Announcer: If you are an investor worried about government spending and inflation, you need to consider hedging with precious metals. The expert in the business is Larry Allen with International Collectors Associates.
Larry Allen: I was here when gold hit previous high in ’80 of $875. Gold currently is trading in the $1240 range so it kind of leads some people to say, “Well, we’ve never been this high. Those sheer numbers, that’s correct.
But if you really dissect it and you start thinking about, “What did that car cost me in 1980, or that house cost me?” It was a fourth or a third of what they cost today. So if you factor for inflation, it would not be unusual to see gold $2,000 – $3,000 even currently. Our projection is that we will see those type of numbers over the next couple of years.
Announcer: Call Larry Allen today at (866) 211-8971 and ask for their complimentary information package or log on to mygoldportfolio.com. That’s International Collectors Associates (866) 211-8971.
Richard: Larry heads up the Precious Metals Group in International Collectors Association. Larry, are you there?
Larry: I am. Hey Richard, how are you?
Richard: I’m excellent. What a great day this is here.
Larry: Well, good.
Richard: How’s the weather there?
Larry: We’re in Durango, Colorado – a little corner of Colorado – and it’s beautiful. In fact, many of your listeners probably end up skiing out here or coming our way.
Richard: So International Collectors Associates is a precious metals company that’s been in business over 30 years, right Larry?
Larry: That is correct. A gentleman named Don McAlvany started this firm in 1972. It’s still owned and still run by the same family. We are a precious metals firm. We handle the gold, silver, platinum, palladium; any of the precious metals. We do also collectible coins, gold and silver IRAs. We also have a program for offshore storage with Switzerland.
So, been in the industry a long time. I’ve been with Don personally since 1980, so pretty well-versed in the precious metals area.
Richard: That’s great. So you guys have got some real longevity there. You’re not one of those dealers that just popped up in the last five years because gold started skyrocketing.
Larry: Yeah. Richard, it seems like everybody and his brother is a gold dealer these days. But we’re one of the old stalwarts. We’ve seen it through a lot of market cycles. So yeah, we’re not going anywhere; planning on being here a long time as well.
Richard: That’s great. Can you tell us some more about the benefits of dealing with International Collectors Associates?
Larry: One of the things – or a number of things – that we’ve always done that, hopefully, separates us from just a coin dealer, if you will, is we have produced an economic, geopolitic type of newsletter for years, almost going back to the inception of the company.
Richard: The McAlvany Intelligence Advisor?
Larry: Exactly. And Don is renowned. He speaks all over, not only nationally, but abroad. And then we also do produce every year a DVD on those topics as well. That’s something that we do provide. We have a care package we can talk about maybe towards the end of it that any of your listeners can call for that have samples of these things.
But beyond that, we also have a podcast weekly with interviews with recognized financial figures as well as our feeling and our take on the market.
So we’re competitive on our pricing and we are an A+ rated firm with Better Business. We believe that we do a very excellent job on the service in providing whatever type of precious metals interest somebody has.
We feel that we bring a lot more to the table than just that because we do monitor it. We have a few strategies. There are opportunities between the different metals in what they call strategy trading or compounding ounces. So we do a lot of stuff rather than just sell metals, gold coins and that’s the end of it.
Richard: So you’ve got a real expert there – Don McAlvany.
Larry: Indeed. He’s been in this industry for prior – even to ’72 to the inception of the firm. He was the National Sales Manager for years prior to that with International Investors, the world’s largest gold mining share fund. So yeah, his background goes pretty deep in this area.
Richard: That is awesome. What a tremendous resource you represent.
Larry: Well, we would hope to think so and we’d sure enjoy coordinating and marrying up with your interests. Hopefully, we can provide some good things for your listeners as well.
Richard: Well, we are all concerned about inflation, the way the government is spending money.
Larry: In the 30 years, I’ve been doing this, gold and silver have always been kind of an inflation hedge. These days with where we’re going with this administration and fiscal policies, and then you look at the trouble that the euro is in with all these foreign currencies, today I’m seeing more and more investors and businesses park assets in gold and silver for protection of the decline of the value of their currency. So it’s kind of becoming a currency hedge as well.
Richard: That’s tremendous. So not only does it have intrinsic value, but it can help you hedge inflation.
Larry: Indeed. A lot of people will look at it from the speculative standpoint that we have some great appreciation over the next couple of years or beyond, and I believe we do. But also, I think it’s just one of those to help you sleep at night as you watch the erosion of your spending power of your dollar for sure.
Richard: And the euro. The euro was highly celebrated just a year ago, and now people are saying it might drop below the value of a dollar.
Larry: Exactly. You have very fiscally responsible Germany [5:31 inaudible] Italy, Spain, and Greece which did hit the wall, if you will. So I know that there’s got to be consternation within the group of countries the represent the EU. Kind of like one keeps a very tight checkbook and the other one likes to write them, if you will.
Richard: Yeah. One’s a little bit more socialistic than the other I think.
Larry: Yeah. That probably comes into the equation as well.
Richard: You bet. And now, you do also work with self-directed IRAs. Is that correct?
Larry: That is correct. You can put physical gold in your IRA in a qualified capacity, and it’s actually very easy to do.
Richard: Well Larry, tell us more about the Swiss storage programs because I think some of our listeners are international and they would be interested in that.
Larry: Sure. We, for years, had done some placements overseas in Switzerland. Probably three to four years ago we constructed an actual program because we wanted it easy for an investor. You can invest as little as $10,000. It is held in a secured depository in Zurich, Switzerland.
Richard: You mean not in an American bank, Larry? [laughs]
Larry: No. Well, true. No, we chose, maybe wisely, not to go that direction.
Richard: Well Larry, what else would you like to say to wrap it up?
Larry: Well, I would just encourage folks, if they’d like to get our care package of information, we’d be happy to provide it.
Richard: You bet. What number should they call, or how do they get in touch with you?
Larry: Our toll-free number here is (866) 211-8971. My name is Larry Allen. Website is www.mygoldportfolio.com. We do have a complimentary packet of information that we’d be happy to send to you.
Richard: And again, that number is 866…
Larry: 211-8971.
Richard: 211-8971.
Larry: Correct.
Richard: That is great. This is a direction that a lot of people need to take not, of course, with the majority of their assets, but we’re recommending that at least 10% be put into hedging. We don’t mean hedge funds [laughs] because we’ve seen what happened to those in the last five years.
Larry: Indeed.
Richard: Something that is a hard asset, that has intrinsic value like precious metals. So Larry, you’ve been of great assistance today. We really appreciate you coming on the show. Again, Larry Allen with International Collectors Associates, and you can reach him at (866) 211-8971

