, that are acting in your best interest as fiduciaries, are spending all of their professional energy committed to protecting your wealth just like we do here at Creative Planning. If you’re not sure where to turn, visit creativeplanning.com/radio now to speak with one of our local advisors. There’s no cost for this second opinion, and we’ve provided it for tens of thousands of people just like you. Why not give your wealth a second look, at creativeplanning.com/radio?

I want to transition over to an article that I wrote that I will post to that radio page of our website entitled The Five-Year Challenge. I’m often asked by clients who are doing well financially how they can help set their child or grandchild up for financial success. As Warren Buffet referenced with his children, he wanted to help them enough that they knew they could do anything, but not help them so much that they could do nothing. I think we all mostly understand the impact of compound interest. However, many young adults that are entering the workforce have a relatively low income. I have a 21 and a 20-year-old. They’re not in their peak earning years yet. And while they’re both hard workers, it’s difficult for them to set a lot of money aside for their future. So as a parent or grandparent, you might be wondering how you can help support those young adults in your life in saving for the future at a young age.

All right. So here’s the five-year challenge. You make a deal with your kids or your grandkids that for every year in a five-year period that they max out both their Roth 401k, which is $22,500 is the limit for 2023, and their Roth IRA, $6,500 limit for 2023, you’ll give them money to cover their lost salary. So even if they only make $29,000, they basically put all of that into retirement accounts. And yeah, they’d have nothing to live on, which is why you’re going to replace all of that money for them.

Here are the benefits. It allows them to fund their tax-exempt accounts at a very low tax rate, given that they’re likely in a low bracket, because they’re young and not making a lot of money. And if it’s left untouched until retirement and invested appropriately, the Roth assets are poised to take advantage of compound interest over decades. Now, if you’re married, you can use the annual gift tax exclusion to remove funds from your estate and provide those assets to your child or grandchild with absolutely no tax implications.

So let me give you an example. Kristen is 24 years old. She’s single. She’s working her first full-time job. She makes $45 grand a year, which places her in the 12% income tax bracket. Kristen accepts this five-year challenge from her grandparents, and contributes each month to both a Roth 401k and her Roth IRA at a rate that allows her to max out her contribution limits for the year. So again, she wouldn’t have much to live on in the meantime. Because of that, each month, Kristen’s grandparents gift her an amount equal to her contribution to replace that loss salary. Over the course of five years, Kristen is able to save $145,000. Given the benefit of compound interest, if Kristen never contributed another penny to her accounts, her initial $145,000 investment has the potential to grow to $1.548 million by age 65. And by the way, that’s only assuming a 7% annual rate of return.

Now, you say, “Well, that’s great, John. I see how Kristen benefits. How do I as the grandparent benefit?” Well, in 2023, you can give up to $17 grand annually, if you’re married, $34,000 jointly, without any tax implications. And because the maximum gift tax exclusion is per recipient, if you have five different young adult grandchildren, and you’re rolling, and you’ve got the means to give each of them $29,000 per year, you can, again, without any tax implications.

I personally love this strategy, because you’re not funding their accounts. You’re challenging them to fund the accounts, and simply reimbursing them. It teaches responsibility, but gets the clock started on compound interest while they’re in an extremely low tax bracket.

If you have questions about your financial plan, or how you can most tax efficiently help those around you that you love, visit creativeplanning.com/radio to speak with a local advisor.

Well, my guest today is Candace Varner. Candace is the Director of Tax Services here at Creative Planning. Candace Varner, welcome back to Rethink Your Money.

Candace Varner:  Thanks for having me back.

John:  Well, tax season has just ended. I’m interested to know what stories you have. Maybe more importantly, what do you think are some lessons that listeners can learn, that you saw consistently throughout this past tax season?

Candace:  Well, first, I am happy that tax season is over. I think this was maybe one of the first normal ones we’ve had in four years or so, so that felt really good. I think one of the things I saw, which isn’t necessarily specific to this year, but the difference between gains in 2021, and I will say what was not gains in 2022, all comes home on the tax return when we go to file. So this year, I was looking at a lot of returns that we were back to the tax loss harvesting. The mutual fund, capital gain distributions at the end of the year were significantly down from 2021.

John:  Sure.