Patrick: Welcome to Financial Fortress, the show that gives you good information on how to follow the secrets of the wealthy. Richard, we have a great show today. I know you wanted to start with the difference between brokers and the Registered Investment Advisors.
Richard: Thank you, Pat. Yes, there is a difference between who is just another salesman compared to someone that is only a Registered Investment Advisor. The Registered Investment Advisor’s only business acts as a trusted advisor. 95% of the Registered Advisor also carry the brokerage licenses whose only purpose is to collect commissions in addition to fees, and that represents a conflict of interest.
What it means is they don’t have a duty to you. They have a duty to themselves and the brokerage firm first, and yours second. I don’t know how you feel about being second with your money, but if you want someone that cares about you, you need to talk to someone that is in the wealth advisory business and is only a Registered Investment Adviser.
Unlike the brokers, we are required to act as your fiduciary only. You don’t have to worry about the conflicts of interest you’ll get with stock brokers and the insurance only sales people. Our golden rule is in our mission statement, so we’re going to treat you just as if you would like to be treated ourselves if we knew nothing about financial services.
You’ll find we offices all over the city, in North and Northeast Dallas, in the park cities uptown, Plano, Addison, Arlington, and Grapevine Southlake areas.
This week, we’re going to talk about undisclosed fees that were in the news again. Investors, unfortunately, don’t know that the fees that they’re paying on their 401Ks are much higher than the human resources groups that their companies have told them.
That is because the brokerage industry has not been forced to disclose the fees to the participants. So, 50 million 401K participants who deserve to know how much they’re paying for their retirement accounts don’t really know.
And lawmakers in the Senate decided this week to drop a measure that would have forced the 401K industry to disclose those fees. Does that sound fair to you? We don’t think it is.
Now, don’t get me wrong. There are those who advocate against 401K fees just because it would be difficult for some sort of a standardized report to be created by all the different brokers that are out there. It is quite possible that would take them a little bit of time. But in the meantime, they’re siphoning off tens of billions of dollars that belong to the American investors, and it’s just not right.
Patrick: I understand. I understand you have a workshop that’s coming up pretty soon.
Richard: Yes, we do have a workshop coming up for people that are in the Northern suburbs of Dallas; North, Northeast, and Eastern suburbs. We’ll be meeting at the Master Grill Steakhouse, that’s one of those Brazilian Steakhouses, at the Firewheel Mall.
Patrick: And that’s on?
Richard: We’ll be there on June 16th and June 22nd. That’s this coming Wednesday and the following Tuesday.
Patrick: What time should they be there?
Richard: 6:00 is when the seminar will start.
Patrick: Very good. Who should be attending these workshops?
Richard: Most of our clients are over 55 and have substantial assets ranging from $250,000 on up to invest.
Patrick: Very good. You were talking about the 401Ks and the expenses. They’re allowed to do this? They’re allowed to overcharge people all of this money and lawmakers you say are just letting it go, huh?
Richard: Well, they are. The lawmakers are ignoring the fact that the actual cost that people are paying on these funds are typically twice, three times, even four times as high as they think they are.
Patrick: Well, that’s because they all have corporate pension plans, right? Or wrong?
Richard: Well, Congress certainly has a heck of a pension plan.
Patrick: Well, I know that’s right. So what can anybody do? Folks that have money tied up in these 401Ks, what can they do?
Richard: Well, there’s a couple of things they can do. First of all, you need to notify your Senator immediately that this should’ve been included in the legislation. They cut it out at the last minute on the Financial Regulatory Reform.
And the second thing they should know is that you have a right under the Pension Protection Act of 2006 to roll your 401K out of your company and into a Traditional IRA that could be managed by someone that has a duty to take care of you and to disclose all the fees, like we do.
Patrick: Well, I know that you’re going to talk a little later about the Roth IRA, but that would be a logical thing to do, wouldn’t it, if they go through and analyze that?
Richard: Yes, the costs on their 401Ks, most of those costs are unknown. We have several ways of finding out what the actual costs are, but even we can’t find out all the costs. A lot of these are hidden from the public and they’re not listed in the prospectuses.
Patrick: I guess I presumed something there on that last thing. If you have a 401K and you have to stay with it in the company, you’re allowed now, due to some legislation, that you can take it out because of the Enron thing, right?
Richard: Yeah, the Enron Act is the colloquial term for it.
Patrick: But you can take it out and you can put it into your own self-directed IRA.
Richard: Correct.
Patrick: But it has to be a regular IRA, right?
Richard: It’s a Traditional IRA. There’s no tax consequences to do so. It simply means that you roll it over into an account and you can have that managed professionally. The other advantage to that, not only can you find out what your fees are on a Traditional IRA if it’s managed by us, you could have a selection of tens of thousands of different products, different funds, that are not available to you in the company 401K.
The reason the company 401K limits the number of options you have is so that the brokerage account, the brokerage manager, doesn’t have to deal with too many options. So by limiting their options, they can keep the disclosed fees low. The undisclosed fees are another matter.
Patrick: What else did you want to tell us about the 401Ks and the fees?
Richard: Those are the key things. Again, the cost of a 401K might be shown at your company to be less than 1%, but often we find that it ranges from 2-4% when we get done with all the disclosure information that we have access to that the public does not.
Patrick: Very good. Back to the workshop real quick, because we didn’t tell people how they could register. Do you want to tell them how they can register?
Richard: Yes, you can call (972) 325-1700 and you can find out all sorts of interesting facts by coming to one of our seminars because we discuss how the wealthy invest differently.
Patrick: I know it’s about a 60-minute presentation.
Richard: Correct.
Patrick: It’s not a sales presentation at all. Having been to a few, I would tell you it’s worth it and you should come. Who should be attending these really?
Richard: Again, most of our clientele are over age 55 that typically have assets ranging from $250,000 on up.
Patrick: Very good. Dinner follows as well, right?
Richard: Yes, this is one of those Brazilian Steakhouses where they cut off about a dozen different types of meat. They roast it on the spit, and they bring it to the table and you can take a slice and try it, see if you like it and, if not, just not take any more. They’ve also got an excellent salad bar. I highly recommend it. They’re at the Firewheel Mall, and the phone number to register is (972) 325-1700.
Patrick: What else did you want to talk about with the undisclosed fees?
Richard: Again, it’s up to you to make your viewpoint known to your Congressmen and your Senator. This was supposed to be the administration that was going to clean all this up, but look what’s happening. They are not taking care of the American public and the wealthy that is in 401Ks is supposed to sustain us. Social Security is only supposed to be 30-40% of our retirement savings. Pensions have been eradicated by 81% of the Fortune 500.
So 401Ks are really all we’ve got left and our gains are being siphoning off by these large brokerage houses that are managing these accounts and not disclosing these fees properly. If people knew how much it was costing them, they would’ve moved these accounts as soon as they had a chance to in 2007.
Patrick: I understand. We’re coming up on a break here in a little bit and I want to make sure folks know that next week, we’re going to have Harry Dent on the phone, so to speak, joining us for the interview. It’s going to be a great show.
Harry is known for his latest book, The Coming Great Depression. Actually, I was acquainted with Harry Dent back in 1993 when he came out with his book, The Coming Great Boom. That was really good.
It was good information. It will be great information next week. I think you all will really enjoy that. So make sure you tune in next week at 5:30-6:30 on KSKY. You’ll really enjoy the show.
Richard, I know there’s so much more of the show to go. We’ve talked about the fees. What else did you want to cover?
Richard: Well, again, Harry Dent is going to be an awesome opportunity for listeners next week on the 20th. His last book printed last year was The Great Depression Ahead. Harry does research based on the predictive ability of consumer spending to determine what’s going to happen in the stock market.
Since 2/3 of our stock market is driven and our gross domestic product is driven by consumer spending, it’s real important that you look at the demographics of our society and how when people get older, they have a tendency to spend more or less of different types of things and how that affects different sectors of the economy and the economy overall.
Very bright guy, Harvard Business School. I think you’ll enjoy listening to him. I highly recommend you show up.
Patrick: I know that people can also contact you during the week, Richard. They can catch you at your office direct, right?
Richard: Yes, Sir.
Patrick: That’s (972) 758-4484. If you want to join the call today or the conversation, (972) 299-5759. Connect with Richard direct during the week at (972) 758-4484 or register for the event on the 16th at (972) 325-1700. No salesman will call. You’ll just get a confirmation letter if you want to come either the 16th or the 22nd out in Garland. It will be a great presentation, and then dinner to follow. You’ll want to stick around. We’ve got so much more of the show. We’ll be right back.
[commercial]
Patrick: Welcome back to Financial Fortress Radio. I’m here with Richard Jordan, the Chief of Investment Strategies in the DFW area. Richard, we’ve got a great show. You got a big article this week on the bonds and the bond bubble. What’s going on in bonds this week?
Richard: Well, it’s not just this week. It’s been going on since last year. We saw a record amount of money getting poured in the bonds when the bear market began back in ’07 and ’08, and that’s normal.
But when the stock market recovered last year in ’09 and ran up another 50% or so since then, people still carried the fear from the previous bear market and, as a result, they have continued to pour money into bonds hoping that they’re safe.
For several weeks now, I have told clients and investors that we are in the middle of a bond industry bubble and, recently, last week, Warren Buffet, on Thursday testified that a US government inquiry commission on the financial crisis and he said that municipal bonds are expected to go down soon for three reason, the same three things I’ve been talking about to my clients and to my investors for the last six months – overly generous retirement and health benefits that have been promised to the baby boomers working in these cities and states who create those municipal bonds, over 40-50% of the workforce, depending upon the municipality, are all retiring in the next five years, and they’re all expecting these huge pensions.
Some of these government service jobs have 90% pension rates. 90% of their salary will be paid to them for a lifetime. And although the actuary tables when they created these pensions 40 years ago expected these people to only live two or three years past 65, now the average person lives to about 80. So that’s another 13 years that are not expected that they will have to pay for.
Then you combine that with property tax collections being down 15 to even 50% in some cities and states like Florida, like Nevada, like California. And finally, sales tax collections down 10% in the best areas, like Dallas, but down as much as 50% in some of these cities and states.
So of course Warren has already dramatically reduced his municipal bond portfolio in the first quarter of this year, and we didn’t hear about that until just about a week ago.
Patrick: Very good. I know that he has a pretty big portfolio as well, doesn’t he?
Richard: Yes. He had over five billion dollars in munis and he cut back almost 50%. Anything that looked the least big risky in the wrong areas, he immediately sold. That is because of the record defaults that are being forecasted in munis right now. There was another article in the Wall Street Journal about it last week, and there was another article on Money News.
So while the yields look attractive on munis right now, the reason is when yields seem like they’re high, it’s because there’s an undercurrent where they’re expecting a record number of defaults.
Now what happens when they default? You not only don’t get your interest, you lose your principle. Does that sound like a safe investment?
Patrick: Well, are most of the investors out there right now in the mutual funds or do they buy the municipal bonds direct?
Richard: Most are buying actually through the bond funds. Again, the bond funds are being created by large brokerage houses and they’re being pushed by the bond brokers at the large brokerage houses who are driven by what? Commissions.
Since they have no requirement to disclose any additional risk beyond what’s in the prospectus, even stuff that’s in the news, like this has been recently. It just demonstrates they don’t have a fiduciary duty to you and you’re risking your life savings by giving your money to those folks.
Patrick: Do you think the government will, in any way, try to bail those municipalities out?
Richard: There’s a possibility of that. But how many more bailouts can we produce in this country? We’ve already got a record amount of debt and it’s becoming real unpopular to add to that debt in an election year.
Patrick: I understand there’s a lot of transition this year from people trying to, in a sense, fire the incumbent. So what can we do?
Richard: Again, I would be selling out of the bonds and I would be taking a look at other types of investments right now. There’s simply too much cash that have gone into these bonds and we’ve got a bubble that’s ready to burst. So let’s take a look at bonds that are considered the safest like US treasuries.
The average yield on five-year treasures this year has dropped to 1.9% and that’s the lowest rate in the last 25 years. Most of my clients are seniors, and seniors have a much higher rate of inflation than the average economy.
The consumer price index that the government touts does not include food, does not include energy, and it limits healthcare cost to 4% of income. When you add those three things in, there’s a much higher percentage of a senior’s budget. What happens is the amount of inflation they’re experiencing is typically 3-4% higher than the consumer price index.
So when the government is quoting 1%, a lot of seniors are experiencing 4%, 5% even. So when they’re only getting 1.9% on a five-year treasury. They’re losing 2-3% per year in purchasing power.
Let’s take a look at the rate over the last three years because of the record amount that’s gone in is still only 2.28%. So for most seniors, this is a losing investment.
Patrick: How much do you think someone can lose on this?
Richard: Again, as a result of the deficits, we are going to expect o see rates go up as soon as this election is over. I expect that we’re going to see rates go back to their historical averages. That five-year treasury used to be an average of 3.48%, about 3.5% over the last ten years.
The market value of that bond will result, if it goes up, the current market goes up to 3.48, that 1.9 is going to be worth 44% less.
Think about taking a 44% loss on one of the bonds that you thought would be the safest possible investment, a US treasury. Again, that’s more than most people lost in 2008 in the stock market.
Patrick: One of the things I’m curious about with these treasuries. You look at the average mutual fund out there that has a money market fund. Are they stuffing treasuries in those? And if so, do the money market funds that generally have a consistent dollar price, are they going to be affected by these changing rates?
Richard: Most of the money market funds are buying short-term treasures and those are 90 days or less, no longer than six months. The rates on those products are typically around 2/10 of a percent on up to about 4/10 of a percent. Again, we’re dealing with record low returns on these products. The yields are unbelievably low.
And now you know why the Chinese and the Japanese have started cutting way back on buying US treasury bonds and why you should, too.
Patrick: Who is going to fill in the gap? If we lose the Chinese and the Japanese that have purchased so much of our debt in the past, who is going to fill in?
Richard: Well, what’s been happening is the Federal Reserve has been buying these bonds that the Chinese didn’t day. That’s one arm of the government buying debt from another arm of the government. It’s robbing Peter to pay Paul. It just does not work long-term.
Patrick: I know you’ve got a workshop coming up. Before we go to the break here, can you tell us about this coming workshop?
Richard: Yeah. The workshop will cover some of these issues. We’ll be at the Master Grill Steakhouse at Firewheel Mall in Garland. That’s right there where Garland Highway 78 hits the George Bush Turnpike. So it’s pretty accessible for anybody in the North, or Northeastern, or Eastern suburbs. It will be at 6:00 p.m. this coming Wednesday, June 16th and the following Tuesday, June 22nd.
Patrick: And how would they register?
Richard: You can call (972) 325-1700 to register. No salesman will call back. Just leave your name, address, and phone number so we can send you a confirmation letter.
Patrick: So it’s (972) 325-1700. They’re going to get an hour presentation from you. What’s one or two of the topics that you’re going to cover?
Richard: Again, we’ll talk about how the wealthy invest differently and how they save money on taxes; both income taxes and estate taxes while they’re managing their investments.
Patrick: That’s great. (972) 325-1700. Or if you want to call Richard direct this next week, it’s (972) 758-4484. This is Financial Fortress Radio. We’ll be right back.
[commercial]
Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher. Richard Jordan is the Chief Investment Strategist in the DFW area here on Financial Fortress. Richard, I know one of the things that you really have talked about, but you want to get into a little more is going back to the fees associated with your retirement accounts. Most people just don’t know how much they’re paying, do they?
Richard: They have no idea. Because the average investor never reads a prospectus, the typical person believes that they’re paying less than 1% to have their accounts managed when, in fact, they’re typically paying three to four times that.
Patrick: What are some of the other things that are included in these undisclosed fees?
Richard: Well, the undisclosed fees are just that. They’re not disclosed. They’re referred to in the prospectus by various, vague terminology. As a result of that, the government and the SEC allows these mutual fund companies to get away with the language that’s in there.
Certain types of fees have to be disclosed like ordinary initial commissions, but other types of compensation are referred to in vague terms that actually are forms of commissions.
For instance, if you sell so much of this mutual fund, we’re going to buy a trip to Tahiti for everybody on your brokerage team. We’re going to allow you to go golf at the finest golf course in your area. We’re going to spend a lot of money on special things for your people. Those are typically referred to in vague terminology as just “compensation.”
As a result, the investor can’t figure out what that stuff means, if he even bothers to read the prospectus.
Patrick: I guess it gets a little fuzzy, and I’m sure that’s kind of their intent, but if we were to look at it, are there any keys to finding some of those expenses or do we just need to call you?
Richard: That’s what we do for a living. If I could teach you everything I’ve learned in the last eight to ten years about finding undisclosed fees, it would take several weeks. We can’t get that covered in a show; we can’t even get that covered in a typical one-hour meeting.
Most people’s eyes glaze over when I start talking about some of this terminology. But I can show the results to people if they’ll simply bring their brokerage statements in and allow me a couple of hours to go over those statements because I can find the real information and show them what they’re actually paying.
I had a client come in that had been using a major brokerage house last week. And she was very smart. She was a very bright lady and her husband had been very smart and had accumulated well over a million dollars before he had passed.
But over the last 15 years, she wasn’t taking any money out of this account. It had gone down by about 45%. She was greatly concerned there wasn’t going to be anything left at the end for her heirs.
And she said, “But I’m only paying an average of about .83% on all these different funds, and I just don’t understand. My management fee is only about1%. How can I be losing money this fast?”
I went through and analyzed. She was in about 30 different funds. All the information that I have access to as a Registered Advisor that the public can’t get their hands on. And what I found was that her actual cost was 3.18% instead of .83%. Is that a little bit of a difference?
Patrick: So she was losing money no matter what the market did almost, it seems like.
Richard: And her fees – her undisclosed fees – were three times higher than her disclosed fees, meaning that she was paying four times what she thought she was paying for fees.
Patrick: Wow. So how much had she lost?
Richard: Again, she had lost about 45% in the last 15 years when the S&P 500 index probably has averaged around 5-6%. And of course, most of the gain in the S&P 500 was in the 90s, between ’94 and ’99. In the last ten years, as everyone knows, the S&P is down about 20-25%.
Patrick: Wow. That’s amazing. Speaking of the 90s, one of the things that I do want to make sure people know is that Harry Dent is going to be on the show next week. I think he’s one of the good guys. He’s been around for a while. I actually learned about Harry in the 90s when he came out with one of his early books called The Great Boom Ahead. It was done in ’93 and he very accurately assessed what was going to happen in the next ten or so years, plus.
And then in 2009, his latest book is called The Coming Great Depression. He’s using some interesting tools to assess what’s been going on in the marketplace, and what’s coming ahead.
But he has been very accurate to a great degree – not perfect; I don’t think anybody gets it all the time. But he has done a good job. So we wanted to get him on the air. We thought he’d give you some good information. So listen next week, 5:30-6:30.
Richard: It should be a great show. Again, Harry Dent is a Harvard Business School economist. He started writing books in 1989. He’s got about seven or eight books out there. A lot of his research is based on consumer spending patterns compared to demographics.
His major theory deals with the fact that young adults, of course, when they start having children and [38:38 inaudible] them, keep spending money more and more as the children grow up. It’s funny how kids cost money, isn’t it?
Patrick: A lot of money.
Richard: And then after the kids finish college and leave home, the spending slows down the last 15 years of the working life for the typical adult in America. They end up saving more and more to prepare for their own retirement.
For the baby boomers, that means that there have been record amounts of savings that have accumulated over the last 10-15 years, but now with the fear in the market and people flocking the bonds, a lot of people are going to get hurt by this bond bubble.
Patrick: We were just talking about that in the last quarter. The bond bubble is going to be significant. There are going to be more people losing more money than I think anybody would expect. Wouldn’t you agree, Richard?
Richard: Yes, and losing money on things that are considered the safest possible investments, like US treasury bonds or treasury inflation protected bonds, those are both a great risk in the coming market; a bond bubble bust.
Take a look at the base rate for a five-year treasury inflation-protected securities right now – 0.5%. Take the last 12 months inflation late – and again, the inflation rate that the government creates is different for these bonds than it is for the consumer price index that you hear announced. It’s even lower.
They say it’s 0.9% in the last year. Right now, the TIPS that have just been recently released are paying 1.4%. Think about that. 1.4%. With over $3 trillion in cash still sitting on the sidelines combined with high unemployment, we now have a substantial risk of deflation.
What would happen to your treasury inflation-protected security if we did go through deflation? It would drop below that 0.5%. In fact, this is the only bond that is allowed to drop below zero and erode your principle.
So you could actually start losing money on this. Not only would it be worth less in the open market if you tried to sell it, but the actual face value that if you held it to term, if you held it to maturity, the amount returned to you by Uncle Sam would be less than what you initially put in.
The reason you don’t know about this – Uncle Sam doesn’t have a fiduciary duty to explain bonds to you and neither does your broker. But we do, and we want to explain these things to our clients so they understand that they can get the same level of trusted advice that the wealthy have enjoyed since 1940.
Patrick: You’ve got a workshop coming up that should help them understand some of this. Wouldn’t you agree?
Richard: You bet. We’ll talk about the five key financial strategies that millionaires use on Wednesday night, June 16th and Tuesday, June 22nd at 6:00 p.m. at the Master Grill Steakhouse at the Firewheel Mall in Richardson.
Patrick: And how would they register?
Richard: You can call (972) 325-1700.
Patrick: (972) 325-1700. You can register to come to the June 16th at 6:00 p.m. workshop with Richard Jordan at the Master Grill Steakhouse. I know that it’s a good 60 minutes of a lot of content.
Richard: You bet.
Patrick: And they’ll be able to visit with you, ask you questions and enjoy a nice dinner afterwards. That’s (972) 325-1700. Register for the event. No salesman will call. It’s just a confirmation. We’ll be right back with Financial Fortress Radio. Thanks again.
[commercial]
Patrick: Welcome back Financial Fortress Radio. This is Pat Dougher, Richard Jordan is in the house and we’re talking about ways to help you invest correctly. I know we’ve been talking about the undisclosed fees in the marketplace that’s a real shocker for most people, the bond bubble and how it really has a potential to be a real damaging effect to your investments and your portfolio in the next year.
Our guest next week being Harry Dent. This section, I know you wanted to talk about the Roth IRA. Explain what the Roth is, Richard, and why someone might consider transforming their old IRA into a Roth?
Richard: The Roth IRA is a different type of IRA. The Traditional IRA, you use pre-tax dollars to create an account, and then that account grows tax deferred. What that means is the dollars going in, the principle, were never taxed and then the dollars that the account made were never taxed so all of that money is taxable when it comes out.
Patrick: Very good. We get that. That’s a regular IRA.
Richard: Traditional IRA, or Rollover IRA. There are number of terms for them; SEPs, etc. Then we’ve got the Roth IRA and the Roth basically uses after tax dollars going in and then all the gains after you create the Roth IRA are tax free.
And since you’ve already paid taxes on the dollars before you put them in the Roth and all the gains in that type of IRA are tax free, that means all the gains that you take out of that are going to be tax free for your lifetime and for the lifetime of your heirs.
Patrick: So it’s a little bit like there’s two containers. One, you’ve never paid any taxes on the dollars that are in that IRA, so when it comes out, you pay taxes on it. If you do a Roth, that container, the taxes have been paid on the way in before they get there, and everything that comes out of there is tax free.
Richard: Exactly.
Patrick: I understand that we’ve got a rare opportunity in the next couple of years to change the Traditional IRA to a Roth. Tell us about that and why there’s a unique opportunity there.
Richard: Again, Congress passes laws to benefit who? The political action committees that represent the large companies and industries and the wealthy. This change in the Roth IRA law that went into effect at the beginning of this year was designed to help the wealthy who have record amounts of money sitting in large 401Ks and large IRAs of various types; Traditional and Rollover types.
And they’re scared that we’re going to see much higher tax rates over the next ten years, and that fear is well founded because of the large budget deficits. The Tax Foundation report that came out in March said we would have to effectively double our tax rates – and that includes the people in the 10% bracket, would have to go to 19. The people in the 15% bracket would have to go to 32. The people in the 25% bracket would have to go to 58%. It goes on and on. Effectively, double tax rates for ten years to pay off our deficit.
Patrick: Isn’t that a little bit scary? Because even if we gave more taxes in, at the rate that they keep over spending it, won’t they just increase the dollars spent?
Richard: Well, they can do that, but I think what will happen is people, eventually, will make a demand for a balanced budget upon Congress. That’s going to be a demand that’s going to be made by the people because they understand the pain they feel from the increasing tax rates. Until people feel pain, they don’t demand Congress changes.
So here we have the wealthy that got this Roth IRA law changed that was designed to benefit the lower and the middle class. Under the new law, anybody, regardless of their income level can roll their Traditional IRA into a Roth IRA. They’ve got two years to pay the tax on it interest free. When’s the last time Uncle Sam gave you a loan interest free?
Patrick: Never. I know their interest rates are very, very high and they charge penalties on top of what’s there.
Richard: Right. And unlike a Traditional IRA, you do not have to take a required minimum distribution out of a Roth. If that money is just sitting there waiting to go to the next generation, it can now sit there and continue to accumulate.
The reason this opportunity is so tremendous is because we’ve had a little dip in the market, but we’re still in a bull market so over the next 16 months, it is likely that this bull market is going to continue.
If you convert today to a Roth IRA and this market runs up 30% over the next 16 months, and there is a likelihood that will occur, then the run-up in your stock portfolio would essentially pay all the taxes due on your new Roth IRA. And now you own a truly tax-free account that can benefit you in generations for up to five generations to come. And with the use of clever estate planning, we can even extend it past that.
But we can easily stretch a half a million dollar Roth IRA into five generations. Just let us show you how.
Patrick: If somebody wants to do that, they can call you directly at your office, correct?
Richard: That’s correct. Or they can come to the seminar. Either way. My direct number is (972) 758-4484. But that’s also my trading desk so if the market is open, I’m generally busy with clients or I am busy online, so I would recommend you call after 3:00 p.m.
Patrick: Okay. So that’s (972) 758-4484. And they can discuss their IRAs and all their investments. You can look at what the options are.
Richard: Absolutely.
Patrick: (972) 758-4484. Let’s talk about the workshop you’ve got coming up.
Richard: Absolutely. They can come to the seminar and kick the tires, get a chance to meet me, hear about the five ways the wealthy invest differently and that’s coming up at the Master Grill Steakhouse at the Firewheel Mall this coming Wednesday night, June 16th at 6:00 p.m. Just call (972) 325-1700 to register for that.
Patrick: And if they do, they’ll get a confirmation letter. Is that correct?
Richard: You get a confirmation letter in the mail. No call from a salesman. Just simply leave your name, and address and phone number on the voicemail. If they come, they’re going to get a chance to learn how the wealthy get their principle and high returns in income guaranteed on their money, how they get high returns even above index averages without taking on necessary risk in stock and bond markets or variable annuities, how to identify poor investments with high fees, how the rich legally avoid paying up to 99% of their capital gains taxes, and how the IRS levies an outrageous tax of 68% or more on many middle class folks’ IRAs when they pass away and how that won’t happen to the rich because they’ll either convert it to a Roth IRA or they’ll use some other clever legal entities to protect it. We talk about all that at the seminar.
Patrick: That’s the June 16th – this coming Wednesday night, 6:00 p.m. Master Grill Steakhouse. That’s over in the Firewheel Mall in Richardson in the Garland area. If they register, they can come to the 16th or to the 22nd which is the following Tuesday. Correct?
Richard: Correct.
Patrick: And there’s 60 minutes of great information. Then afterwards, dinner but they can ask you questions, learn more about what you’re doing, what you’re recommending and even if they want to know more, then after that they can sit down with you in an appointment kind of a setting. Correct?
Richard: Absolutely.
Patrick: Okay. You can just call (972) 325-1700 to register for this great workshop. Or if you want to call Richard direct it’s (972) 758-4484. Don’t forget, next week we’ve got Harry Dent. Harry’s got a couple of books. Actually, he’s got several book out there, the latest one being The Coming Great Depression.
You won’t want to miss that. Harry’s a good guy. You’ll enjoy the presentation and what he’s talking about there. It will be a great show.
One last time, if you want to register for this coming workshop, it’s (972) 325-1700. There’s so much to come, so much to talk about. We will be talking to you next week on Financial Fortress Radio. Thanks again. Have a great week.

P: Welcome to another Sunday’s edition of Tax Talk. This is Pat Dougher. We have Jeff Pickering CPA Master’s in Taxation, Rex Hogue of Bolinger & Hogue BigTexLaw.com and we’ve got a great show. Today is all about June weddings.
J: June Weddings! It is June and this is the time when most people get – I don’t know why June is the month, but everybody gets married in June.
R: Actually, I know the reason for that.
J: What is the reason?
R: Back in the old days, people took a bath in May. They smelled a lot better in June than they did in April.
[laughter]
P: He is actually right. I have heard that useless bit of information. But yes, that is correct.
J: We should point out that all three of us are married.
P: Yes, and we did take a bath, and it wasn’t just in May. So you’ve got a checklist of some of the things – because the topics today are really on what are the tax implications of getting married, and how to prepare for it.
J: Right. Every bride has a checklist and, of course, the groom’s got it to. There’s the wedding cake, there’s the tuxedos and the bridal gown. Who’s going to be the photographer? Put on that checklist “see your tax advisor.” Both of you should bring in your tax returns from at least three years ago. Go talk. See if you’re on the same page tax-wise. It’s important to get this done before so that you can limit your arguments afterward.
P: Now, I know that you’ve got probably a slew of clients that have, well, walked through the door without looking under the hood.
J: Oh, happens all the time.
P: Okay. What are some of the problems people can run into?
J: Well, the most common one is – I don’t know why it’s the guy, but usually it’s the guy – has a tax problem. Maybe they ran a business and had some payroll problems. But usually, the guy has tax problems from way, way back and these don’t come up until after they’re married. After they’re married, all of a sudden, they get a notice about something and, “Oh yeah, that’s from six years ago, honey.” It’s a $50,000 tax liability.
Or what could happen is they were planning on getting a big refund and, all of a sudden, it gets snatched out from under them because…
P: He’s got an obligation.
J: He’s got an obligation that was a past obligation.
R: Really, part of the problem is that women tend to be better organized than men and they tend to have their tax affairs in better order at the date of the wedding. A lot of times, they haven’t – especially if a woman is moving straight out of her parent’s home into a marriage which happens more often that way than with men – they haven’t had a chance to mess anything up yet.
So typically, women are either more organized or they go into it with fewer problems just because of life.
P: Well though, there is the other alternative which is the remarriage. They’ve been married, they went through a divorce, they’re getting remarried and there’s a fear factor of learning too much even though you should.
J: Right. You definitely need to take your future spouse in and talk about – get your tax returns, find out what’s there. See if you’re on the same page. One of the biggest problems in marriages talks about money, and taxes are at the heart of that.
P: You’ve got your checklist. Visit your tax planner.
J: Basically, that’s the main thing. You want to visit your consultant, bring in your prior year returns. You want to lay it out there and see if there’s going to be any issues.
P: Very good.
R: Yeah, you’re going to have the issues and a lot of people, they would rather bury their head in the sand and deal with them later, but that’s really a very bad strategy. They need to know up front, like any other big issue in a marriage.
J: Sure. We’re a community property state. Most of our listeners know what that means. That means that you own most…
R: Actually, I suspect most of them don’t. They just think they know what it means.
J: Okay. Well, go ahead, Rex. Tell us.
R: Well, one of the challenges – people assume once we get married, everything’s community property. That is far from true. A lot of times, people think, “No, if it’s just got my name on it, it’s separate property.” That’s not true either.
So, one of the advantages of sitting down and talking with your tax advisor is you can sort through those kinds of issues, and know how to do things and not make mistakes that can just be devastating later on, like we’ve seen so many people make.
P: Even before the show, we were talking about this looking under the hood for what’s the rest of the story. And you said that’s actually one of the reasons for prenuptials.
R: Yeah, and we don’t recommend a prenuptial in every single case, but a lot of people think that a prenuptial is only about planning for divorce, and nothing could be further from the truth. There are some other issues.
So just going to talk about what happens when the woman marries the bad boy who’s into it with the IRS. Well, a prenuptial agreement can actually protect her in that circumstance, and it’s not about them getting a divorce. It’s about protecting her from potential problems with the IRS, or maybe creditors of his business or something like that.
P: That’s great. Well, I know we’ve got more on the checklist. I would encourage you, if you’ve got questions about a June wedding or the marriage situation – and I hate to use it that way, but it really kind of is; marriage is a situation. It’s (214) 787-1570. You’ve got an opportunity to ask a CPA, Master’s in Taxation, and Estate Attorney question about your future in planning.
And planning is so important. We say on the show all the time, “The more you know, the more you get to keep.” Sit down with these guys and visit with them about ways that you can keep more of what you make.
I know, Jeff, you’re up there in Plano. You’re a local guy. What’s the crossroads again?
J: It’s between Legacy and Spring Creek on Preston Road.
P: Very good. So it’s 6533 Preston Road, Suite 300 in Plano. You can call him at (972) 378-5200. And Rex, the best way to get a hold of you guys, and I know you’ve got a report this week, right?
R: We do. We’ll talk about the report here in a little bit. But yes, we’ve got a $69 report that we’re offering for free. The best way to get in touch with us is through our website. Contact us at BigTexLaw.com. Go to our website, go to the ‘Contact Us’ tab, fill out the information and we can get you whatever you request.
P: Sure. I know this week, it will be on the family estate planning. I know that’s what so much of this show is really all about. There’s so much more information. Do you want to give us one more before we go to break?
J: You mean a tip on what’s going to happen? Yeah, when we come back, we’re going to talk about what happens when you marry the bad boy – or girl, but it’s usually the boy.
P: Us guys, we just really do it to ourselves, don’t we?
J: I don’t know what it is. It’s the gene. So what you can do; what you can do if you have a tax problem that’s entered into your marriage and it’s become a source of conflict.
P: And Rex, we’ve got more to come with the whole estate planning after the break about what are some keys that you can do to prepare.
R: Right. We’re going to talk a lot about things you can do to prepare for that wedding from a legal viewpoint, and really in addition to seeing your income tax advisor, you really ought to see your estate planning attorney because the day that you get married, you instantly create some new issues that most people never think about. They should be dealt with as well.
P: I agree. (214) 787-1570. This is Tax Talk on Radioactive KLIF. We’ll be right back.
[commercial]
P: Welcome back to Tax Talk. This is Pat Dougher, Jeff Pickering CPA, noted Rex Hogue of Bolinger & Hogue, BigTexLaw.com. We appreciate that because he is a very accomplished author and several other things that go with being an Estate attorney in the Frisco area. I didn’t mention that you guys are up there just north of…
R: Just north of 121, just south of Gaylord on the west side in the Starwood Medical Offices.
P: Very good. Well, today is the wedding talk, the wedding show on Tax Talk. It really is all the ways that you can save some money on your taxes. We went through a little, short checklist which we’re continuing to expand because the fact is that you really do need to look at a person’s history, right?
J: Right. You’re getting married. You’re getting married to their past as well as their future. So their tax past is something you’ve got to check into.
P: Very good. Well, we’ve got a caller on the line. If you want to call in to ask either one of these two great guys a tax question or estate planning question, call into (214) 787-1570, #KLIF on your Sprint phone. If you’re outside the DFW area, it’s (800) 583-1570. Paul, you are on the air. You’ve got a question about a family limited trust.
Paul: That’s correct. Hi, guys. I appreciate the time here.
J: Glad to, Paul.
Paul: I’ve got a situation where – and I don’t want to call it a situation; that’s probably the wrong word. But I am planning on getting married again. The two parties involved in the marriage – one has a high net worth in real estate, and the other does not.
All of that net worth is in a family limited trust. How would the prenup add to the protection of that in the event that the marriage did not last?
R: Paul, when you say a family limited trust, the thing that comes to my mind is you may mean a family trust, you may mean a family limited partnership. I’m not sure.
Parties need to sit down and talk that through because there are – let me assume for a moment you mean a family limited partnership.
Paul: That’s correct, yes.
R: Okay, a limited partnership. Well, there are so many different ways that they can be designed that it’s impossible to answer a question without looking at what the documents are and what they do, and trying to figure out what it is that you’re trying to accomplish.
The documents just pretty much are everything. What do they allow? Some limited partnerships allow really a lot of leeway as to transfers, and a lot of others don’t have much leeway at all. It depends greatly on what the documents say.
J: It’s tough. I’ve had clients where the situation arises when there’s a high net worth person. Usually, it’s no problem if the guy is the high net worth person, except unless he decides to later divorce.
But there’s usually some issues where the female, the woman, is the high net worth person –it’s just my observation; I have lots and lots of clients – that it’s very difficult for the guy to be in that position.
R: And one of the things you have to look at is, a lot of people don’t realize that income, when you get married, all income becomes community property. But if you have income going back into separate property, you obtain it for community property purposes and that can just create a real mess.
It’s one of the reasons that you need to sit down and talk to a tax advisor beforehand and learn this is how – what you’ve already got – this is how the income from it is going to be treated, and this is how you need to make sure that that income gets funneled so that you don’t create problems you don’t intend to create.
J: Right. When you get married, if you get married to this high net worth person and you file the joint tax return, you’ve got to remember that is a joint and several liability which means the IRS can look to either one of you for 100% of the tax liability. That’s a new concept for people who are not married, who haven’t been married. Actually, it’s a new concept for people who are married because a lot of them don’t realize that.
R: We had a situation a few years ago where a relatively high net worth wife went into a marriage, got a prenup, who was with a husband who had a business and had a lot of tax issues going in. She really regretted that she did not sit down and talk to somebody before they got married because they filed jointly the first year and she had just been stuck with all kinds of things that could have been avoided with just a little planning.
She loves her husband, but doesn’t love the problem that created. So Paul, you need to sit down and talk to somebody and have things really looked at.
J: This is definitely an advisor situation.
Paul: Agreed. Okay, guys.
P: Thanks so much, Paul. We appreciate the call.
R: Thanks, Paul.
P: Well, that was excellent because he was able to at least look at some of the potential problems. I know that it looks like he really ought to sit down with either or both of you, and figure out exactly what the document says and where to go from there. Would that be about right?
J: Yes, definitely.
R: Yeah, there’s both income tax issues and estate tax issues involved there.
J: Yeah, we love to see young couples, even old couples.
P: I know you guys will sit down with somebody for 45 minutes, visit with them about what’s going on, look at their information and then just see where it needs to go and if they want to follow through, they can. Correct?
R: 45 minutes at no cost, we might add.
J: For us, what we do is we bill 45 minutes unless they have a business, or are trying to get into a business because we do business consulting, startup consulting, also.
R: Jeff, would you consider a family limited partnership to be a business, though?
J: Yes, I would consider that a business. Anything that files a business return.
R: We do, yeah.
J: Definitely.
P: That’s good. (214) 787-1570 to ask a CPA, Estate Attorney questions about what is going with your, essentially, legal marriage. This month, it’s June weddings so let’s talk about that.
J: That’s right.
P: I know that we want to get into the estate planning. I know that, Rex, you actually even have a special definition for that. Would you talk about that?
R: We do. Our definition of estate planning, I’m just going to read it for you. “I want to control my property while I’m alive, and carry myself from my loved ones if I become incapacitated, if what I have, to whom I want, the way I want and when I want. Make sure assets I passed to beneficiaries are protected from their current creditors, respective lawsuit creditors and a beneficiary spouse in case of divorce once it passes hands, make sure assets I pass to beneficiaries don’t make them ineligible for programs to which they would otherwise be entitled, minimize professional fees and court costs while effectively administering my affairs, and save every last tax dollar possible.”
Seven points to that definition and our experience is that when people sit down and talk about estate planning, they want a plan that does all of those things most of the time.
P: That sounds like it would be very hard to read or say very much.
R: Well, if I hadn’t done it so many times, it would be very difficult to do.
P: That reminds me of something I heard at A&M a lot.
R: Nothing that long there.
P: Yeah, really. [21:28 inaudible]. What’s the real – when you think of title or property?
R: Well, title is so important. Even in Paul’s question, you kind of see this. The way that people own property, really you can start and estate planning with title to property if you understand it.
Two basic types – you can either own it individually solely; all by yourself or you own it jointly. If you own it jointly, it becomes complicated because it could be with or without right of survivorship or it could be community property; really three different ways.
And if it’s community property, it could also be with or without right of survivorship. Community property has so many implications in family law, probate law, tax law and debtor-creditor law – and it’s different. The definition for community property is different in all four areas of law, and people need to understand that when they ask the question, “Is this community property?” you can get a technically correct answer that’s useless because you’re talking about one area of law and the person who’s answering the question is talking about a completely different area of law.
As an example, if you’re talking to a family attorney, to them, community property is any property that the court can divide. But if you’re talking about the tax law definition, it’s any property that meets the IRS’s definition under Section 10149 which, by the way, is on the test at the end of the show.
[laughter]
About whether or not it is community property and what happens with right of survivorship property. So they’re just different.
P: That’s excellent. For me, I’m such an Aggie. This report, is it pretty easy to read? Because legalese is something that is just hard.
R: It is pretty easy to read; very easy reading. It’s really written on a fifth-grade level. Hard for a lawyer to write that way.
P: Good. That will be just good enough for me. So just go to BigTexLaw.com. Go the ‘Contact Us,’ fill out the information, request family estate planning guide and the special report and you guys will send it to them.
It really is a good bit of information that, like you said, it’s not written in legalese which helps me and you’ll enjoy it.
I know we’ve got so much more of the show to go. We’re going to continue with the wedding theme and look at different kinds of problems with probate, and joint tenancy and some other issues with the “bad boy,” and how to protect yourself from them.
With that, I know we’re going to a break here in just a second. You can call into (214) 787-1570. This is Tax Talk on KLIF.
[commercial]
P: Welcome back to Tax Talk. This is the show for June weddings. I know there’s so much information out there on all the things you need to put a wedding together, or a marriage together. But tax implications are huge. We’ve been talking about that with Jeff Pickering, Rex Hogue about the different things that you need to make sure you check off your list; one, of course, is talk to one of these guys.
R: Both of them.
P: Yeah, at least. That’s correct. There are so many ways to protect yourself from the bad boy. Why don’t we learn about the bad boy.
J: Okay. This is your typical situation. A woman gets married to – is attracted to the bad boy who has got plenty of personality, and also past tax problems. This doesn’t come up until later on. You find out that your refund got snatched, or you started getting notices.
There are three things that basically you can do if this has already happened to you. Hopefully, you saw us and we could help you in avoiding these things; the notices and things like that.
You can have something called Innocent Spouse Relief, and you can have what’s called Separation of Liability. Then there’s something Equitable Relief which means that if none of those two worked, then it’s like the third category; a catchall category. But you are at the mercy of the IRS when you choose equitable.
P: If you were to look for Innocent Spouse, what are some of the components to applying for that?
J: Well, basically, if your spouse – or it could be your former spouse – if they fail to report income, improperly reported income or improperly claimed credits and deductions. There’s a big Seventh Circuit court case that’s happened right now, which is bad for the Innocent Spouse people.
You’re supposed to search your innocent spouse two years after they start giving you collections notices. This poor lady married to a dentist, the dentist was accused of Medicare fraud. He died. She said, “I need Innocent Spouse.” He said, “Yeah, no problem. I’ll file it for you.” This is after all the Medicare stuff came out. He died before filing the Innocent Spouse, so she thinks that her Innocent Spouse is filed.
P: Oops.
J: It’s not, and it’s past the two years when she finds out. So she goes to court and the court said, “It’s too bad. You were supposed to have two years to file your Innocent Spouse.” Unfortunately, for that poor lady – she has Equitable Relief, but she has to rely on the kind-hearted people at the IRS for Equitable Relief.
R: Which they are neither kind, nor do they have hearts. So that may be a problem. One of the things about Innocent Spouse, to me, on the research I’ve done, maybe not as much as you, Jeff. But it seems to me that a common element is there has to be some lack of control by the spouse claiming Innocent Spouse.
J: That’s right.
R: If they genuinely didn’t know and didn’t really have the chance to know…
J: Or shouldn’t have. Yeah, shouldn’t have known. The Innocent Spouse usually falls down when one of the spouses has education that’s related to finance.
R: Right, like being a tax professional, it would be different for you and I to claim Innocent Spouse if our spouses did something.
J: But, believe it or not – I’ve seen cases where a CPA has filed for Innocent Spouse, had no idea what the other spouse was doing and should have, unfortunately, but she was denied Innocent Spouse Relief.
P: Well, isn’t that one of the keys, also, is know where the finances – who’s controlling them and then monitor between the couple and know where certain paperwork is.
J: That’s on your checklist, too. You should decide – besides deciding who’s writing the checks; is it going to be a joint or separate checking account. One of the things you’ve got to understand when you’re getting married is where the tax documents are, and you have to understand that it’s a joint and several liability. So you are responsible for that return when you’re assigned.
R: A lot of people don’t realize this. When you file a tax return, you file it under penalties of perjury. You’re saying that what’s on that report is accurate. Al Capone learned that.
J: Unfortunately, if you have the IRS prepare your return, guess who’s responsible for that tax return?
P: You.
J: You; not the IRS.
P: Ow. That’s like handing the KGB some secret documents and saying, “Hey, keep your mouth…” No. [laughs]
R: It’s very gracious of the IRS to do your return for you.
J: Yeah, it’s very nice of them to do that, but you are ultimately responsible. And as a tax preparer, I’ve got to tell you, this is something that many tax preparers won’t tell you is that they sign the return, but you’re the one liable for the taxes.
R: Yes.
P: Now, isn’t there some benefit in having someone like you, Jeff, do the return for them?
J: Definitely. There are benefits. You can get out of penalties if you have a professional preparer prepare your tax returns – and they’ll keep you out of hot water, just as a matter of fact. You may be able to sue your preparer if he’s done something wrong to injure you. But ultimately, the taxes are yours.
P: And having someone else do it is not a software package, right?
R: Right. That works with Turbo Tax, right?
J: No. Turbo Tax doesn’t count, doesn’t get you out of the penalties. You cannot use a software to say, “A professional preparer prepared my return. Please get me out of the substantial understatement penalty,” for instance.
R: Now, a lot of people don’t realize if you file your own return and you fill it out all nice and neat on a computer, you’re becoming an audit risk because you’re a target now. They know that Turbo Tax, you probably used something like Turbo Tax. We’ve talked about on this show, has some errors in it.
So if you’re going to fill out your own return, at least do it by hand. Give yourself a chance to not be caught in that little trap.
J: I always recommend that people just go see – if you do your return yourself, at least have a preparer do it once every three years just to look over your shoulder, just to make sure you’re doing things right, make sure you’re caught up on all the tax laws.
R: We actually recommend that they have a professional prepare it once every three years as well as the two years in between.
[laughter]
J: There you go.
P: I understand that. When we’re looking at some of these things that have to do with married or unmarried. Now there’s a new designation out there – domestic partnership.
J: Domestic partner. Domestic partner, hopefully, if you have someone in the room that doesn’t need to hear this, you may excuse them. But we’re talking about domestic partners which is another word for same-sex marriages. Our state of Texas doesn’t have, doesn’t recognize same-sex marriages or domestic partners. Many other states do.
R: Some other states.
J: Some other states; not many.
P: California is a big one.
J: California is a big one. The Defensive Marriage Act kind of butted heads with California’s marriage law, same-sex marriage law. So what California did is they said, “Okay, we’re going to have something called Domestic Limited Partners.”
Domestic Limited Partners are not married; they just have all the same property rights as married people.
P: Until they get to Texas.
R: Then they can’t get a divorce because Texas doesn’t recognize homosexual marriage; therefore, how do you get a divorce when the state doesn’t even recognize that you’re married? And some people think that’s horribly unfair on the part of Texas, but the fact is when they went off to California and got married, they really agreed to live under California law and then they come back here and want to play by those rules under Texas law and the world doesn’t work that way.
J: Right. The big issue you’re saying to yourself is, “I’m not a same-sex person; why am I interested in this topic?” Basically, I want to tell people out there, even same-sex couples, these people that are registered under the domestic partnership law, if I have that couple in my office, I’m going to be able to save them lots of taxes because they act like a married person, they share a bank account, assets; all that other stuff like a married person. But the tax laws regarding related parties doesn’t apply to that couple.
Now I should also mention that California’s Domestic Partnership Law, it allows for opposite sex partners, as long as one of them is eligible for Social Security. So it’s possible, and this is kind of in a crazy world, that people can get not married in California, they’re opposite sex couples; they could be not married in California, as long as one of them is old enough, and still avoid all of these related party rules which every time I look around, when we’re doing tax planning, there’s always a related party rule to keep you from saving taxes, like I can’t sell a property to my wife and create a tax loss. That’s a big one.
P: Isn’t that amazing? Well, I know that there’s so much to that, and we’ll get back to this in just a second. The one thing I want to do is encourage you to connect to Jeff Pickering and Rex Hogue. Jeff’s at (978) 378-5200 up in Plano in between Legacy and Spring Creek on Preston. Right?
J: Yeah. Between Legacy and Spring Creek on Preston Road, 6533.
P: And Rex, you guys are out in Frisco, but you’re just north of 121, right?
J: And just south of Gaylord Parkway.
P: Very good. The best way to connect, and I would even get the special report on family estate planning, is go to BigTexLaw.com. Go to the ‘Contact Us,’ fill out the form and ask for it. It’s a great report. If you have questions, you can call in (214) 787-1570. We’ll be right back.
[commercial]
P: Welcome back to Tax Talk. We have had a great show today. This has been all about June weddings, getting married to the right person. Well, at least, making sure that you know what’s the rest of the story.
J: Sure. As I said, you’re getting married to that person’s tax problems as well as the rest of them.
P: And I know that you brought up several points as far as how to protect yourself from the bad boy, so to speak; the history. That was really good. One of the things I do want to mention is that we transcribe these shows, and they end up on all of our sites one way or the other. I know you guys put the recording, Jeff and Rex, you guys put everything and the transcription. At DoerSuccess, we do as well. Always great information if you ever want to follow up.
One of the things I had just noticed is we hadn’t given out Rex’s information as far as his phone number. It’s (972) 309-0104. You can find that also at BigTexLaw.com. They’re offering the free family estate planning guide this week, or special report. You want to make sure you get it. It will help you a ton to make sure that you’re setting up your estate, from the beginning, the right way. Wouldn’t you agree, Rex?
R: Absolutely. If you do call in, the easier way is through our website. But if you do call in, leave a message in Marilyn’s box, not mine; Marilyn’s box.
P: Very good. Well, I know you wanted to cover a couple more points on this family estate guide. So go ahead.
R: Yeah. One of the things that we talk about in this report is probate. A lot of people, particularly there are some estate planning attorneys out there who talk about probate like it’s a huge problem.
The truth is probate is a solution to the problem. The problem is we need a signature from somebody, and we can’t get it.
P: What’s the definition of probate?
R: Well, probate can be defined as the court supervised transfer of assets for somebody who has died, or the court supervised management of assets for somebody who has become incapacitated. Our definition is it’s a lawsuit you file against yourself at your own expense to protect your disgruntled heirs and your creditors.
But that doesn’t mean that probate is always bad. There are times that you do need it, and I’m not one saying that it’s really a problem; it’s just not always a good solution to the problem.
One of the things that we talk about in the report is right of survivorship. A lot of people don’t realize the significance of having right of survivorship. It is one of things that I honestly think anybody who actually knows what they’re doing would never use it.
P: Why do you say that? Because if you buy a mutual fund or something like that, “Do you want joint tenant with right of survivorship?”
R: They don’t realize the danger, but it creates tax problems, it’s a great way to disinherit your kids. You can even disinherit yourself with that kind of property if you own it with another person.
If you own it with your spouse and you have children from prior marriages, you may be setting up World War III between your spouse and your children from prior marriages.
If you put your child’s name on and your child has a debt, or they go through a divorce, or they’re involved in a car accident where there’s a lawsuit or their business goes bad, you could lose your property and that’s where we talk about you can disinherit yourself.
But worse, what if you have, let’s say four kids, you have the oldest child’s name on as the right of survivorship, you die, it goes to the older child.
P: And no one else gets anything?
R: That’s right. They don’t get anything. So it can be a real nightmare. The thing that people are trying to accomplish with right of survivorship, there’s a far better way to do it that doesn’t create tax problems, it doesn’t start World War III, it doesn’t cause you to put your own property at risk. There’s just a lot better ways to do that.
P: Well, one of the things that I think a lot of people might be concerned about is the cost in all of those things. It doesn’t cost anything to sit down with you guys and begin the process, does it?
R: That’s exactly right. Our report today, which technically is called “What Everyone Should Know About Effective Planning for Incapacity and Death.” $69 report.
We outline some of these problems and one of the things that we ask in there, people will say, “Can I afford to do quality estate planning?” And I tell people that’s the wrong question. The real question is, “Can you afford not to? Can your family afford for you not to do it?”
Another thing that we talk about in the report is what we call planning by the box; beneficiary designations on life insurance, retirement plans, pay-on-death accounts, transfer-on-death accounts also create all kind of potential problems.
Now, you have to use those sometimes because that’s just how some assets are passed, but it’s important that you coordinate them.
Another thing that we talk about is challenges with wills. Sometimes, the ‘I love you will’ – “I give everything to my spouse is really, “I don’t love you, but this is the appearance of loving you,” because it can create tax problems, World War III between the kids, will sometimes, if there’s a dispute in the family, having a will is almost guaranteed to cause it to erupt after death.
Another thing that we talk about in here is the do-it-yourself kit, which we like to call the Do it yourself brain surgery kit. I’ve been calling it that for years. Here, we talked about this just within the last couple of weeks. Legal Zoom now offers a way to do that. Legal Zoom is being sued because it turned out to be the Do it yourself brain surgery kit.
So in our report, we talk about those issues and the good news, folks, is we do also talk about a solution. I’d love to get to it, but we actually have a fascinating thing that Jeff brought up that I want us to get back to.
Jeff, we were talking about what happens when two people live together and they’re not married. And let’s say they have the business together, and then ultimately that business grows; it becomes a huge success, but they discover that their being together is not such a great success.
J: Right. So what would happen is if they were not married, what they would have is a taxable event on them separating. If they were married, they would pay zero taxes because it would all be a transfer of the marital estate.
R: What a nightmare. And that’s not the only problem. I always tell people, today it’s a lot more common for people to live together and not be married, but once again, I say if people really understood it, they would never do it. Legally, it’s a nightmare; they’re not protected, they don’t know what liabilities they have, they don’t know what kind of tax issues they’re facing.
P: That is so critical. Like I say, get the report. Get with Jeff and Rex this next week. I would just encourage you to do that. To connect with Jeff Pickering, it’s (972) 378-5200. And someone’s there, right?
J: Someone is there right now if you’d like to call right now.
P: And then with Big Tex Law or Bolinger & Hogue, it’s real easy. Go to their website, BigTexLaw.com, connect through the ‘Contact Us’ and fill out the form. If you want to, just call them (972) 309-0104. They’re just up there in Frisco at 2595 Dallas Parkway.
Local guys. Both of these folks will sit down with you for 45 minutes to make sure you get where you want to go with your finances, with your taxes because in our book, the more you know, the more you get to keep. We’ll talk to you next week here on Tax Talk Sundays at noon. We’ll talk soon. Thanks, again.