Candace:  And so when I’m talking to clients, what that results in is just a lot of conversations about the timing of tax payments, why we’re coming up with the estimates that we are, why you’d be overpaid or underpaid, and all of these things. Because I talked to many clients who I would say, “You have a gain.” And they would say, “What gains? My accounts are down.” And I said, “Well, that’s not necessarily how that works.” So just a lot of education around that, consistently this year, of just, what are they talking to their advisors about? What are you seeing in your accounts versus what actually ends up on your tax return?

John:  Yeah. That’s interesting. Obviously a totally different environment for performance of both stocks and bonds in 2022, from the past several years. I guess 2018 was down, but other than that, pretty much the past decade, everything was up, right?

Candace:  Yup.

John:  So it was a unique environment, and there are unique tax opportunities, as you mentioned with harvesting or Roth converting, things of that nature. So Candace, what do you think investors can learn regarding managing gains and losses to just be more tax efficient?

Candace:  Yeah. I would say I talk to a lot of people who, they want to be doing something that makes them feel a little bit more in control. But like you said, the strategies that we already have in place are really going to have the biggest impact on their ultimate tax liability. So the asset allocation of where we’re owning things, “Is this in a qualified account? Is this in my taxable account?” Things like that, and planning for that ahead of time, so that it’s where you want it to be. And then the tax loss harvesting. I think when there were gains over the last couple years, not a lot of people had tax losses, or they’d run through them all for their gains, but now we’re building them up again. And I’ve got one client this year who I think has had large losses that we’ve been able to harvest for a really long time, just building up, and now he’s selling his second home for a $2 million gain and not paying a cent of tax on it.

So sometimes it’s a really long horizon, but that asset builds up, and it doesn’t feel the same because it’s a tax attribute, but when it pays off, it’s huge. So I think just staying the course, listening to your advisors. We’re all very psychological about finances, and specifically tax. I know it’s hard during tax season to have those conversations. Most people don’t want a call from me to talk about taxes, but if you can stay the course and be focused on what that means in the long run, it really does pay off.

John:  Well, and I think other people are thinking, “Well, not only do I not want a call from Candace, but I don’t want losses. Why would I want losses?” And I think the key distinction here is that you’re not putting money in an individual stock, it’s Enron, it goes to zero, and, oh, now you can book the loss. The advantage of being in an investment that goes up into the right over time, like a diversified portfolio, but along the way, having temporary drops in value where you can capture those losses without actually losing your principal, just capturing that price at that moment, is such a great opportunity, and then reinvesting in something similar. For those that aren’t familiar with tax loss harvesting, can’t buy the exact same thing within 30 days, but you’re not getting out of the market. You don’t have to be sitting in cash. You don’t have to be selling low.

Candace:  Right.

John:  You’re just capturing the loss, booking it, and to your point, those can be very valuable when offsetting future gains, or gains that are unrealized that are already sitting there in the portfolio. So I think that’s fantastic. I think a lot of people were able to probably get out of concentrated positions that maybe-

Candace:  Yeah. Definitely.

John:  … had a lot of growth that they didn’t want to be in. They finally had some opportunities to do so.

Candace:  And I think they kind of have to go through that cycle with you guys once or twice to really see how it’s going to work. And the other thing is, a lot of CPAs don’t come at the tax loss that way. So even before I was here, we only get the 1099 at the end of the year, and it says, “Oh my god, this guy lost so much money for you.” And just not thinking through. A lot of it is just, even if I understand how it’s happening now, if I’m not looking at your overall financial plan and I’m just looking at that one statement, I have a very different reaction to it. And so sometimes CPAs who are not thinking the whole big picture are not helping our cause.

John:  And there are two different things for clients that I’ve had that work with outside CPAs, that again, don’t really know the whole picture. That’s one of them. They say, “What in the world is going on? Your investment advisor lost you so much money.” And it’s like, “Well, no. The market was down. They captured those losses, and we stayed invested.”

The other thing that I see is, you do a Roth conversion, or something to accelerate taxes because you’re in a low tax environment and want to capture them today, and the outside CPA that doesn’t understand that that person has $3 million in retirement accounts, and they say, “Why did you pay all this in taxes? You’re going to have to write a check for $40,000 for taxes. Why in the world did they do this?” And again, it’s to minimize the lifetime tax bill, but it just speaks to the importance of having a big picture, comprehensive plan, where your certified financial planner is communicating with your CPA, and they understand the bigger picture to minimize your tax bill over the rest of your lifetime, not just doing things today to minimize taxes, which is often just pushing them into the future, which may or may not be good, right?