At our seminars on social media, we present an overview of how to get started in social media. We concentrate on LinkedIn, Twitter, Facebook, YouTube and Blogging as these are popular, fast-growth platforms that look like they are here to stay.

Social media takes time. Beginners spend approximately 2 hours a week. After a few months, the amount of time spent jumps to about 10 hours a week. Those who actively practice social media marketing, commit 20 hours a week or more to keeping up with their social media activities. As with any initiative before you start, make sure you can devote the time and energy needed to have a consistent presence. Starting small with steady growth is preferable to a big splash then fizzling out.

Many people are struggling with an effective social media strategy and evaluating the social media return-on-investment. There are some who claim you can make money with social media, but quantifying the revenue has been difficult. For most, social media is a model for positive promotion, reputation monitoring and networking. Remember, social media is an extension of the more traditional forms of networking. So approach your social media communications with the same integrity and etiquette that you would use in face-to-face exchanges.

LinkedIn – A business-oriented social media site used for networking. You can create your personal profile and make a company page. You approve people that want to link to you and send invitations to others to link. Once linked, you get notification on posts, groups, updates and other details about your connections. LinkedIn is powerful for connecting to business professionals, researching companies and participating in industry and topical groups. You can send your Facebook, Twitter, Blog and other posts directly to your LinkedIn page

Facebook – Originally used as a social networking site for college students, Facebook has gained acceptance and influence for all ages. On Facebook, it is easy to post pictures, videos and personal information. Users connect by posting information on walls. You have to accept invitations from friends and choose what information to share. Facebook accounts are created by an individual, but you can make a company page linked to your personal account to promote your company. Use Facebook ads to promote your company by designing an ad and choosing the demographics that will view the ads. Ads can be pay-per-impression or pay-per-click. The fasting growing Facebook demographic is women over 55 years of age.

Twitter – A social networking and microblogging service that enables its users to send and read messages known as tweets. Tweets are text-bases posts of up to 140 characters displayed on the author’s profile page and delivered to the author’s subscribers who are known as followers. Find followers that are interested in your industry, products or services. Follow those who tweet information of interest or value. Use tweets to drive followers to your blog or other social media sites. Send tweets on a variety of topics, but don’t just tweet advertisements or your followers will dwindle.

YouTube – A video-sharing website on which users can upload, share, and view videos. Most of the content on YouTube has been uploaded by individuals but some media corporations offer content. Users can watch the videos and registered users are permitted to upload an unlimited number of videos. Use YouTube to upload video blogs, interview, tutorials and presentation to name a few. YouTube content can be used on your website or blog to provide information through video. Some markets prefer video and recording demonstrations, instructions and interviews can be a powerful addition to the printed word. Photos can be uploaded to YouTube, set to music and made into a video with captions. On your YouTube account you can monitor how many views each video has received and allow viewers to leave comments.

Blogging – Blog comes from the term web log. A business blog is a website with regular entries of information, commentary, and events. Blogs can be maintained by a single individual or group. There are many group blogs on broad topics of interest Blogs are mainly text, but often add graphics, music or video for meaning and content. Entries are commonly displayed in reverse-chronological order. Most blogs allow readers to leave comments in an interactive format, but it is important that comments should be reviewed before being posted to your business blog. Blogs should be professional and well written. Your posts should be used to establish your expertise in an industry or on a topic. Use other social media sites to drive users to your blog where you can explore topics more deeply. Microblogging is another type of blogging, featuring very short posts.

Want to try social media, but don’t know where to start?

Try LinkedIn first. It’s easy to get started, find connections and add content.
Then try Facebook. It’s a bit more complicated, but worth the effort. Once you get your personal page and some friends, make a company page and suggest it to your friends.
Now you’re ready for Twitter. Set up your account and tweet once or twice a day. Remember to make your tweets interesting and minimize advertisement.
Now start blogging! Use the other sites to drive traffic to your blog. Create content that can also be used on your social media sites, web pages and newsletters.

Patrick: Welcome to Financial Fortress Radio. This is Pat Dougher. So thankful you’re here today. We’ve got a great show for you and I want to get right into it. Richard Jordan. Richard, what is going on in Washington this week in New York? What’s been happening? Because I’ve seen a lot of things.
Richard: Well we’ve had quite a challenge. The market took a big hit on Friday because the employment report came out and it turns out that 90% of the jobs that were created were census workers. Of course, that’s – what, a 90-day job? Maybe it will last the rest of the summer and those people are unemployed again. So 411,000 out of the 430,000 jobs were census workers. Does that sound like an awesome recovery to you or what?
Patrick: [Laughs] I would think that’s what I’d call underemployment.
Richard: Well, we’re looking to Washington for guidance of course and we’re just not getting it and, as a result, we’re just seeing a lot of turmoil in the markets and expect a lot more turmoil to come. The recovery plan is still going slowly.
So, we’re going to talk today about also what happened in New York. We had a little testimony the day before from Warren Buffet, and Warren pretty much echoed what I said last week; that we are in the middle of a bond-industry bubble. And according to Warren Buffet, I think you would probably consider him a pretty good investor, wouldn’t you?
Patrick: Bright guy. The last time I checked, he ran a fund worth several billion dollars.
Richard: Yeah, probably hundreds of billions. But anyway, Warren testified to the US Government Inquiry Commission on the financial crisis. He said that municipal bonds are expected to go down and there are going to be record defaults. It’s primarily due to three reasons.
Overly generous retirement and health benefits promised to the baby boomers who represent over 40 – 50% of the government workforce, and all are retiring in the next 5 years. We see the same thing in the Post Office except the number is over 60%. Property tax collections are down 15 – 50% in all cities and states, and sales taxes are down 10 – 50%.
So, of course, Warren loves to testify about what he’s already done once he’s already done it. He dramatically reduced his muni-bond portfolio early this year because of the record defaults that are expected.
We’ve been talking about this also since the beginning of the year and our clients are well aware of it. So while the yields look attractive on muni’s right now, the record defaults means you are taking a huge risk buying muni’s right now, just like the junk bonds in the 1980s. Can you say Michael Milken?
Patrick: Well, for those of you that know history, that would be one to remember, because he was the junk-bond king.
Richard: Yes, he was. And he went to jail for it.
Patrick: Well, good riddance at that point but, because I know he took a lot of people for a really rough ride at that time and the thing that I wonder, who they’re going to hang out to dry in this new muni junk bond debacle.
Richard: Well, of course, the same ratings agencies were involved in rating these muni’s as the ones that rated the sub-prime mortgage bonds.
Patrick: That’s encouraging.
Richard: Yes and Congress is looking at filing not just fraud charges, but possibly criminal charges against the bond-rating agencies in New York and I’m not mentioning any names, like S&P or Moody’s, but you can read about it yourself.
Patrick: That’s a really huge thing. A lot of people do not understand how big that is. But, if those things start to happen, like if we look at California or Florida, which are probably two of the biggest states that are being affected immediately by that, right?
Richard: That’s right.
Patrick: If those things start to collapse, what are we going to see or what are they going to see as some of the by-products of that?
Richard: Well, we’re going to see huge cuts in services. We’re going to see a lot of road projects come to a halt. Of course, your friendly bond broker is going to collect his commissions up front so he’s got no requirement to disclose this risk to you because they have no fiduciary duty to you.
We’re going to see a lot of senior citizens that have poured their money into muni’s and corporate bonds in the last three years, out of fear of the stock market, lose their life savings in this sector.
I looked at a portfolio just a few weeks ago that was more than 50% muni’s and this guy was in a leveraged-bond fund. Can you say horrible idea?
Patrick: Well, no kidding. But, even beyond that, I mean the people that typically invest in muni’s are the ones who want to take the highest, or will get the greatest benefit, from the tax-free interest, correct?
Richard: Or they just don’t like paying taxes.
Patrick: Well, true, but in the sense that…
Richard: They’ve got something against the current administration. I don’t know what that might be, but some of the people that listen to this station might have something against paying taxes to the current administration considering what their plan is.
Patrick: Well, I’m just seeing that if those people have large holdings and then these things start to go through the eye of the needle, all it will take is one state beginning to go have defaults for it to have a ripple effect all across the nation, won’t it?
Richard: Yes, and the key problem is that these bond-rating agencies get paid by the very people that ask them to rate the bonds, so there is an inherent conflict of interest. Congress has not dealt with this in the so-called new financial regulations that they have passed in the House. They still are a long ways away from protecting the consumer. The only way you can get protection is you need to hire yourself someone that has a fiduciary duty to you.
Now, that would not be a broker or an insurance salesman. That would have to be a Registered Investment Advisor who is required to act as your fiduciary and trusted advisor – and that’s what we are. We’re in that top 5% that are only registered advisors. We don’t carry the extra licenses so that we can collect commissions on your stocks, bonds, mutual funds and variable annuities.
If we put you in one of those products, it’s because we are going to win together. It’s not because we want to lose, or we don’t care about you. The broker is driven by commissions first and that’s the inherent flaw in the system, just like the bond-rating agencies are driven by getting their fees paid.
If somebody tosses them a 6-inch thick document that explains through some complicated mathematical gyration that somehow sub-prime mortgage bonds are a great investment and should be rated triple-A, you get the kind of financial meltdown that we had over the last three years and we’re still paying for it.
Patrick: That’s right.
Richard: And Europe’s paying for it now.
Patrick: Well, I know that’s right. I know you have a workshop coming up?
Richard: We do.
Patrick: When is that scheduled for now?
Richard: We’ll be at the Master Grill Steakhouse at Firewheel Mall in the Richardson Garland area. If you don’t know where Firewheel Mall is, it’s right at the end of the George Bush Turnpike, just east of Central Expressway a couple of miles, and you’ll find us there at 6:30 p.m. on Wednesday, June 16th.
Patrick: Very good. And they should call and register.
Richard: Yes. Simply call (972) 325-1700 and you will hear more facts about how you can do a better job of investing, lower your costs, and get higher returns without worrying about the conflicts of interest that are inherent in our financial services industry.
Patrick: Well, I agree. The last week, we had that workshop out in Timarron. It was great. There was a good crowd, great questions afterwards and it was all just information that would help somebody understand exactly where they are and what they need to begin positioning themselves to take advantage of the tax tsunami that is coming and other things that are changing.
One thing I would love to encourage is if you’re listening to the show and you have a question for Richard, it doesn’t have to be on the topic we’re on. If we’re talking about financial planning and if you’re talking about questions that you just have, if you had the opportunity to ask a financial planner, a Registered Investment Advisor, or someone in that financial field a question, call in. (972) 299-KSKY (5759) or 866-660-5759, and ask Richard a question. So, with that, I know that you wanted to get back to more about bonds.
Richard: Yeah. We’ve got, in general, a bond-industry bubble. The last three years, we’ve had record amounts pour into it historically compared to any other period in history. The interest rates because of that have dropped to extremely low yields, low interest rates, and this oversupply of bonds is going to be a problem when people try to get out of them fast because the market value of them is going to be dropping quickly when inflation finally hits.
Now, it’s being held down artificially by the fed keeping the overnight-funds rate low, but that’s not going to last much past the election this year. You need to start thinking about getting out of bonds before the professionals do, and the professionals work 6 –12 months in advance. They are going to be all out by the end of this year. So you need to start thinking about it. It’s only six months away.
The average yield on five-year treasuries is only 1.9% right now; the lowest rate in the last 25 years. And the average rate in the last three years on that product is only 2.28. So while US treasuries want to look safe, just imagine if they just jump up to their last 10-year historical average of 3.48, the market value of your 1.9 bond will mean a 44% loss if you have to sell one of those. You’ll lose 44% of the face value. Every $10,000 you’ve got will be worth $5,600. Does that sound like a place you want to have your money put?
Patrick: I thought these were conservative investments, too.
Richard: Well yeah. But, you still have to consider that when inflation hits, 1.9% is nothing compared to the historical averages we’ve had on inflation. You will lose your purchasing power and when you have to sell these things in an emergency, you’re only going to get the market value. Now you know why the Chinese and Japanese have cut way back on buying treasury bonds.
Patrick: Yeah, well, one of the last things I want to do is make sure that people know they can register for your upcoming workshop. What’s the information on that?
Richard: June 16th, Wednesday, at the Master Grill Steakhouse at Firewheel Mall, (972)325-1700.
Patrick: (972) 325-1700, and there’s no salesman on that line, right?
Richard: No salesman.
Patrick: All they are going to get is they are going to be able to leave their information. You’ll send them a confirmation.
Richard: Correct.
Patrick: And then they’ll be able to attend the workshop for free and typically there’s a meal afterwards, but the real benefit is what you can get out of this great workshop. We’ll be right back with more of Financial Fortress Radio.
[commercial].
Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher, Richard Jordan. We have a great show going. We’ve been talking about how Warren Buffet was listening to your advice – well, maybe not that. He was just – it seemed that he was echoing everything we talked about last week when we were talking about the bonds and the future debacle in the municipal arena and several other things.
I know we’d mentioned the inflation or the treasury-inflation protected securities. Tell us a little bit more about those and what’s going on and why investors that have money in those may be in for a really, really rough ride.
Richard: Well, we talked last week about TIPS. The latest rate they are offering is 0.5%, as a base rate, and the 12-month inflation rate that they’ve calculated with their special little method, that is the only place that inflation occurs is somewhere in Congress, I guess, I don’t know; doesn’t make any sense to me. Can you believe inflation was only 0.9% in the last 12 months?
So, the TIPS are paying a combined 1.4% compared to the treasuries paying 1.9. So, you’ve got a 5-year bond that’s supposed to be inflation protected, but the problem is you’ve got $3 trillion in cash still sitting on the sidelines, you’ve got high unemployment, we now have a substantial risk of deflation.
So, if prices continue to drop on things people are buying – and Uncle Sam measures that with this special index just for the treasury-inflation protected securities. It’s not the same as the Consumer Price Index; it’s another way they use to control the amount of returns they are going to pay investors.
TIPS were a great idea 10-years ago when they came out, but they have slowly found a way to make them a non-attractive investment. So, it can actually reduce the principal on your bond. Can you imagine that?
Patrick: No, I really can’t. But, the other thing I’m curious about is if deflation occurs, what are some of the things that will be driving deflation so that people can say, “Yep; we’re seeing it.”
Richard: Well, it’s just falling prices. When prices start falling, then employers are going to have the ability to drop wages and that’s going to drop our quality of life because you know how long it takes to get employers to agree to bring wages back up.
Patrick: Right.
Richard: It’s sort of like when you hear that crude oil has dropped at the wholesale level last week. Why does it take two weeks for it to drop at the gas pump? But if it goes up over the weekend, the crude oil, why is it that the retail gas prices go up with it?
Patrick: Oh, in fac,t it’s so fast at that point.
Richard: Isn’t it interesting how that happens?
Patrick: Oh yeah.
Richard: There’s some collusion in the oil industry there. So, Uncle Sam controls what he wants to pay on these TIPS and they were a great investment 10years ago, not very good right now. So, if you’re getting advice to start buying a lot of bonds, or if you’ve been buying a lot of bonds, any kinds of bonds, you may want to rethink this strategy.
There’s been way too much money poured into bonds and bond funds and when we see these rates change they are going to change rapidly after this November election. There is no reason for the fed to hold rates down after that, unless we’ve got deflation and, if that happens, it will be just like Japan. We could go six, eight, ten years with a deflationary spiral and that will cause long-term unemployment, long-term loss of value in your housing, long-term value loss in everything.
Even the stuff you’re trying to peddle on eBay and Craigslist is going to drop like a rock, so cash is going to be king either way and the only opportunity really you’ve got left is in the market. But, you’ve got to carefully select what you’re doing.
Now, why are you being steered to buy these kinds of products? Because you’ve got a product focus in the brokerage industry. They are only concerned about pushing the items that make the most commissions for them and, right now, if they can’t convince you to get into the stock market they’re going to try to get you into the bond funds because bond funds, just like stock funds, any mutual funds have high interest, high commission rates.
So, when I look at mutual funds and bond funds on somebody’s brokerage statement, I often, even with a sophisticated investor, am told, but I’m only paying 1% for these because I’m a so-called elite investor with this top-ten brokerage outfit. I’ve got a lot of money here. I’ve got a million here. I’ve got three-quarters of a million; I’ve got $2 million, whatever. And they treat me with kid gloves. They love me.
Well, I run from an independent outfit in analysis of the funds that they are holding, and typically what I find is that they are paying two, three, even four times as much in undisclosed fees as they are in disclosed fees. Isn’t that interesting, Pat?
Patrick: Well, how can you even find out what undisclosed fees are, or can you?
Richard: Well, again, this is not something the industry wants to share. This is something that requires some investigation and some analysis. And if you want to go through a lot of prospectuses and read them over carefully and if you know what all the vague terminology means, and then you want to go back and analyze those costs in previous years, you can arrive at these figures, just like I can. It’s a lot of work.
Patrick: So, what can we do about it?
Richard: You could hire yourself a Registered Investment Advisor, like us, that doesn’t carry the brokerage licenses that do not have the conflict of interest that your stockbroker and your insurance sales guy has.
Patrick: Very good. So, you have a workshop coming up. Tell us about that.
Richard: We’ll be at the Master Grill Steakhouse at the Firewheel Mall and that will be on June 16th, on Wednesday, at 6:30 p.m.
Patrick: Richard, who should be really attending those?
Richard: Anybody that’s got a serious amount of money invested and would like to get away from these losing cycles where they keep losing and their brokers keep winning. Have you noticed their broker is not suffering?
Patrick: Well, that’s kind of indicative of the whole scenario though. A broker is a salesperson.
Richard: Absolutely.
Patrick: And I know that you spend a fair amount of your week just doing research, don’t you?
Richard: Yes. I probably spend at least half of my week in research every week, and some weeks it’s more than that. I limit the amount of time I spend face-to-face with clients for that reason so I can do the best possible job for my clients.
The typical profile in the industry is they spend 97% of their time either making cold calls, setting up appointments, in meetings with clients, trying to sell the stock pick of the week or the mutual fund of the month and that decision, that recommendation is driven by the highest possible commission they can make for themselves.
Patrick: So, if somebody wanted to come to the workshop, they would just…
Richard: Dial (972) 325-1700 and leave your name and address. We’ll get a confirmation letter over to you. There is no obligation whatsoever. I don’t know if you’ve ever been to a Master Grill, but it sure is scary. It’s a Brazilian steakhouse where they cook the meat on the spits, and they bring it to the table and they slice off what you want, so it’s really quite a feast and I think you would enjoy it if you’re just looking for some food, but we’re really looking to attract people that want to learn something new.
Patrick: Right. So that’s (972) 325-1700. Now, if someone wanted to ask you a question, Richard, could they call you direct?
Richard: Sure. I’m pretty busy during the day with the market and all the turmoil lately, so I’d recommend they call after 3:00, but if they call my desk and leave a voicemail, I’ll try to get back to them the same day after 3:00, (972) 758-4484.
Patrick: 972-758-4484. And that will get them to your direct line?