Candace:  Yeah. “I’m going to kick the can down the road, but I look pretty good when I finish your tax return this year.”

John:  Exactly.

Candace:  So yeah, explaining to them what the big picture is.

John:  And it makes sense, right? I mean, maybe from your perspective, Candace, if you’re just in a vacuum, doing the tax return as a CPA, you do feel like you’ve done your job or the client’s happier when you report to them they don’t have to pay a lot in taxes, right?

Candace:  Yes. Exactly.

John:  So I mean, that’s just sort of the nature of the relationship, right?

Candace:  Yup. Definitely. And especially if the client, being almost a middleman in that scenario, if they don’t understand what’s going on, it’s really hard to explain it and defend it when you weren’t involved in the strategy to begin with. So yeah, it’s kind of a perfect storm there if everyone’s not communicating.

John:  Yeah. Good point. I’m speaking with Creative Planning Tax Director Candace. What are some examples, Candace, of gains and losses that you’ve seen surprise clients on their tax returns?

Candace:  I would say the biggest surprises happen, the capital gain distributions at the end of the year. They don’t know those are coming, and they don’t realize how that factors in because they didn’t sell anything. And then mergers or sales of companies, when they didn’t actively choose to do anything, but they got cash into their account, or sometimes they just get shares in the new company, but it’s taxable. They’ll probably get notified that it’s happening, but it’s not the same as, “Hey, I’m placing a trade and we’re selling this.” And so the impact of it, they don’t realize it as it’s happening, because they don’t feel it. Sometimes even the regular trading throughout the year, they don’t feel it the same. But those ones usually are more consequential, and they’ll be surprised by it when I call and say, “Hey, we need to pay an estimate because you have gains.” I love surprising people with tax bills.

John:  Oh, I’m sure. Yeah. Everyone loves that. Can you speak, Candace, to the importance of tax planning?

Candace:  Yup.

John:  What do you think is a good cadence throughout a year for someone to be truly doing a good job, and proactively looking at their taxes in advance?

Candace:  Well, I would say the starting point is finishing the last year’s tax return. So what I do with a client is, say it’s April 1. I’m going to call you, “We’re done with your 2022 return. Here’s the results.” But a lot of that conversation is just, “Now what do we expect for 2023?” So to me, it should really start towards the beginning of the year. Now, how often we’re going to check in or how often we need to is going to depend a lot on what kind of income you have. If you’re self-employed, and that fluctuates all the time, we’re going to be talking every two or three months. If you are retired, and we’re just waiting to do a Roth conversion or something like that, maybe we’re good towards the end of the year. But our philosophy is always just that the main point is no surprises.

And so like you said, if you wait until tax season to gather your forms, there’s very little that I can do at that point. What we really want to do is instead work together all throughout the year. The tax return preparation is, I don’t want to say an afterthought, but it’s just, “Here’s the evidence of everything we planned for.” And it’s not, “Oh, guess how the results showed up?” It’s usually, “Hey, remember what I told you in November? That turned out to be exactly correct, and now just sign here.” That’s an ideal scenario for everyone involved, just so I can do planning for them, but also I want to be able to help, and I can’t make a lot of moves if the year is done. I think most people get done with tax seasons and think, “That’s the end. I don’t have to think about that again for another year,” which I totally understand.

John:  Hey, you can relate to that, right, Candace?

Candace:  I can totally relate to that. Although there’s a deadline every month for us for something, but absolutely, I understand that. And I think it’s not something someone enjoys, so it’s natural to want to put it off, but if you can just get ahead of it like one year, and then you’re consistently ahead of it, you’ll feel better all the time.

The other thing that comes up sometimes is I get asked a lot about when to exercise stock options or sell those, and that is really a key area that has to be done in conjunction with tax and the financial planner. Because we’re looking at it often from a purely tax perspective, and someone says, “Well, when should I exercise these?” Well, you’re going to pay less tax if you do it X, but we have to weigh that against, “What do you think this stock is going to do?” Those are usually privately held companies, or a volatile stock, or something like that, where it’s easy to say the tax recommendation, but it has to be combined with that. Because, see, we’re not talking an ETF or Apple or S&P 500. We’re talking about other stocks that you have substantial amounts of your wealth in, and the stock price is a much bigger … I hate to say the word “gamble,” but sometimes it feels that way. It’s a lot more of a risk. And so what does that look like in your overall financial plan? And are we willing to take that risk by deferring those stock options?