Richard: That goes direct to my trading desk and I man that as much as I can during the day, but I don’t pick up the phone when I’m busy. So, like I said, before 3:00, when the market’s open, I probably won’t pick up the phone unless I recognize your name.
Patrick: Very good. Well, I know that if folks want to ask you a question now they can call in at (866) 660-5759. Again, one last time here before the break, Richard, where’s the workshop going to be?
Richard: Master Grill Steakhouse, Firewheel Mall. It’s at the end of the George Bush Turnpike, just east of Central Expressway, in the Richardson Garland area.
Patrick: And that will be on?
Richard: June 16th. That’s a Wednesday, at 6:30 p.m.
Patrick: So, it will be 6:30 – 7:30. Your time to share with them the insights that you teach that you help people with and then after that, there will be nice a dinner.
Richard: An educational workshop followed by a gourmet dinner, absolutely.
Patrick: And I’m really thankful it’s not a sales pitch, so you’ll really enjoy that if you come.
Richard: Nothing will be sold.
Patrick: To register, it’s (972) 325-1700. This has been Financial Fortress Radio and we’ve got more to come, right after this.
[commercial]
Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher, Richard Jordan. We’ve got a great show going. We’ve been talking about the bond market and how it really is set up for going through the eye of the needle next year. It was neat to hear Warren Buffet echo last week’s show, earlier this week, when he testified in front of Congress over some of the things that are going on with the municipal industry, and that’s good and bad.
It’s neat to be on the forefront; it’s kind of sad for those that are still investing in muni’s, and the future of muni’s. And we’ve also been talking about the undisclosed fees. That’s something that a lot of people don’t have a clue about their investments and how much of their investments are actually being taken by the financial institutions that are controlling their assets, so to speak. Wouldn’t you agree?
Richard: It is just astounding. Occasionally, I get someone in my office that keeps extraordinarily good records. I had a lady, whose husband died about 15 years ago, in my office last week and she showed me the returns she’s had over the last 15 years, and the market has probably only averaged about 5% over the last 15 years because, as you know, in the last ten years, it peaked at 14,000 on the Dow and, right now, it’s running right at about 11. So, it’s down a good 25%.
So, a lot of people experienced losses in the last ten years, but the average, because of the run up of the tax and a lot of other things in the bubble that occurred in the late 90s meant that they had some astounding returns then. Most people still averaged about a 5% rate of return in the last 15 years gross… gross return.
In other words, that’s the return that the broker told them they were making. That’s the return the mutual fund told them they were making. That’s the return they saw published in the magazines, and that’s what Morningstar said they were making. Bu,t unless they had somebody analyze those funds for them carefully, what they would have found is that the average cost for a fund are about 8% a year.
Patrick: 8% a year?
Richard: 8%.
Patrick: That doesn’t even seem realistic.
Richard: Because commissions average over five and then you’ve got disclosed fees usually running around one, and then you’ve got undisclosed fees running another 2 – 4%. So, no broker worth his salt wants to keep you in a fund more than a year. He wants to earn another commission every year on you and so the average amount of time he’s going to leave you in a fund is typically 12 –18 month
Patrick: I remember hearing stories even recently where somebody had half a million dollars to invest and they were in about 45 funds and I just kind of cringed because I knew what the broker had done.
Richard: Absolutely.
Patrick: He had actually kept the investments below the break points for commissions, so that he would get the most money out of the deal.
Richard: Yeah. Just blatant misuse of their power. In that case, had he put that person in funds a $100,000 at a chunk, they would have paid the lowest possible commission instead by averaging 10 or 15 or 20,000 in each fund, the highest possible commission, the maximum commission is 8.5%. That kind of account was probably paying closer to 7 or 8% on the average, and that’s what was happening with this poor lady.
She started out with a $1.5 million 15 years ago. She’s worth about 800,000 right now and she’s not taking anything out of it to live on. And she’s reinvesting all her dividends. So, you tell me, where did the money go?
Patrick: Really? That’s scary. Well, I know that if somebody had a question to call in to talk to you, they could just dial (866) 660-5759 if you want to get on during the show. If not, if you want to call and register for your next workshop, you’ve got a workshop coming up.
Richard: We do.
Patrick: June 16th?
Richard: I believe that’s right, on Wednesday at the Master Grill in Firewheel Mall. It’s in the Richardson Garland area at the end of the George Bush Turnpike. It’s a great mall. If you haven’t been there yet, you need to take a look at it. It’s just a block north of the AMC Theatre there.
This is one of those Brazilian steakhouses where they bring the meat to the table, about a dozen different varieties, after they cook it on a spit and slice off what you like and if you’re a vegetarian, an awesome salad bar.
Patrick: Yeah, I almost couldn’t come because I was on this no-meat diet for the next 90 days so that’s great. Now, to register, it’s real simple.
Richard: (972) 325-1700. Leave your name, address and phone number and we’ll get a confirmation letter out to you. No salesman will call. It’s a simple matter of registering. The seminar is strictly informational. We’re not pushing products.
In fact, that is the big difference between a broker and a Registered Investment Advisor. We’re looking for solutions for you that meet your goals and needs, and we care about those goals because we’re a fiduciary. We’re required to act as a fiduciary.
Furthermore, even if we weren’t, the golden rule is part of our mission statement. That’s just the way I feel about the business, and that’s the way we run the business.
Patrick: Well, weren’t there even some material this week that you saw in, really, about this fiduciary equation or fiduciary responsibility.
Richard: Yes. We’re 40 years now in the financial planning industry, and one of the trade magazines last month ran an article. This article was written by a gentleman that runs an educational business for brokers. Basically, what he does is he tries to teach brokers how to act like they care, to act like they are a fiduciary because we know they’re not.
He talks specifically in this article, about the brokers always claiming they want to do the best things for clients and provide impartial advice just like a Registered Investment Adviser does. And since they want to, that’s why there’s no need for Congress to regulate them in this area. And this guy, who actually teaches them how to act like they care, says, “If it’s true, then someone please explain to me why so many of our industry publications are filled with advice on how to avoid being too salesy and how to avoid pushing products.”
And why do they want to push products? Because there’s commissions tied to those products. In a survey that was done by another outfit that also does education he quotes among all the major brokerage firms, and what the result was – this is a large company; one of the best known in the industry – was that only 6.6% of the Registered Investment Advisors were true wealth managers.
The rest held brokerage licenses and were operating within the traditional investment generalist model where they value the transactions more than the long-term financial planning, or the financial health or the financial goals of the client. So, 93.4% of the people work this way in the financial services industry. That means you have only one chance in 16 to get it right.
And I know that there are persuasive guys out there in this business. I know that you meet them and they sound like they know what they are talking about, but trust me, they care about themselves first, second and third, the brokerage house fourth, and you’re way down on the list. You’re lucky if you’re on the top ten.
Patrick: Well, and with that in mind, I know that to really get a connection to a Registered Investment Advisor like you, meet him, go listen to your workshop. I would encourage you to do that. I’ve been through it a couple of times; really enjoyed it, found it to be informational intense and non-salesy which is really appreciated and I could tell in the audience. We had a great workshop this last week. Next one’s on June 16th.
Richard: At the Master Grill Steakhouse in the Firewheel Mall.
Patrick: And you’ll start at 6:30?
Richard: 6:30 is the start time. We’ll be done talking at 7:30. You’ll be eating at 7:30. Again, if you’re a vegan, they’ve got a great salad bar. If you’re a carnivore like I am, you won’t believe how much stuff they got there for you.
Patrick: It should be really good. So, just to register, they just dial the (972) 325-1700 and if someone wanted to connect to you directly, they can just call your direct line?
Richard: Absolutely. (972) 758-4484. If you’re worried about asking questions on the air about personal matters feel free to call. I return most calls after 3:00 because the market closes at 3:00.
Patrick: So, that’s (972) 758-4484 is your direct line.
Richard: That’s correct.
Patrick: To register for the workshop, the 16th, (972) 325-1700. There’s no salesman to call. It will just be they’ll leave their name and number, and address and you’ll send them a letter of confirmation. We’re just really thankful for this. We’ve got more to come on Financial Fortress Radio. We’ll be right back.
[commercial]
Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher, Richard Jordan. We’ve had a great show. We’re talking about the bond market and the debacle that’s in front of it, the munis in the scary position that they’re in and even Warren Buffet saying what a mess that they’ve got there.
We’ve also been looking at undisclosed fees. A lot of people don’t even realize how much they’re paying in their investments. One of the things we want to make sure is encourage people to look at the Roth IRA. I know that you’re a big proponent of the Roth IRA. Can you tell us, not only what it is, but why someone would look at it?
Richard: A lot of people come to me and they say, “I don’t want to support this current administration.” I know how they feel.
Patrick: You feel their pain?
Richard: I feel their pain. I felt that way once before, but I’m an analytical guy and I like to look at the numbers. I’d rather give you good financial advise than bad financial advice. What an idea.
So, the key thing you’ve got to look at – there was a report put out by the Independent Tax Foundation in March and what it said was with the amount of deficits that we had already accumulated by January 1st of this year that we would basically have to double our tax rates for a ten-year period in order to pay off the debt that we already have – ten years, double the rates.
So, would you rather pay the rates we’re paying today or would you rather pay twice as much when you take it out on a minimum required distribution table over the next 15 or 20 years? Imagine the pain you’re going to feel if you’re taking that money out and you’re paying 50 or 60% on it, and you could’ve just swallowed and went ahead and make that payment today at 28 or 33%.
So, consider this: you’ve got two years to make the tax payments. You can make 50% next year and 50% the year after that – number one. Number two – you can characterize it as a Roth while we’re at a low point right now. The market is at 11,000 in the DOW and in the next 18 months – or not quite 18 months; it’s now about 16 months – you’ve got until October 17th of 2011 to decide whether to keep that a Roth or whether to flip it back to a traditional IRA.
If the market runs up 30% in the next 16 months, which it’s likely to because we’re still in a long-term bull market – I know it looks bearish this summer – then you’re taxes are going to get paid for by the increase in the stock market.
Wouldn’t that be a wonderful idea to have a fund that is completely tax free that you could take money out of the rest of your life and the rest of all your heirs life, if you plan on leaving it to your heirs anyway.
Patrick: So, for the uneducated investor, so to speak, the people that have not kept up with Roths, the Roth IRA is a new IRA, relatively new IRA, that they’ve come up with where once taxes have been paid on that money, it never has to be taxed again. Is that what I’m hearing?
Richard: It never gets taxed again. All the money that’s in it and the increases that are made in it are not taxed.
Patrick: So, if I had money from a 401K and I wanted to roll it over into a Roth IRA, I’m going to pay the taxes on what’s in the 401K or the IRA.
Richard: The standard IRA – traditional.
Patrick: So, you’re saying I’m going to pay the taxes, but I have two years to pay it.
Richard: You got two years to pay it at no interest. When’s the last time Uncle Sam gave you no interest for two years?
Patrick: Never. IRS, KGB – they’re…big interest. It’s like organized crime; it’s crazy. The point is you pay this 28 – 33%.
Richard: If you’re in a high tax bracket, you could pay that much. If you’ve got a large IRA, you could pay that much. If you’ve got a small one, you’re going to pay a lot less.
The point is, you should sit down and talk about it with somebody that has your best interest at heart, like a Registered Investment Advisor.
Patrick: Well, they could ask you about it, right? You’ll visit with somebody?
Richard: Sure. I’ll do the analysis.
Patrick: You can do the analysis and they could call your desk at (972) 758-4484.
Richard: We’ll schedule a meeting, and we’ll go over your holdings and we’ll decide whether it’s a good idea for you or not.
Patrick: Okay. And I know that if they do decide to roll it, they can actually even sweep it back.
Richard: They can change it back to a traditional IRA or whatever form it’s in right now as long as they do it before October 17th of 2011. So, that’s 16 months out.
So, imagine this. You go to Las Vegas, you roll the dice and you don’t put your bet down until after you see what number comes up. That’s what this is analogous to.
Think about that. If the market goes up, and most bull markets have run between three and four years, half the gain was taken the first year which has already occurred. The other 50% is over the next two years. So the odds are, this market is going to go up another 50 or 60% over the next two years after we get done messing around with this bearish summer and worrying about, “Oh, my God. What’s going to happen in Europe?”
Patrick: The thing that I hear, and a lot of people need to understand, is that if they sit down with you, they schedule an appointment and they sit with you, you don’t even have the licenses to sell a commissionable product, right?
Richard: We don’t carry any of the Series 6 or Series 7 licenses because they create a conflict of interest.
Patrick: They’re what brokers carry.
Richard: The only purpose of carrying those licenses is to collect commissions on stocks, bonds, mutual funds and variable annuities. If I want to make a recommendation to put you in one of those items, I can make that recommendation and we can put you in it, but I will not get paid a commission. So, I don’t have a conflict of interest. I’m only going to recommend that if it’s in your best interest, if it fits your risk profile, it’s still within the amount of risk you want to take, if the likely outcome, the amount of gains you’re likely to make is within your goal standards; it’s high enough to meet your goal standards and that, overall, that your financial plan is going to have a very high likelihood of being achieved. That’s the only reason we would put you in anything is to win together.
Patrick: Right. But, there’s no commission on that stuff?
Richard: No.
Patrick: That’s the thing that a lot of people need to understand is that you really do take the Registered Investment Advisor position and what was defined in the 40s to be exactly where you position yourself, so there is just a fiduciary responsibility that you’re fulfilling. Correct?
Richard: And no conflict of interest with the brokerage licenses. That’s the problem you’ve got is that 15 out of 16 registered advisors also carry the brokerage licenses. It represents a conflict of interest. The SEC allows it. Why do they allow it? Because – and this is never going to change as long as this industry is centered in New York – the guys that run the mutual funds, the guys that run the brokerage houses and the executives of the SEC all go to the same supper clubs, all belong to the same country clubs, their kids all belong to the same schools.
They know each other. It’s a tight, cliquey, little group. It’s kind of like if you know someone in the telecom industry here in Dallas, you may know about a cell phone that’s coming out before the rest of the world knows about it because you know someone in the industry.
It’s the same thing on Wall Street. It’s a tight, cliquey, little deal and it’s never going to change as long as the regulatory people are in New York with the people that are trying to regulate.
Patrick: So, if somebody wanted to connect with you, they could just set up an appointment at (972) 758-4484. Look at their IRAs, analyze it whether it would be worthwhile to go into a Roth. Is that correct?
Richard: That’s correct.
Patrick: Then the next thing, as we’re finishing the show, we want to make sure that you, really, come to one of your workshops.
Richard: Yeah. If you just like to kick the tires and hear me talk in general about several topics – purely educational – we’ll be at the Master Grill Steakhouse in the Firewheel Mall at the end of the George Bush Turnpike just east of Central. That will be on June 16th on a Wednesday night at 6:30 p.m. or Tuesday June 22nd at 6:30 p.m. Just call (972) 325-1700 to register and no salesman will call or answer the phone. Just leave your name and address. We’ll send you a confirmation letter. We look forward to seeing you.
Patrick: It’s (972) 325-1700. Get yourself registered for this event. I’ve been several times myself. I highly recommend it. It’s something that is not a sales pitch. It’s all about giving you good information to help you achieve your goals your way.
Again, this is Pat Dougher, Richard Jordan with Financial Fortress Radio. You can also hear the Financial Fortress on DougherSuccess.com later in the week. Thanks. We’ll talk to you next week. Have a great one.
Richard: Take care.

Patrick: Welcome to another Tax Talk this Sunday. It’s Patrick Dougher. We’ve got Jeff Pickering CPA, Rex Hogue Attorney with Bolinger & Hogue in the North Texas area, and we’re here to answer questions on taxes, and estate planning and things that would really effect, well, how much the government gets.
We believe that the more you know, the more you get to keep. That’s what this show is all about. In fact, one of the things that I want to encourage you to do – we have a show lined up, lots of information that has to do with loopholes in the taxes to the, what I’ll call, tax earthquake out in California that all of us that are married should tap into and learn to bring into our world, as well as some of the things that have to do with IRA Roth conversions and more.
But if you have a question that you would normally ask an accountant or an attorney, a tax attorney, then you really do want to try to call in. You can call in at (214) 787-1580 or if you’re on a Sprint phone, it’s just #KLIF. If you’re outside the area, it’s (800) 583-1570.
The one thing I want to make sure is that if you have a question that you would normally ask an attorney or a CPA, you’ve got the best around me, in my opinion. The reason I say that is I know that Jeff has a Masters in Taxation and Rex has been an attorney for 17 years helping, literally, their clients not have to pay as much to the government and that’s the thing that we’re really trying to emphasize.
I know we’ve got a lot of information to go to, and I want to get with Jeff because there’s a new – all I can think is it’s a new earthquake out in the epicenter of all of that stuff which would be California and couples.
Jeff: That’s right. Before we get to that, let’s do a deadline or two. We have a deadline for the foreign bank accounts, the FBARS. If you’ve got $10,000 or more in a foreign bank account, then you’ve got to file a report saying you have that by June 30th, and that’s a criminal offense if you don’t. It’s not like a speeding ticket; It’s a big deal.
Patrick: I see. I know the other thing we do want to make sure, because we didn’t mention it last week – it was a prerecorded show last week – and that was how thankful we are for the military audience out there.
The fact is that we just went through Memorial Day. I’m so thankful. My son is in the military, so it’s a big deal to me, and I always want to say thanks to those folks. But then also, Rex, you were telling me that today is the celebration of D-Day.
Rex: Anniversary of D-Day.
Patrick: Right, and I shouldn’t say celebration because I know that they said 160,000 troops were involved in that assault and almost 10,000 of them lost their lives.
Rex: Yeah, I think the numbers are actually – there was more people involved and more lost their lives than that, but it was a turning point. It was really the battle that, for certain, sunk Germany if the rest of what was going on hadn’t. That had to happen to, ultimately, get Germany to surrender.
Patrick: I heard that; that it was the turning point and we’re so thankful for all of the military that have committed so much of their life to protecting this country, and we’re thankful.
Rex: That’s right.
Jeff: We have some tax laws that are good for the military. There are some military pay exclusions. There are exclusions for people serving in a combat zone and also extensions for those people. So the military people generally know about that, but I just thought I’d mention it in case anybody’s forgetting.
Patrick: I have a question for you about that. He is from Illinois. That’s where he went into the military. Well, they have a state income tax there and he said, “I want to change my residence to Texas.” Is that something they can easily do?
Jeff: That is a good question. I know there is an exception for military. My dad was also in the military, as yours. When we were overseas, he changed his state to Texas because they don’t have state income tax.
Patrick: That’s right.
Jeff: So I know that when you are overseas, you have to pick a state, but I’m not sure if you are physically present in the state, that they’re going to let you change to Texas.
Patrick: Well, it is kind of funny because he’s out in Fort Benning, and that’s the thing. Go ahead. We’ve got more stuff to cover.
Jeff: For the car buffs who are going to buy a hybrid vehicle, the full credit for the VW and Audi hybrids runs out on June 30th. It’s going to be halfway through.
Patrick: We have a caller on the line. It’s Phillip. He’s got a question on tax rates for insurance. Phillip, go ahead. You’re on the air.
Phillip: My question was for the beneficiaries, for someone who passed away – mother, father – what is normally the tax rate that the beneficiaries get taxed from federal because I’m Texas, so we don’t have a state tax, but I was more worried about the federal.
Rex: Typically, Phillip, life insurance comes income tax free in most cases, so there’s no income tax on it. It does come estate tax free in most cases, so if there is tax on it to be paid, normally it’s going to be the estate tax, but typically no income tax with life insurance.
Phillip: Okay. How much is estate tax?
Rex: Well, estate tax, it’s only if the estate is large enough for that to be applicable. It’s going to be in the 45% range.4
Phillip: Okay. But Texas is about the 45% range?
Rex: It has nothing to do with the state. That’s the federal estate tax.
Phillip: Oh, okay. And my other question was – some guys and I at work were talking. If you win the lottery, how much does the federal government take, and is there a way to get them to take less?
Jeff: That is a question that many tax practitioners like to answer. I had a client that won the lottery. That was way back when it first started. They got, basically, a fourth of the face amount of the lottery after taxes because they took the cash option.
Phillip: So, you get basically a fourth?
Jeff: That’s back then. I think they probably changed it because the interest rates have gone down, which actually increases your after tax take of the lottery proceeds.
Rex: There’s an interesting situation that can come up that typically those payouts are made over a 20-year period. If somebody dies during that 20 period, the IRS, those wonderful people, will accelerate the full amount so that its paid all in one year.
That came up when somebody died prior to receiving their third payment. They died between the first and second year after they won, but they had gotten two payments. The IRS accelerated the payment. Then the family has no choice but to turn around basically and make a deal with the IRS to pay it out as they get it.
Well, the way it worked out for that family, the IRS was going to get the next 16 or 17 payments and they were going to get the very last payment, and part of the next to last payment. The rest went to the IRS because of interest on the income tax generated and the estate tax.
Jeff: For lotto winners, they’ve definitely got to do some planning.
Rex: Before they take the proceeds.
Jeff: Exactly. The planning is all done up ahead. For many of those folks, apparently they lose their money. It’s all spent for a while. So it’s not just income tax planning, but they’ve also got to change the way their appetite for spending is.
Rex: Right. So what you’re saying is basically it’s always better to take the cash option because you’re going to get the money upfront, you’re just going to get taxed.
Jeff: As a CPA, that’s what I would do.
Rex: Just make sure you reserve enough to pay the tax.
Patrick: Thanks Phillip, those are great questions. We’re right here on a break. So We’ll be right back with more of Tax Talk this Sunday.
[commercial]
Patrick: Welcome back to Tax Talk. The more you know, the more you get to keep. When we really talk about that, we’re encouraging you to call in with any tax or estate related question. Anything you would ask of CPA or an attorney, you have the opportunity right now. Jeff Pickering CPA, Masters in Taxation. Rex Hogue, Bolinger & Hogue 17+ years of helping people save money on their estates.
One of the things I always like to do is make sure you guys know these are local guys. Jeff, his office is up at 6433 Preston Rd., Suite 300 in Plano and you can call him (972) 378-5200. Great guys to connect with. I know he does my taxes and I’m so thankful. Really, I was so thankful this year.
And Rex, I know they’re local up in Frisco, Bolinger & Hogue is at 2595 Dallas Parkway in Frisco, Suite 100. You can call them at (972) 309-0104. If you’d like some information about what they do, just leave a message. Jeff, is somebody standing by today?
Jeff: Somebody is there right now if somebody wants to call and make an appointment or if you’re too shy to ask something on the air also, you can call our office and ask it there or email. We’ve got another email address which is Jeff@taxtalkradio.com.
Patrick: Great. And Rex, they can email you?
Rex: Rex@bigtexlaw.com.
Patrick: And also, call in. If you have a question that you would ask a CPA or an attorney, then I would call in today at (214) 787-1570. If you’re outside the DFW area, it’s (800) 583-1570 or #KLIF on your Sprint wireless phone.
Again, we’ve got so much to cover. But, one of the things that our caller just asked about was the lottery; winning the lottery and what are the tax implications. Rex, you had a funny story at the break. I don’t want to miss it. Tell us more.
Rex: Well, I was telling you the estate tax implication. There’s a group of local public defenders here in the Dallas area. Several years ago, they went and bought lottery tickets together and ended up winning.
The Dallas Morning News asked one of them the question, “Being lawyers, did y’all do anything different?” And they said, “Well, of course, yeah. We know better than to take it outright.” The only problem is, they’re criminal defense guys. They don’t know anything about this.
Jeff: Oh yeah, just big dogs barking.
Rex: So, they didn’t do anything different and about a year and a half later, one of them died. By that time, the initial payment and the first year payment had been made. Well, the IRS hit them. The estate tax was 55%, so that took 11 of the 20 payments just on estate tax.
But, they didn’t have that kind of money to go pay the IRS, so they made a deal with the IRS under the Internal Revenue Code you can pay out the estate tax – I believe it’s 6166 is the code section, but I might be wrong about that. They agreed to an interest schedule that took out payments through year 18 – or through year 17. So, just to pay the estate tax, the IRS got 80% of it.
Patrick: Just because they didn’t plan, which is one of the things that we continue to talk about around here is that if you’ve got a business and you’re not doing estate or tax planning, you’re really missing the boat.
You’ve got two excellent resources right here. You can call in at (214) 787-1570 and ask Jeff or Rex a question about those areas. But also, sitting down with you guys is more than worthwhile. Both of you guys offer at least a 45-minute consultation. Is that about right?
Jeff: That’s right. For people who are interested in starting a business or who have businesses, we’ll do the 45 minutes. It’s important to do it upfront; do it right up front. That’s why we give the free time.
Patrick: In fact, isn’t that something that we’re looking at, even in the next few years, that if you’re starting a businesses, you’ll probably be a small business in the first few years. I know that there’s a new Medicare tax that’s coming.
Jeff: Yeah. Not only a Medicare tax, the 3.8%, but I’ll mention it now since you brought it up. On May 28th, the House passed by a vote of 215 to 204, the American Jobs closing Loopholes and Preventing Outsourcing tax Act of 2010.
There’s a provision in there that will tax people who are consultants and have and have an S-corporation. So people who are affected, they’ll get up to a 15% tax on their S-corporation K-1 income if they’re a consultant. If they’re in healthcare – doctors; if they’re an attorney, they’re a lawyer if they’re in performing arts, but a lot of people are in consulting.
This bill has passed the House. It’s now in the Senate. So if you want to complain about it before it gets passed into law, now would be the time to do it. If you’re in Texas, you would call our Senators, Hutchinson and Cornyn, and if you’re listening on the web or in other states, you would call your Senators from those states. But it’s a big tax and they’re just sneaking it in trying to do it fast the way they did with the ObamaCare stuff.
Rex: And that’s going to affect regular people too because a lot of those people employ small numbers of people, relatively speaking, but it’s actually a huge number of people and what they’re going to end up doing to pay for that tax is laying off employees because they can’t afford to keep them.
Patrick: Wow. That’s interesting. Let me go to Robert. We’ve got Robert. He’s got a question about life insurance. Robert, go ahead. You’re on the air.
Robert: Yes. I was curious to get your opinion on this second-to-die life insurance policy. Are you familiar with that?
Rex: I am. What’s the question?
Robert: I just wanted to get your opinion on really what you thought about it and how it’s tied into my parent’s estate and how the minimum required distribution coming out of their – it’s a 401K; their IRA retirement account.
Rex: Okay. What does that have to do with second-to-die insurance?
Robert: Well, I guess, two things. Number one, if that’s the correct way to make the actual premium payment and annual payment, and then also, what you thought about the policy itself.
Rex: Well, second-to-die insurance is very useful when a family needs cash at the end of the surviving spouse’s death, for whatever reason. But, of course, every company is different and generally those plans should be in irrevocable trusts so that the life insurance is outside of the taxable estate, but it’s hard to give any opinion other than that.
We believe in insurance. It’s a great tool. Second-to-die insurance can be a great way to generate some life insurance when you need cash on the surviving spouse’s death. But whether it’s good in a particular case, of course, depends on the facts.
Robert: Okay, very good.
Jeff: Alright. Thanks, Robert.
Patrick: Thank you so much, Robert. Well, I want to go into this case with Legal Zoom.
Rex: Very interesting case. Robert Shapiro is back in the news. Most people know he was OJ Simpson’s lawyer and he started LegalZoom.com with a couple of other people. Personally, I’m glad that Legal Zoom is out there because they create some huge messes that lawyers like us get to fix and charge a lot of money for; a whole lot more to fix their problems than to do it right to begin with.
Jeff: That’s right.
Rex: Of course, I’m being sarcastic there if you don’t know. But what happened is they advertised that they customize documents, but their customizing is limited to putting in customer’s name and identifying personal information which, I don’t call that customizing. I call that filling in the blanks.
They claim that virtually anyone can create a valid legal document and that it’s reviewed for accuracy and reliability which gives clients or customers a false sense of security.
So, somebody sued Legal Zoom because they created a living trust on Legal Zoom. It apparently didn’t do was it was supposed to do, so they had to go hire a real lawyer to fix the mess it created, and now they’re suing Legal Zoom.
I don’t know whether they should be able to sue Legal Zoom because I’m not real familiar with what their ads say. I see Robert Shapiro on TV. I think about something else until the show’s back on.
At any rate, it’s an interesting lawsuit because they’re claiming that they help people practice law without a license. If you go tell your friend to go to LegalZoom.com, you could be held liable for practicing law without a license – not real encouraging.
They claim that they’re a fraudulent business practices. It’s hard to say how this suit is going to come out. It just hit the news and it’s really a big deal. A lot of estate planning attorneys are having a lot of fun with this.
Patrick: Outstanding. Well, I know we’re coming up on a break, so we want to make sure that if you have a question for either Jeff Pickering CPA or Rex Hogue an attorney, then call in at (214) 787-1570. We’ve got so much more of the show to bring you and we’re going to be talking about things that have to do with the new information sharing that the IRS is being involved with and you don’t want to miss that because you’re going to find out that the next big snooper is actually the IRS. We’ll be right back.
[commercial]
Patrick: Welcome back to Tax Talk. We’re having a great show here. We’re talking about ways that you can save money on your taxes and reduce them a bit. One of the things that we always have is Jeff Pickering CPA, Masters in Taxation. Rex Hogue, Bolinger & Hogue BigTexLaw.com – Attorneys in the North Texas area.
One of the things that we want to make sure is that you feel welcome to call in to ask your tax question or an estate tax type of question to these two professionals and that you also know that they’re local guys. A lot of people may not realize it, but Jeff is actually just up in Plano and your crossroads up there are?
Jeff: Legacy and Spring Creek.
Patrick: Legacy and Spring Creek. You can call him. There’s someone standing by right now (972)378-5200. And that’s just at 6533 Preston Road, Suite 300 in Plano. Rex, y’all are just in Frisco, 2595 Dallas Parkway, Frisco, Texas Suite 100. People can call you at (972) 309-0104. We’re going to talk about it later, but you do have a special booklet, right?
Jeff: We do. We have a free report we’re giving away this week on heritage trusts.
Patrick: On the heritage trust. If somebody wanted that, go ahead and just call in. Leave all the information, right?
Jeff: Leave their name, address, and a phone number and, preferably, an email address and put it in Marilyn’s box. Don’t put it in my box. Put it in Marilyn’s box. She’s the one who handles that for us.
Patrick: Great. Before we go to the callers here, I want to make sure that we get back to this new level of insecurity the rest of the world has for information with the IRS because they will bet the next big peeper, so to speak. We’ll go to Robert. Robert, you’re on the air. You have a question?
Robert: Yeah. I just caught the tail end of your discussion about the S-corporation.
Jeff: Yeah, that’s S-corporations that have K-1 income.
Robert: Yeah, I’m sorry. I have an S-corp with K-1 income.
Jeff: Okay. Then you would be the subject of this tax that they’re looking at in the Senate. Tomorrow, they’re getting back from break and they’re going to be looking at this bill that was already passed in the House. Now it’s in the Senate, so if they approve it, then it goes to Joint Committee, and then signed by the President.
Robert: What exactly is it going to tax? Is going to tax all your income?
Jeff: It’s going to tax the income that appears on your K-1. So, take a look at your K-1 and just assume that whatever’s there will be subject to self-employment taxes, which are 15.3%.
Robert: Was that on a pass-through basis?
Jeff: That’s right; the pass-through part of it. It’s a bill that affects you if you’re in consulting, if you’re in healthcare, engineering, law, accounting, lobbying, architecture, performing arts, athletics, investment advice, management, brokerage services.
But, I can tell you, most of my clients who have S-corporations they’re in consulting or healthcare, so it’s going to be a big one for those. It’s going to his the S-corporations that have three or fewer owners. It’s an unfair tax against small businesses is what it is.
Rex: Anti-small business tax.
Jeff: It’s an anti-small business tax. Since we are a Radioactive Talk Radio station, you would want to contact your Senator, because it’s in the Senate, and tell each of them how you feel about this bill.
Robert: So instead of being taxed as ordinary income on the K-1, it will be taxed with self-employment tax.
Jeff: That’s right.
Robert: So, that’s the additional tax there.
Jeff: That’s right, bill.
Robert: That will be pretty big. You’re right.
Jeff: I encourage you, if you’re a consultant or in healthcare, law – any of those other fields; just consulting as everything – I encourage you to contact your Senator and let them know; Senator Hutchinson and Cornyn.
Robert: I will do that. Thank you.
Patrick: Thanks so much, Robert. Go ahead, Linda. You’ve got a question about your husband’s will.
Linda: Yes. My husband and I had a will drawn up in the state of Tennessee. We are now in the state of Texas and we do not know if it is legal in the state of Texas.
Rex: Linda, the chances are good that it is legal. The question is is it going to have the same effect you intended because Texas interprets wills differently than Tennessee does. I would highly recommend that you sit down and talk to a Texas attorney who knows about wills and estate planning because there are some big, big differences between the two states.
Linda: Oh, goodie. [laughs] Okay. Well, thank you very, very much.
Jeff: The main would be the community versus separate property issues. Is that right, Rex?
Rex: That’s one of them, but there’s all kinds of fun things that come up.
Patrick: Very good. Thanks so much, Linda.
L: Alright. Thank you.
Patrick: You bet. Well, we want to go ahead and get Scott. Scott, you’ve got a question on your Roth IRA.
Scott: Yes. My question is this. Seven years ago I was with a corporation and I unexpectedly got let go and I started doing contract work. My financial planner said, “Why don’t you consider starting a Roth 401K.” And I did and I was able to shelter a lot more money than you would under a straight Roth, which I had also.
Now, my question is this. I can’t remember the exact form, but the IRS came out in January that I needed to fill out a 5500. That may not be the exact form number.
Jeff: Yeah. It is a 5500, or a 5500-EZ.
Scott: Okay. Then I got another one probably in the last 30 days that anybody under the plan, which I was the only one, the employee needed to know. Is this something new?
Jeff: No, there’s always been a requirement for 401K plans to file a 5500. Usually, if used an expensive enough broker, they’ll do it for you, but if you’re using a discount guy, then you would want to have an accountant file your 5500-EZ, probably in your case.
Scott: Okay. So, I need to see about him doing it then?
Jeff: Right.
Scott: Okay. That’s it. Thank you so much.
Patrick: Thanks again. Well, that was excellent. If you’ve got a question to ask a CPA or an estate tax attorney, then you need to call into (214) 787-1570 or call them direct. Call Jeff at (972) 378-5200; someone is standing by. Or Rex at (972) 309-0104. If you’re calling in this week, ask about their heritage trust special report.
Rex: Special report on heritage trusts, yes.
Patrick: Special report on heritage trusts. I know that there is a little bit more information. We want to go over this new information sharing that the IRS is involved in.
Jeff: We are informing our listeners, the commissioner of the IRS has outlined some new information reporting tools. New added to their arsenal are some information. Basically payment by credit cards; those are going to be added to the IRS database.
So, payments by credit card, all those people. We talked about PayPal and the Internet people getting money on the Internet. Credit cards are going to be there, basis reporting. So, your stock cost. Before, you were kind of just coming up with a number. Now, they’re going to have the number because the brokerage companies are going to be required to give the stock basis.
Payments to corporations – that’s a new thing; part of ObamaCare. So, the 1099s, there’s going to be a huge, incredible amount of paperwork of people passing back and forth 1099s to corporations because they used to be exempt from this.
The IRS already does some information sharing. They share information with 29 states; Texas being one of them. They share information with other government agencies; the Department of Education, the FBI – other agencies that need your tax data.
In addition to that, they share information with anybody who’s a treaty member. So, any country that the US has signed a tax treaty with, they have an information sharing program going on.
Patrick: Outstanding. Well, I know that for a lot of us, all it means is that Big Brother really is looking over you. There’s so much more information we want to cover. I want to make sure that you know about this heritage trust special report. Call in and get that it’s (972) 309-0104. Leave all your information. Right, Rex?
Rex: Yeah. Leave their name, their address, preferably an email. The easiest way to do this is to go to our website, bigtexlaw.com. Go to ‘Contact Us,’ fill out the form and tell us you want the heritage trust report and we’ll get it to you.
Or if you don’t have access to the web or you don’t have email, call (972) 309-0104 and leave the message in Marilyn’s box. I found out we don’t have a general box, but Marilyn is the appropriate person to leave that information with.
Patrick: Very good. We’ve got some callers lining up. After the break, we’re going to be talking about the heritage trust and answering your questions on Tax Talk here on Radioactive KLIF.
[commercial]
Patrick: Welcome back to Tax Talk. This is Pat Dougher, Jeff Pickering CPA, Rex Hogue of bigtexlaw.com. We’re really having a great show. We’ve got much information that we’ve gone over. We’ve talked about the different loopholes; closing some of those, the 3.8 Medicare tax for S-corps and we’ve got callers on the line.
One of the things I want to make sure is that people know that bigtexlaw.com or Bolinger & Hogue is giving away the Top Ten Reasons Why You Need a Heritage Trust.
Rex: Basically, we just got a report that explains the three basic ways that you can pas property to your kids; either outright and why we think that’s a bad way through what we call a convenience trust, or a payout trust or, sometimes, a testamentary trust versus the way that we think is the best way to do it, which is through a heritage trust which offers a lot of benefits to the kids. Our report talks all about it. Maybe we’ll get a chance to cover more of that after we…
Patrick: Answer some questions here. That’s correct. Well, I know you can just call (972) 309-0104 or go to bigtexlaw.com, ‘Contact Us,’ and fill out the form and you can get that. Excellent. Why don’t we go ahead. We’ve got Ed. You’ve got a question about percent of house payment?
Ed: Yes, good afternoon. My name is Ed and I live in King, Texas. Thank you for accepting my call. I am a land man. I use my home as my home as my primary office. What percentage or what can be deducted as far as my taxes.
Jeff: Okay, Ed. You’re a land guy.
Ed: Exactly.
Jeff: Right. You’ve got to be very careful about how you do your taxes because you want to consider all your stuff as investment and not as a trade or business. You call it investment, then you’re talking about capital gains, but if you’re talking about a trade or business, you’re talking about ordinary income with the self-employment tax possibly.
You can take the home office, but the place you take it has got to be consistent with treating your job as an investment, which would be on the Schedule A. So, the normal rules for home office are percentage of your square footage of the office to the total. You multiply that times all costs of keeping your home including mortgage, property taxes, maintenance, repairs; what have you.
Ed: Excellent. I will be making an appointment with you.
Jeff: We’d be glad to have you.
Rex: There’s another thing you can do if you have an entity. You can have the entity actually lease the home. You’ve got to have the proper entity set up. You’ve got to have a lease agreement, but that works even better because it doesn’t show up on your 1040. It shows up on your entity return.
Jeff: Depending on what kind of entity you have. If you have a flow-through entity, then it will find its way into the right place on your 1040, but if you have separate non flow-through entity, then you’re right; it would stay at the entity level.
Ed: I’ll let you guys work that part out.
[laughter]
Ed: A lot of legal mumbo-jumbo. I can see you guys are very, very, very good.
Rex: It does have to do with your audit risk, though. You’re a lot more likely to be audited if it’s on your 1040.
Ed: That’s what I’ve heard.
Jeff: I’ll go along with that.
Patrick: Ed, it looks like you need to sit down with both of these guys, so why don’t you do that. Thank so much, Ed. Bonnie, you’re on the air. You’ve got a question?
Bonnie: Yes, thank you. I am an employee for an out-of-state company, but I’m located in my home office. I want to hire hourly help for only about ten hours a week. What do I need to know to provide that worker with a 1099 form so that I can claim the cost as an unreimbursed office expense seeing as I’m not reimbursed for my office expenses from the corporation that I work for?
Jeff: You have a couple of landmines you’ve got to watch out for. One is, of course, the unreimbursed thing. The other is treating a person that could be an employee as a 1099; the independent contractor versus employee.
I’ll speak to unreimbursed employee business expense. It should be the corporate policy doesn’t reimburse you for these expenses and that they’re ordinary and necessary. So you need to check your employee manual or even get a letter. I say a letter from your supervisor saying, “No, we will not reimburse these. Yes, you may need them, but we’re not going to reimburse them.”
Unless you have that, the IRS is going to say you can’t deduct it because you should’ve gotten it from your employer.
Bonnie: Well, that would be nice if they would provide, but they don’t.
Jeff: You’ve got to have the documentation to make sure you’re set to do this. The second issue you’ve got is whether or not you have an employee or an independent contractor. There’s an old provision called 529 which you may be able to use.
Or you may just wind up, depending on the facts and the circumstances, you may wind up treating this person as an employee and actually paying their wages.
It’s a little much to get in on a radio show, but if you’d like to make an appointment, I can talk to you or your accountant could.
Patrick: One of the things I’m curious about is and – again, Bonnie you might sit down with Jeff on this – but the possibility of setting up her own company within what she’s doing just as a different entity.
Jeff: There is a possibility. That’s an interesting choice. You’d have to do it correctly because what you’re saying is you’re saying that this is an employee business expense that I’m paying my company. I’m paying this company here. You would have to navigate that very carefully too.
Patrick: Rex, do you have anything?
Rex: Basically, I’d just reiterate what Jeff just said.
Patrick: That’s really good.
[laughing]
Patrick: Thanks again, Bonnie, I hope you sit down with Jeff or Rex. That’s all the callers right now. We’ve got so much more to cover. Real quickly, though, I want to get into this heritage trust thing.
Rex: Let’s just talk briefly. You can give assets out right to your kids. A lot of people do that and they don’t realize that there’s actually great danger in that. Then there’s another level you can provide more benefits. It’s actually frequently done; we always do it. That is creating the possibility that it could be left to them in what we call a convenience trust, which if you’ve got a child who isn’t a good money manager, you definitely don’t want to give it to them outright.
If you want to make sure that it remains separate property in case that child goes through a divorce and their ex-spouse doesn’t get what you left for your child. It can also help them avoid guardianship if the child becomes incapacitated. It’ll avoid probate when the child dies. It can even avoid the IRS getting a second bite at the apple for estate tax purposes when the child dies.
As good as that is, the heritage trust actually does some other things that a lot of people want. It provides asset protection where current creditors of a child cannot get to what you leave them, future creditors; if they’re involved in a lawsuit, they’re in a car accident or something – can’t get to it. The spouse not only can’t get it, but it can’t be considered in a divorce. It can stay in the family bloodline.
So if your child dies and their spouse gets remarried, what you left your spouse, your child doesn’t wind up with their replacement. It’s still your grandkids’.
Patrick: One of the things that I’m noticing is that as we’re wrapping this show up, I want to make sure that people just – it seems like this is so important. Just call you, Rex, and set an appointment so that they can get the right information on this.
Not only can you get the special report, but I know you’ll sit down with folks and really go over what their situation is to make sure that you are taken care of. That’s (972) 309-0104 or visit bigtexlaw.com. Next week is the marriage.
Jeff: That’s right. If you know somebody that’s getting married, be sure to listen next week. It’s our June wedding show.
Patrick: It’s going to be a great show. With that, I know we’ve got so much more to cover. We’ll talk to you next week on Tax Talk. This is Pat Dougher.
Transcribed by:
Lainie Lord
www.magiscript.com