John:  I was thinking about giving a tax tip, Candace. Do you have a quick hitter one that we can do?

Candace:  Well, I think that folds into what we were just talking about. My tip of the month is, don’t forget about me and all the CPAs now that you’re done with tax season. This is the time when we have time to talk to you. We would love to talk to you in May or June. We’d love to sit down and actually plan out what’s happening so that you understand what’s happening. So think about your taxes earlier and don’t be done with it for the year.

John:  I love it. That’s a great tip. My tip is that if you look at your accounts, and every account has the exact same allocation, whether it be a Roth, whether it be a non-qualified, that is a red flag right there. Because speaking to asset location, you probably could reshuffle the deck, hold the exact same assets in different proportions within the different types of taxable accounts to achieve more tax efficiency.

Candace:  Absolutely.

John:  So thank you so much as always, Candace, for joining me here on Rethink Your Money.

Candace:  Thanks for having me.

John:  That was Creative Planning Director of Tax Services, Candace Varner. If you’re not getting proactive tax advice from your financial advisor, it’s time for you to consider an upgrade. If you’re not sure where to turn, and you’re looking to take the first step, we offer, here at Creative Planning, a complimentary analysis from a credentialed fiduciary. We’re not looking to sell you anything, but rather give you clarity around your situation. To speak with one of our local financial advisors, visit creativeplanning.com/radio now. Why not give your wealth a second look?

Well, in 1955, car accidents claimed the lives of around 37,000 Americans. Adjusted for the number of miles driven, that is six times the fatality rate we experience today. The interesting part, though, is that Ford began offering seat belts in every model of their vehicles in the year 1955, and it was a mere $27 upgrade, which indexed for inflation is roughly $200 today. The research at the time showed that seat belts reduced auto fatalities by nearly 70%, an absolute staggering statistic. Yet despite this undeniable evidence, only 2% of people in 1955 who purchased a Ford chose to opt for the seatbelt upgrade. Think about that. A whopping 98% succumbed to inertia.

Morgan Housel wrote about this in his book related to inertia and our finances, and it really is astonishing to think about how long it took for seatbelt usage to become widespread, for us to adopt it as Americans. Even in the early 1980s, seatbelt usage was under 15%, and it wasn’t until about a half century later, in the early 2000s, that our seatbelt usage finally exceeded 80%.

What this example highlights is how susceptible we are to that pull of inertia, that powerful force that keeps us stuck in our old ways, even when we know deep down that change is for the better. And my theory is that making a change is hard for you, as it is for me as well, because first off, it requires effort. We have to expend more energy to make a change, and we have a lot going on in our lives, and that’s easier said than done. But perhaps more importantly, it requires an admission that what we were previously doing was wrong. That’s hard.

So as we shift our focus to the world of finance, take a moment to reflect on your own financial habits. What are you currently doing simply because that’s what you’ve always done? Are there areas with your plan that objectively could be improved? But yeah, it would take some effort. You’d have to overcome inertia. You may have to admit that what you were doing before was wrong.

It’s not uncommon that I meet with prospective clients who are receiving subpar advice, yet they just continue on, because that’s what they’ve been doing. In fact, I just recently met with a married couple who had accumulated a seven figure net worth, but guess what? No estate plan of any kind. Not one single estate planning document. They still had one minor child, so no guardianship for them. Two of their three children are in college, so just past that age of majority. And on top of that, their investments were costing them dearly, because their advisor, from their own words, had been market timing, trying to get in and out of the market, and they told me, “My advisor’s pretty smart, but this just hasn’t worked. We’ve been out of the market when it tends to run up. We’re late to get out of the market. We would’ve been way better off in an S&P 500 index fund.” And they also shared with me that their advisor never provided any guidance on tax strategies or communicated with their CPA. And to add injury to insult, they were paying 1.5% for this suboptimal advice.

And it was clear, by all objective measurements, that a change was needed. But at the conclusion of our visit, they responded with the classic, “Yeah, we’ll think about it. We’ll get back to you.” And maybe they’ll make a change. I hope they do. Not because they need to work with me, and they need to work with Creative Planning, but because they’re not wearing a seatbelt in their Ford, and it’s a $200 upgrade. In this case, it’s less expensive. It’ll save you money to put on the seatbelt.

But this scenario perfectly encapsulates why you continually rethinking your approach to your money is absolutely vital to success. Because it’s not going to be easy to break away from that grip of inertia. But when you do take that brave step, you open yourself up to a world of possibilities and financial growth. Remember the wise words from Albert Einstein. “The measure of intelligence is the ability to change.” Don’t underestimate your ability to question the norms, and to make meaningful changes that will, in fact, shape your financial future.

If you’d like to rethink your financial situation today, meet with one of our local advisors by visiting creativeplanning.com/radio. We’ve been helping families just like you since 1983. Why not give your wealth a second look? And speaking of rethinking our money, let’s examine the common wisdom that a life insurance payout will not trigger taxes. Have you heard that before? Have you always assumed that life insurance proceeds would be, in fact, tax-free? Well, that is partly true, because while the taxation of life insurance payouts are generally income tax-free, there are other circumstances where there are in fact tax implications. The first, withdrawals from cash value policies. Also scenarios where the death benefit of a life insurance policy comes through installment payouts. If you surrender a life insurance policy. All of those can be accompanied by a tax bill.

The first was a scenario where the death benefit was considered to be a gift. So in this scenario, two gentlemen owned a business together. Fortunately, neither had passed away, but their cross-purchase buy-sell agreement was completely off. And I’ll use Tony and Rick as their names. Not actually their names, but that’s what we’ll go with here. And as is appropriate in cross-purchase agreements, they were cross-insured. So Tony owned a policy on Rick’s life, and Rick owned a policy on Tony’s life. And both of them agreed that if either dies, their widows will ultimately get the death benefit.

But here’s where they went wrong. To save time, they each named the other’s wife the beneficiary of the policy. And I know this can be a little bit confusing, but on the policy that Tony owned on Rick’s life, Rick’s wife was the beneficiary, right? Which makes sense, because if Rick dies, Rick’s widow is the beneficiary, and vice-versa. The business was worth about $12 million. So the death benefits were $6 million each.

But there were two major issues here. The first is what is called the Goodman Triangle, and David Smucker wrote a great piece at The Tax Advisor on this topic, where three parties are involved. Where one person owns a life insurance policy on the life of a second person, and the beneficiary of the policy is a third person. In this situation, the owner of the policy is treated as making a gift to the beneficiary. And so let me summarize if I lost you, because I know there are a lot of moving parts. What results in this is that if Tony dies, Rick will be considered to be giving a taxable gift of $6 million to Tony’s widow.

Now, the second issue relates to the ownership of stock, which will be in Tony’s estate. How is Rick going to get ownership of the stock to which he is clearly entitled? But here’s the solution, and frankly it’s a simple one. Rick should be the beneficiary of the policy of Tony’s life, and vice versa. Their spouses shouldn’t be involved. That way, if Tony dies, Rick will receive the policy benefit, the $6 million, and will be able to then buy Tony’s stock from his estate. And so that’s an example of where a life insurance payout would absolutely trigger taxes.

And the second and very common aspect of taxation on life insurance proceeds is regarding estate taxes. See, the biggest issue, even if you set up what’s called an ILIT, an irrevocable life insurance trust, to hold the life insurance out of your estate, there is a three-year lookback rule according to section 2035 of the IRS code. And what’s outlined in that section is that if you transfer assets out of an estate within three years of the date of death, for estate tax purposes, it’s clawed back into the estate. So create the life insurance trust before any formal application of the life insurance. The trustee will then apply as the original owner, which will avoid the three-year lookback. All of that to say, yes, generally speaking, a life insurance payout will not trigger taxes. But in some cases, and I’ve seen it firsthand, people are very surprised that it’s structured in a way that would in fact create taxation.

More than anything, the lesson here is don’t go about this alone. Get great advice. Have an experienced attorney involved, working with your financial advisor, with your insurance agent, to create a plan that’s taking a comprehensive look at your entire situation.

The final piece of common wisdom to evaluate today is that real estate is the best investment. By the way, I hear this all the time. And maybe it’s because we all know a few people in our lives that have made a lot of money building their real estate empire. But let’s examine this a bit closer. For the majority of US history, housing prices have increased only slightly more than the level of inflation in the economy. Really, it’s only during the period between 1990 and 2006, which many refer to as the great moderation, where housing returns started to rival those of the stock market. But again, from 1890 through 2022, the US housing market, and this might surprise you, is up a total of just 122%. That’s 0.6% per year above the rate of inflation, and the majority of that return has come in the past three decades or so.

Let me put some color around that. From 1890 to 1989, so 100 years, the US housing market appreciated just 30%. It was less than 0.3% per year. So practically speaking, it went absolutely nowhere for 100 years. Since 1989, it’s now up more than 70%, which is more than 1.6% per year above inflation. You might look at those numbers and think they’re terrible. They kind of are. By comparison, the stock market’s long-term rate of return above inflation is more like 6% to 7% per year. So housing is a complicated investment where the return calculation is, frankly, often unclear, and will come down to things like leverage, which a lot of real estate is very highly leveraged, and that’s why people can create massive wealth, but it’s not unaccompanied by risk.

I mean, very few people would borrow 80%, and by the way, the custodians would never allow it, the value of your stocks on margin. But that’s what we do when we purchase homes. I mean, in some cases we’re receiving an FHA loan or a VA loan and putting as little as 0% down in borrowing for the entire asset. That leverage and good timing can create a bit of a false narrative that real estate is significantly better than the stock market. Absolutely couldn’t be further from the truth from a numbers standpoint. But the other thing is that housing is very geographically dictated.

Here’s the biggest benefit, in my opinion, to real estate. It’s illiquid. It’s not easy to sell. It’s hard to get emotional and fire sale your home. You have to hire a realtor, pay a lot of costs, then you have to move. It’s a huge pain, and it costs a lot of money. And so discipline and staying power when it comes to real estate is a lot higher than when you can go to your phone and click one button, and sell out of an entire account, and put it in cash. I mean, shoot, I’ve often thought we’d be better off putting huge penalties on the S&P 500 purely to control investor behavior. Of course we’d never do that, but investors in general would probably receive a lot better returns. The returns the market has actually delivered, but so few Americans have actually been able to capture, oftentimes due to selling low and buying high as a result of emotional investing.

Lastly, I’ll say this. We often, and I’m guilty of this as well, underestimate the actual carrying costs that erode a real estate return. A year ago, I looked at what we spent on our home. It was staggering, just over the last 12 months. For example, if you buy a home for $400 grand and you sell it for $800,000 12 years later, you might actually be surprised at how little you netted, once factoring in $200,000 of interest, $150,000 in maintenance costs. Again, you were there for 12 years. Some improvements, furniture, $40,000 in realtor charges when you sell the home, $10,000 in moving expenses, and there’s your $400 grand of profit. It’s gone. So be very careful when you assume that real estate has been the best investment, because that’s one that’s worth rethinking.

If you have questions about your situation and would like to lean on our experience here at Creative Planning, 100 CPAs, 70 attorneys, and over 300 certified financial planners, visit creativeplanning.com/radio now to schedule your second opinion. It’s complimentary. There’s no obligation to become a client, and we are fiduciaries, acting in your best interests, providing objective advice that’s independent, and maybe for the first time in your life, not looking to sell you something. Let us provide clarity on what you’ve worked a lifetime to save. Again, that’s creativeplanning.com/radio now, to meet with a local advisor just like myself.

It is time for our listener questions, and I’ll hand it over to one of my producers, Lauren, for the question.

Lauren Newman:  Hi, John. The first question I have for you comes from Linda in Houston, Texas. Linda writes, “I have some valuable jewelry and I’m wondering if I should protect it in case it is lost or stolen. Should I get insurance for my jewelry as part of my insurance plan? How can I determine the value of my jewelry and ensure it is adequately covered?”

John:     So Linda, the number one thing you want to ask yourself is, is this jewelry item valuable to the point where you’d be upset if it were lost or stolen? And if it is, then purchasing insurance is a good idea. And I’m thinking clearly it is, because you’re asking the question. But one quick note to consider, if it’s only valuable for the sentimental reason, but not really all that expensive, that would be a scenario where insuring it probably isn’t going to make much of a difference. But jewelry is small, so it is susceptible to loss, theft, damage.

Here are the steps and considerations I would take. Get your jewelry appraised now so you know its value. And you can do this through a certified gemologist or jewelry appraiser. Make sure you include the item’s size, the weight, and the quality of the stone and metal. Next, you want to choose an insurer, and you want to find one that covers these needs, and understand the policy area, and make sure to compare different options and companies. If you’re working with an independent insurance brokerage company, as we have here at Creative Planning, we can shop and compare those on your behalf.

There are three general ways to insure jewelry. Look at homeowners or renters insurance. Most standard homeowners or renters insurance policies provide coverage for personal belongings, including jewelry. However, the coverage for the jewelry is often limited, so check your policy or your contract to understand those limits. And if those are inadequate, you can consider adding additional coverage if needed.

Another option is scheduled personal property endorsements. So if that jewelry exceeds the coverage limits of the standard policy, you can add a scheduled personal property endorsement, or in some cases, it’ll be a rider, to your homeowners or renters insurance.

And the final would be standalone jewelry insurance. This is done by specialized insurance companies and are specifically designed to provide comprehensive coverage, such as worldwide, no deductible. It’ll cover a wide range of risks, including loss, theft, damage, and even a mysterious disappearance. Standalone policies can be completely tailored to your specific needs, and may offer more flexibility, and certainly higher coverage limits compared to standalone homeowners or renters insurance. All of that is going to come down to the value of your jewelry.

If you’re a Kardashian, and you received a $5 million ring, or whatever it was worth, from Kanye West, that’s probably a standalone jewelry insurance policy. If your jewelries were $2,000, that’s not going to be practical. But I do recommend if it’s valuable, look into insuring it one of those ways. You will need to provide documentation, which will include the appraisal report, photographs, and purchase receipts, and you’ll want to store that jewelry when you’re not wearing it in a secure location, so that there isn’t considered to be negligence. Thanks for the question, Linda.

What do we have next, Lauren?

Lauren:  Our next question comes from Easton in Chandler, Arizona. “Hello. I’ve recently been granted RSUs through my employer, and I’m curious about the tax implications, and how much I should actually hold. Here are a few details. I’m in my early forties, married with two children, and currently hold $150,000 worth of RSUs. Could you provide insights on the tax considerations, and guide me on determining an optimal RSU holding strategy?”

And John, I’m going to admit I don’t know what an RSU is, so maybe you could start off answering that.

John:     Easton’s referring to RSUs, which are restricted stock units. And they are subject to taxation upon vesting. So when RSUs vest, their value at that point is considered taxable income, and that’ll typically be included in your W2 statement. The amount of income tax owed depends on the fair market value of those RSUs at the time of vesting. Then when you sell the RSUs, any gain or loss from that vested value is subject to capital gains tax rates.

So here are the considerations that I would look at, Easton. Number one is the timing of the sale. So really after those RSUs vest, you have the choice of continuing to hold them or sell them, and the timing will affect your tax liability, because if you sell them essentially immediately, there will be virtually no gain or loss, because they just vested. But whatever is there will be short-term, because you held it less than a year. Where if you hold it a year or more, it’ll be considered long-term capital gains or losses, which are lower than ordinary income tax rates.

But the bigger consideration always with RSUs, you say you have $150,000 worth of them. I don’t know how much that represents of your entire portfolio, because diversification is the other key. RSUs are from the company that you currently work at. So being highly concentrated in employer stock, where you work, is anti-diversification, right? Because if you lose your job, the company’s probably not doing well. Your RSUs are probably down in value. You are highly leveraged to the success of that company. With this in mind, a lot of our clients believe in their company, and as a result, want to hold some of the company’s stock. But we agree within the financial plan, and build it out, that it will represent a stated percentage of the overall pie, that’s very personalized to the client’s desires and tolerance for risk. But let’s say they settled at 10%. We would immediately diversify out of any new RSUs that vested, which were above that 10% allocation.

I work out of our Gilbert, Arizona office, Easton, and would be happy to personally review your situation. If you’d like, you can visit creativeplanning.com/radio to schedule that visit.

All right, Lauren. Let’s go to our last question.

Lauren:  So, John, our last question today comes from Dan in San Diego, California. He writes, “I recently got into sports betting through an app and my friend warned me about taxes on my winnings. I’m not making large bets. $5 to $50. Are there any specific rules or regulations I need to be aware of when it comes to this income? Is this something I would need to report?”

John:  Oh, this is a big one. DraftKings, FanDuel, daily fantasy leagues, and sports gambling becoming legalized and popularized all around the country, there is some confusion on this. In short, you will be taxed at ordinary income rates, and these companies are legally obligated to send you a tax form at the end of the year if your winnings are over $600.

Now, let’s face it. Most people lose more money. Not you, Dan. I’m sure you’re really good at fantasy football. But for most people, they lose more than they win, but those losses will not automatically offset your gains. It’s important that you keep specific and detailed records of all losses so that you can claim those against the winnings that are reported to you at tax time. It’s also important to note that you cannot claim losses in excess of your winnings. So you can’t lose $100,000 gambling, make $10,000, and say, “Well, I’m claiming a $90,000 loss.” First off, you’re still going to be sent the tax form that you made $10,000. It’ll be your responsibility. And by the way, you’d have to itemize to be able to do this, to in fact show that you lost more than $10,000. But again, the $90,000 additional that you lost, you’ll just have to figure that out with your spouse, because you’re not receiving any sort of benefit from the IRS.

And you’re in California, so you must be making these bets when you’re traveling and located in another state, because it’s not even legal in California, but the specific state with which you place these bets all have different tax rates specific to them. So in terms of how much tax you’ll pay, that’ll be a combination of federal, state, and local tax laws as well.

Thank you for those questions. If you have questions, email those to radio@creativeplanning.com and I’ll be happy to answer those on the air just as I have today.

Well, I want to conclude with an encouragement around generosity. One of the values that I’ve seen in helping thousands of families become financially stable, financially independent, lower the anxiety, feel like they’ve got a great plan, is that you are then provided the availability to do good things to help others with your money. This is where you’ll find true joy and contentment. Happiness and joyfulness are two very different things. One is temporary. One is lasting. One’s fulfilling. Generosity is defined as the habit of giving without expecting anything in return.

I read a while back Michelle Obama’s first memoir, and she had this portion where she was describing her and Barack’s initial relationship. She had gone to Princeton, was an associate attorney at one of the most respected law firms in the country, out of Chicago, and it was common that they would have hot shots from the best law schools in the country come intern over summers. And Barack was the hotshot coming out of Harvard Law School. And she was essentially tasked over the summer with showing him around and mentoring him.

And she said in the book that it was very obvious really early on that he was on a completely different level, in terms of his mindset, than her. Her entire focus of life was trying to better her situation, improve her outcomes, make something of herself, get to the best prep school, get to the best college, get into the best law school, get hired at a great law firm. But see, Barack was different. His wellbeing, that box was already checked. He wasn’t worried about that. He knew that he would have a good job, and support himself, and be able to support a family one day. And because of that, he was already focused on how he could help others.

By the way, I realize about 50% of you listening do not think he was a good president and do not like his policies. I’m not referencing any of that. But rather I’m making a more broad point. He wasn’t worried about his ability to create success for himself. Because of that, he was able to think about others in need.

And what you can learn from that is, once you have your oxygen mask on, in the event of a loss of cabin pressure, you can look around and see who might need help putting their mask on. But you don’t have that capacity when you are frantically worried about your own security. That’s why having a great financial plan in place, having great advice in your corner, it’s not just for your own benefit, because it will also give you the freedom to do things for others as a result. And that is where you will find meaning and deep fulfillment. And I pray that you find that, because we are the wealthiest society in the history of planet Earth. Let’s make our money matter.

Announcer:  Thank you for listening to Rethink Your Money, presented by Creative Planning. To hear past episodes, or learn more about the topics and articles discussed on the show, go to creativeplanning.com/radio. And to make sure you never miss an episode, you can subscribe to Rethink Your Money wherever you get your podcasts.

Disclaimer:  The proceeding program is furnished by Creative Planning, an SEC registered investment advisory firm that manages or advises on a combined $210 billion in assets as of December 31, 2022. John Hagensen works for Creative Planning, and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning or this station. This commentary is provided for general information purposes only, should not be construed as investment, tax, or legal advice, and does not constitute an attorney-client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.

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