Patrick: In fact, not just asset protection. We’re going to give you the ultimate asset protection plan – how to protect your hard-earned assets from financially crippling law suits; angry ex-spouses, vindictive former employees, jealous neighbors, larcenous plaintiffs, frivolous lawsuits, arbitrary and capricious government officials – I know none of you know any of those, right? – greedy partners, and even identity thieves. This is going to be a great show.
Some of the specifics of today – you’re going to see, and learn, and hear how you can determine if you’re at risk, the types of property that may be at risk, five key rules of asset protection and how to apply them, three types of asset protection tools, the three biggest obstacles to good asset protection planning. Yes, we’ve got a great show for you. To introduce our other hosts…
Jeff: Rex has always been on our show from day one, but we’ve never had a really good, proper introduction. Let me try to do this. This is Rex Hogue of Bolinger and Hogue Law Firm in Frisco, Texas. Mr. Hogue did his undergraduate work at Texas Tech and attended a law school at Regent University in Virginia Beach.
He has been practicing for 17 years, is one of the most well-known and well-respected estate planning attorneys in the country. He is a published author. He’s written books for his clients as well as advisors including Practical Estate Planning and Biblical Principles of Estate Planning.
He is a certified continuing education instructor. That’s for accountants, and for insurance people and financial planners. So, without further ado, Rex Hogue. And Rex, before we actually started all this, we were talking about that accident case you had.
Rex: Yes. Kerry was a young lady who inherited $3 million from her parents. She lived in Colorado. She was going through an intersection one day and somebody tried to go around her, clipped her bumper, caused her to veer off and she t-boned a van load of daycare kids. Unfortunately, it killed the driver and two kids.
There’s a huge lawsuit over the accident and the jury came back with a $9.8 million judgment. They determined that the guy who hit Kerry was 90% liable. But, under Colorado law, they found Kerry 10% liable and, under Colorado law, that meant that she had to pay, or that she could pay, for the entire judgment. And while every state law is different, that was devastating because it wiped out what she had inherited from her parents.
Jeff: That sounds severe for what actually happened. How could it have gone then?
Rex: Well, there’s another interesting case. Back in 1969, Ted Kennedy got a little bit too much elbow exercise one night, got drunk and drove of the Chappaquiddick River Bridge. Mary Jo Kopechne was in his car, and she died.
The Kopechne family sued Ted Kennedy for millions of dollars. Unfortunately for them, the only thing they could collect on was his car insurance. So, it raises the question – why is Kerry 10% liable and she loses everything while Ted Kennedy is 100% liable and he lost nothing?
Well, the answer is the way these two families looked at asset protection planning. Kerry’s family wasn’t concerned about it. Ted Kennedy’s was.
Jeff: Right. So, this is something that you can actually read about. You’ve got a special offer. It’s something you offer usually for $99, but this time, you’re letting our listeners for free get this report?
Rex: Yes. It’s a free report, Jeff, on asset protection called The Ultimate Asset Protection Plan. They can reach us by calling 972-309-0104. Leave a message in our general office mailbox. Or they can go to our website, bigtexlaw.com. Go to ‘Contact Us,’ fill out the information and we’ll be happy to send them the report.
Jeff: And in case you don’t know already, we’re talking about The Ultimate Asset Protection Plan. That’s the topic of our show today.
Rex: Yes. And there was another case that we had in our office. One of our clients had a large judgment from Lloyd’s of London. Lloyd’s of London hired Patterson & Braswell, a large Houston law firm, to come after our client and execute on that judgment.
Well, when the client came to see us, they already had a plan in place. It would never have survived the attack, but we upgraded the plan. We were able to add another partner because, fortunately for us, the wife had some separate property that wasn’t subject to the lawsuit that we had to make a gift to the kids in a trust. We used that to give new arguments to the family to protect themselves against the attack.
What ended up happening in the case is Patterson & Braswell went back and told Lloyd’s of London they would not be able to collect on the judgment because of the structure of it.
So, there are success stories out there. It is very possible to structure things in such a way that you will be asset protected in a case like that.
Jeff: Right. You have different levels of protection. In this case, it was what you call taking it from a level two to a level five. It shows the sophistication and the level of planning you have.
Rex: Yes. And even though they didn’t start with what we would consider a very good plan, they had the basics in place for us to add to it without running into a fraudulent transfer, which we’re going to talk about in the next section.
We’re also going to talk a little bit about levels of asset protection. We’re probably not going to get through all of it, but I’m going to tell you that, in our office, we classify it in different ways and, to us, it’s not really asset protection until it reaches what we call level four.
Again, this report is available for our listeners – The Ultimate Asset Protection Plan. We do normally sell it for $99. I probably should accuse you guys of twisting my arm and making us give it away for this particular show.
Jeff: We force you to do something like that. But, it’s a great value at $99, and you can get it for free even now. For our listeners, you’ve got to call Rex’s office at…
Rex: 972-309-0104 or go to our website, bigtexlaw.com. I’m going to take just a minute and plug my partner, Brad Bolinger. Brad is also a CPA, he’s an attorney, he has an LLM which is an advanced law degree in tax. So, we have an enormous amount of credentials when it comes to tax; Brad in particular has a great background in Tax. We practice in the areas of estate planning, asset protection planning, tax planning and business planning.
Jeff: Right. If someone were to come see you, would it cost them a bundle of money or what?
Rex: No. We actually offer a free 45-minute consultation to our listeners, Jeff. We don’t necessarily do that for everybody, but if you’re a listener to the show and you want to come in and discuss your asset protection situation or if you have a plan and you would like for us to review it, we’ll be happy to do that for you at no cost for the first 45 minutes.
Jeff: Great. And where would they do that if they were to come in for the free?
Rex: Our office is at 2595 Dallas Parkway, Suite 100. That’s in Frisco. We’re between Gaylord Parkway, which is just north of us, and 121 which is just to the south. We’re on the west side of the freeway across from the ball park.
Jeff: Right. So, if you would like the report, it’s free. 972-309-0104 or bigtexlaw.com and fill out the form.
Rex: And we’ll be back right after the break.
[commercial]
Patrick: And welcome back to Tax Talk. This is Pat Dougher, Jeff Pickering CPA, Rex Hogue of Bolinger and Hogue, bigtexlaw.com and we’ve been covering the ultimate asset protection plan for our listeners. You really do want to make sure that you follow through on this. Listen to these tools; these asset protection ideas – ways to protect yourself from the thieves that are out there in this litigious society we’re in. Jeff, I know that you had a question.
Jeff: This always comes up because we always talk about “stuff” as accountants and attorneys. But, we’ve got Kenneth Lay and OJ Simpson. They obviously had some asset protection because they had the cash flow going and they had assets, even though the courts have said that they clearly had done something wrong and had assets taken from them.
Rex: Yes. Ken Lay, of course, lived in Texas which, by the way, is the most debtor-friendly state in the country. He had annuities. They’re not going to be able to get to those annuities. They’re asset protected, so it doesn’t matter how much of a judgment they’re going to get. They’re not going to get to those annuities.
Now, OJ Simpson lived in the worst debtor-friendly state, or the least debtor-friendly sate, in the country – in California. He moved to Florida where they have an unlimited Homestead exemption and they protect annuities and a tool called VEBAs, the Voluntary Employee Benefits plan.
So, while OJ Simpson is hunting down the killers on the golf courses of Florida, the Brown family is not going to be able to take his assets.
Jeff: Right. Yeah, that’s the way it rolls when you have asset protection.
Patrick: Well, it would seem though that even good people – we’re talking about guys that were slugs in the legal system, and they were able to protect themselves. But then, the good people should be able to do something a lot easier.
Rex: Absolutely. In fact, a lot of people can be real misled by these cases because they tend to think, “Hey, I’m not Kenneth Lay. I’m not OJ Simpson. I’m not out there committing crimes, so I don’t have to worry about it.”
But, the fact is most people who are sued never saw it coming. They may be guilty of nothing other than being at the wrong place at the wrong time like Kerry was. Creditors do have rights. When you understand that, creditors have the right to make you play by the rules that were in place at the time the event occurred.
Here’s an example. Let’s suppose you wanted to ship a load of cargo across the ocean. When would you have to insure that load?
Patrick: Front end would be fine.
Rex: Before the ship leaves the dock. Once the ship leaves the dock, it’s too late. It’s a bit late to call Lloyd’s of London after you’ve hit the iceberg. Just like you really can’t buy insurance the day after your house burns down. Asset protection planning has to be in place before the incident occurs that causes the lawsuit.
We get calls from people who were involved in an accident or something has happened. “We might get sued. What can we do to protect ourselves?” We have to tell them, “We can’t help you on that case. We could help you on the next one, but it’s too late for that one.”
We had a really interesting case with a doctor client who we suggested that he do some asset protection planning and he told us, “Yes, I’m going to do it. I’m just going to put it off a few months.” During those few months, one of his employees slipped and fell, hit her head. She has had three brain surgeries. She is 28-years-old. She is disabled for life, and he is going to have to care for her from now on.
One of the things he keeps telling us is, “Y’all told me. I should’ve listened. That should’ve been a priority.” Of course, I don’t take any joy in knowing that we were right. It’s sad. But, it’s sad that it turned out she had a preexisting condition and the accident that he got blamed for probably didn’t even happen at the office.
Patrick: Oh, really? That’s alarming.
Rex: But, we can’t prove it.
Patrick: You’ve got so many tools that you guys actually offer in this Ultimate Asset Protection Plan, right?
Rex: Yeah. We talk a lot about what the rules are. We’re not big on solutions because every single case is different. We can craft solutions once we know the facts, but if you understand the rules of the game, it helps. Let’s just talk about some of those. There are five.
Patrick: Before we do that, let’s make sure the people that have tuned in since the beginning of the hour, maybe recently, that they know how to get a hold of this report.
Rex: Okay. They can call our office, 972-309-0104. Leave a message in our general mailbox. Tell us you want to asset protection report. Give us a phone number and an address. We even prefer email. We can email it and you’ll get it a whole lot faster. Or they can go to our website, www.bigtexlaw.com. Go to the ‘Contact Us’ button and fill out the information, and we’ll send you the report.
Patrick: That’s awesome; really simple. bigtexlaw.com. What’s the phone number again?
Rex: 972-309-0104.
Patrick: Very good. Now, go ahead with your story.
Rex: Okay. Well, there are five key asset protection rules that if you understand these rules and how they work, you will know more about asset protection planning than most lawyers. Rule number one is what we call the property rule. You can always reach property that causes a liability. Rule two: you can always get to the owner of that property. Rule three: you can always get to what the owner owns. Rule four: you can always get to the operator of a property. Rule five: you can always get to what the operator owns.
Jeff, you asked me about people owning lake houses. Eddie and Sally owned a lake house and, one day, a thief broke into that lake house. He left the door ajar when he left. The next door neighbor’s little three-year-old boy came over, wandered through the house, found some fire ant bait and ate it, and it had the same effect on him it had on fire ants. It killed him. Well, who did the neighbors sue?
They sued Eddie and Sally. Why? They own the lake house, and the lake house caused a liability. We can’t go get the thief. Unfortunately, he didn’t leave his name and forwarding address.
Jeff: Rex, I’m going to ask you something real quick. What if the lake house was a rented lake house and there was somebody like a property manager of the lake house?
Rex: Well, there you get into the issue of operator liability as well. A lot of people will have a lake house that they’ll rent. They may or may not protect themselves against people who are injured on the property while they’re renting it.
Here’s the thing. If you just own that lake house in your name and something goes wrong, you will get the lawsuit and anything you have is at risk.
Another example that illustrates the other two rules was the story of Mitch. Mitch was a businessman who the day before his wife’s birthday, he asked his secretary to go to the mall and buy his wife something nice, told her since it’s a personal trip, to take his car. On the way back, she ran over a 45-year-old gentleman out on the bicycle who turned out to be a neurosurgeon who makes a million dollars a year.
Now, we’ve heard about the $250,000 cap on pain and suffering in Texas, but economic damages are excluded from that. And here, the economic damages is 20 years left of practice at a million dollars a year – $20 million of damage.
Now, when a PI lawyer sees a case like this coming, they call this a target-rich environment. Here’s why. They can get to Mitch because it was his car that caused the liability. He owns it. They can get to anything he owns. They’re going to get to the car insurance, but his secretary was operating the car. They can get to her and anything she owns, and her car insurance.
In addition, they may be able to make the argument that this was a business liability because he’s vicariously liable for the acts of his employees, which means if they do something wrong, he has to cover it. So, there’s going to be lots of pockets here that the doctor’s family can go after.
Now, proper planning would help both Eddie and Sally, and Mitch. For example, if Eddie and Sally owned that lake house in an LLC properly structured – that means they’re not the only people involved in it if they’re the only two mom and pop LLC or a single member LLC, not going to be protected. But, they can properly structure it where they may lose the lake house, they may lose the insurance on the lake house, but they don’t lose everything else.
In Mitch’s case, he might have his business protected, his other assets protected, but without some planning, those people are going to be financially devastated by the results of the lawsuit.
Patrick: Wow. And how much of this information is covered in this Ultimate Asset Protection Plan?
Rex: Everything that we’re talking about today is pretty much in this report. I don’t think we mentioned OJ Simpson and Kenneth Lay, but the rest of this information is in there.
Patrick: Very good. For somebody to get a hold of it?
Rex: Go to bigtexlaw.com, go to the ‘Contact Us’ tab, fill out the information or call us at 972-309-0104. Leave a message in our general mailbox and give us your name, address, phone number, email address and we’ll email it to you.
Patrick: Now, if somebody wants to get a hold of you and learn more about what you guys do – I know you guys will sit down for them for 45 minutes.
Rex: Correct. 45 minutes at no cost.
Patrick: And Jeff, you guys do the same?
Jeff: Yes. We do it for people who want to be in business, or want to start a business, or have a business. We give them a free consultation – 45 minutes.
Patrick: Well, I’ll tell you, this is great information. You don’t want to miss a minute of this. We’ll be talking more about the Ultimate Asset Protection Plan coming right up after this.
[commercial]
Patrick: Welcome back to Tax Talk. This is Pat Dougher, Jeff Pickering CPA, Rex Hogue of Bolinger and Hogue, bigtexlaw.com. We’re talking about the ultimate asset protection plan – the one that really takes care of you when the incident occurs after you’ve planned and prepared for it. We’re having a great show. Jeff, I know you had some questions.
Jeff: Yeah. I wanted Rex to explain some of the types of property at risk because one client might get one solution and he might say to his buddy, “Hey, I got this at Bolinger and Hogue,” and then the other client may say, “Well, why didn’t he do that for me?”
Rex: Well, the answer is every situation is unique, every case is different, types of assets are different. We break the types of assets down into what we call Property and Assets – that’s one category. Nest Eggs is a category, and Revenue Streams.
And you may well do something very different for, say, Nest Eggs as opposed to Revenue Streams. You might do the same thing. It depends on the situation and what you’re really trying to protect.
A good example – I’ve got a friend that owns a piece of commercial property, and he came to me and asked me to do an asset protection plan. It’s interesting because it’s an asset, it’s got value right now, it generates revenue, but its primary purpose is his retirement. He’s just trying to get the mortgage paid and all of that, and expects to have that done before he retires. Then the income from it is going to be his retirement plan. So, he’s more interested in protecting a Nest Egg than he is a Property and Asset. That’s a great example.
There are some tools of asset protection. One of the first ones is what we call lines of defense. Lines of defense include things like insurance, exempt property that we’ve talked about; your IRAs, your Homestead.
Patrick: Your VEBAs.
Jeff: Annuities.
Rex: Cash value of life insurance, personal property.
Patrick: Guns.
Rex: Two firearms. Let’s not forget that here in Texas. A second tool is what we call fortifications, and the third tool is what we call strategies. I’m going to go back and just give you some examples.
Lines of defense – insurance is a line of defense. There are three things that can go wrong with insurance. One is you might have a claim that’s not covered by the insurance. Secondly, you might have a claim that exceeds the amount of coverage. And third, your insurance company could go belly-up.
A great example of a line of defense – I like to use the analogy of what happened in France after World War I. The French decided they didn’t enjoy the company of the German Army in their country.
Patrick: Go figure.
Rex: So, they built along the Franco-German border something called the Maginot Line. The idea was that the Germans couldn’t get through and invade Germany. But, we all know history. In the spring of 1940, the Germans invaded France and it took them only three months to overrun the country. Well, the problem wasn’t with the Maginot Line. The problem was the Germans went right around it through Belgium. It’s the classic problem with a line of defense. You can get around it.
The next tool that we use is fortifications. This is where what works for one client won’t work for another because you have to figure out what exactly are you protecting and what are you protecting it from. You really have to look at more than just creditor lawsuits. There are other issues involved.
So, among the things in fortifications – a revocable trust, irrevocable trust, business entities, what we call the family business entities like family limited partnerships and family LLCs. And then asset protection trusts, whether they’re domestic or offshore.
The third tool is strategies. Here’s the key difference between a fortification and a line of defense. You have to get into a fortification. You can’t just go around it. When it gets to strategies, there are several, but I’m going to only talk about one today, and that’s layering.
Part of the objective here is that we like to build a castle for our clients. If we think about a really well-built castle that protects assets, the first thing that we do is we have a very deep, wide moat around the castle. Then we’re going to fill the moat up with fun things like snakes, alligators, crocodiles, piranha, sharks.
Once you want to attack that castle, you first have to get across the moat, then you get to the castle walls and they’re five or six stories high. So, you’ve got to have a way to get from your boat up the walls and scale them. But, then when you get to the top, what’s waiting for you is the defense force.
So, a castle like that is going to be very difficult to take. Compare that to a castle that’s, let’s say, two stories high, sits up on a hill, doesn’t have a lot of people around to protect it, the gate’s usually open, there’s no moat. It’s going to be a whole lot easier to get into that castle and get the stuff out of that castle than the first castle.
Patrick: Awesome. One of the things that I’m noticing just in our notes, I see at least nine different tools of fortification. Now, it looks to me like if somebody was interested in this, they’d want to get your report, wouldn’t they?
Rex: Absolutely. We talk about how all of the tools work. We talk about, for example, that castle is a great example of layering. You’ve got the layer of the moat, the layer of the high walls, the layer of the defense force. There are even other things we can do. For example, put only half the gold in there and build another castle just like it to hold the other half.
Patrick: How would they get the report?
Rex: They can call our office at 972-309-0104 or go to our website, bigtexlaw.com, go to the ‘Contact Us’ tab, fill out the information and we’ll be happy to send the report. By the way, $99 is the cost of the report. It is free to our listeners this week.
Patrick: That really is a big offer too, because you’re going to give them all the things we’ve been talking about in the Ultimate Asset Protection Plan.
Rex: That’s correct.
Patrick: And these strategies and tools of fortification. That’s excellent. What else can we do?
Rex: We see so many different things. Let me give you an example of a case. We have a guy who’s a roofer. I call him Randy the Roofer. Randy had done what he called a family limited partnership.
What happened is Randy had some people out working on a roof, two story roof. I don’t know if you’ve ever seen a roofing hammer, but those things are pretty heavy. One of his roofers dropped a hammer off the roof second story. This homeowner, while they’re redoing the roof, guess what else they’re doing? Putting in a sprinkler system. Unfortunately, the hammer falls off the roof, hits one of the sprinkler guys in the head; luckily, didn’t kill him, but it did cause a closed head injury and a lot of damage.
Well, Randy then discovered – and we actually got into this case because one of the guys who’s of council to our firm represented Randy in the ensuing lawsuit. I can tell you Randy’s attorney did a lot of things wrong.
One thing he did is he had his house owned by this partnership. That is a huge mistake in Texas because he lost his Homestead. The other thing is he was personally the general partner. Well, in a limited partnership, the general partner has general liability. Well, that was him personally.
Jeff: Unlimited, yeah.
Rex: Unlimited. And we asked him, “Why did you do this?” His answer was, “I was trying to protect my assets.” Well, great idea, poor implementation of strategies. Different structure would’ve helped Randy and he could’ve protected his home. He could’ve even conceivably protected his business.
Patrick: Was he doing it himself?
Rex: No, he actually had an attorney do it. One of the scary things is he went to an attorney who has a very good reputation as an estate planner, but he apparently didn’t know very much about asset protection planning. Sadly, that’s not uncommon.
Randy really thought that he was covered. He’s like a lot of people who thought he was covered, so he just didn’t pay attention to what might have happened. Nobody ever said to him, “Well, what about this? What about that?”
Because he was so confident in his LFP, you know what he didn’t have? Enough liability insurance. Liability insurance for Randy would’ve made a huge difference. Instead of him being out of pocket personally, that insurance might well have paid off the claim.
Patrick: One of the things that I’m really curious about – if somebody has already put together some asset protection planning; they’ve got the limited partnership, they’ve got the insurance or something like that, can they come to you guys and ask you about those things?
Rex: Absolutely. We can do an evaluation of their existing plan. One of the things that we’ll do is identify exactly how much asset protection they actually do have, what they have that’s protected. A lot of people worry unnecessarily because they have assets that nobody is going to get.
Patrick: Awesome. One of the things that they need to do is just call your office. 972-209-0104. Jeff, I know you guys do a lot of ideas like this.
Jeff: We do consultations, especially in business. We work with Bolinger and Hogue on many cases.
Patrick: And they’d call?
Jeff: 972-378-5200.
Patrick: Very good. We’ve got more to come. We’ll be right back.
[commercial]
Patrick: Welcome back to Tax Talk. This is Pat Dougher, Jeff Pickering CPA, Rex Hogue of Bolinger and Hogue, bigtexlaw.com. We’re talking about the ultimate asset protection plan, helping you prepare for, well, the worst really. Wouldn’t you agree, Jeff?
Jeff: Yes, that’s right. In our last segment, Rex was talking about that case where the attorney set up the FLP, the Family Limited Partnership. Unfortunately, he was a great estate planning person, but not so good in the asset protection part. Rex, that’s not your case. You actually practice in three major areas. In addition, you have your partner, which is Brad. Brad Bolinger, he’s also in addition to being an attorney, also having – is it a JD?
Rex: He’s got his JD, which is a law degree. He also has is LLM is tax which is an advanced law degree, and he’s also a CPA. So, he’s got tremendous credentials when it comes to tax. We have a couple of other people, other attorneys in the office.
We have Andy Howard who’s of council to our firm. Then we have Kim Atwell. Both of them have some litigation background. So, we see cases – Kim does a lot of probate work for us. Andy gets involved in some litigation cases. So, we have a great background of attorneys in our area, in our firm. Practice in several areas.
Jeff: Right. You focus on estate as well as asset protection and tax.
Rex: And tax planning. We’re one of the few firms that really practices a lot in all three areas.
Patrick: And you’re well-known in the area, aren’t you? Or even throughout the state?
Rex: Well, yes. We practice all over, so I guess we’re fairly well-know. Let’s talk a little bit about what happened with Randy’s roofing because it goes right into the next segment we want to talk about, and that’s levels of protection.
In our firm, what we look for are tools that provide you asset protection, what we call two-way asset protection. That is a tool that if something goes wrong inside, it protects you personally. Also, a tool that protects you from the outside if you’re involved in a car accident so that you don’t lose the business. Corporations do not provide that kind of protection. LLCs, limited partnerships, asset protection trusts do. In any given case, we may have a mix of those.
But, even having a limited partnership or an LLC is not enough. A lot of times, we see these single-person entities. There is no real protection in those. If you have a single member LLC, which we’ve seen a lot of people, they come in with them and they’ve been told that’s an asset protection tool.
We call those the paper mache dragon. The protection is not real. There are easy ways to get around it if you’re a smart creditor. I tell clients always assume you’re going to be up against a smart creditor.
Jeff: Rex, what’s a charging order?
Rex: A charging order is the exclusive remedy in Texas for limited partnerships and LLCs. What it does – basically, you go get a judgment and then you go and force it against a limited partner, for example. You cannot take that limited partnership interest from them. You can only get what’s called a charging order, and that entitles you to distributions made.
There are some challenges with charging orders. Creditors may be able to get to the entity before they ever get to the charging order. If it’s a single member LLC, there’s no third party interest to protect. The whole idea was that if the three of us go into business together and I get sued, it’s unfair for you all to lose the interest in your business and have a new partner forced on you.
Jeff: Right. That’s the original idea, but that kind of goes out the window when you have a single member LLC.
Rex: Yeah. And it also goes out the window if it’s only husband and wife because, while under the tax law, family attribution is out. It’s not true in litigation. If you can compel the husband’s vote, you can compel the wife’s vote. So, the only way to have one that’s protected is to have more than just the husband and wife, and that gets into what we call the business level.
Patrick: Very good. I know that this is a lot of information. I know a lot of people have just tuned in. Maybe they’re hearing a little bit about this asset protection. They need to get the Ultimate Asset Protection Plan. How do they do that?
Rex: They can call our office at 972-309-0104, leave a message in our general mailbox that they want a free copy of our Ultimate Asset Protection Plan report. It’s normally $99, free to our listeners this week. Or they can go to www.bigtexlaw.com, click on ‘Contact Us’ and we’ll send them an email version of that report.
Patrick: So, they just fill out the form, ask for the Ultimate Asset Plan and you’ll send it to them. That’s a huge, huge offer by the way. I also know that you guys will sit down with people?
Jeff: Yes. We offer a free 45-minute consultation to business owners or somebody who wants to get into business. Rex, you’ll do the same I understand?
Rex: We’ll do the same. For our listeners, we will offer a free 45-minute consultation.
Patrick: And especially if you have some estate planning that you’ve already done, that would be one of the keys, wouldn’t it? I know that there are also, it seems to me there are some things in the way. There are some obstacles. What are some of the obstacles?
Rex: Yes. Well, the three biggest obstacles is, first, you have to have a plan in place before the triggering event occurs, and the triggering event is just that event that gives rise to a lawsuit. Secondly, inadequate, uninformed, or inexperienced legal council.
We’ve seen that in a lot of cases we’ve talked about; Randy, Kerry, Mitch. All of these people, really, they had ineffective or uninformed council. They just didn’t really understand how asset protection works. But, the biggest obstacle by far is procrastination.
Patrick: It’s the biggest nation, it is.
Rex: Yes, it is. Inertia is the hardest thing to overcome. Really, the first step is to call and get our report or go to our website and get the report.
Patrick: Well, there’s so much information in there. Think about all the things that we’ve covered today. You’ve talked about the strategies, you’ve talked about the obstacles, you’ve talked about the different levels and ways that people can protect themselves, some of the easy ways that they can mess it up.
Rex: We’ve talked about all that.
Patrick: All they have to do is?
Rex: Call us at 972-309-0104 or contact us at bigtexlaw.com, go to the ‘Contact Us’ tab, fill out the information and we will send them a free copy of the report.
Patrick: Now, that would mean that they would have to exit the largest nation in the world. That’s the nation of procrastination.
Rex: Procrastination, right – Procrasta.
Patrick: It’s get going, get moving, call you guys and sit down with them. Jeff, how would folks get a hold of you?
Jeff: We’re at 972-378-5200. We’re on Preston Road – 6533 Preston Road between Spring Creek and Legacy in Plano, because there’s two 65333 Preston Roads, believe it or not.
Patrick: And I know that you’re no ordinary CPA either. You’ve got your Masters in Taxation. You can really help folks.
Jeff: Masters in Taxation. A large part of my practice is taxation, and we also service businesses and counsel businesses.
Patrick: Great. Rex, anything else you want to offer before we leave?
Rex: Give us a call. We will sit down and talk to you for free for 45 minutes. For our listeners, that’s an offer we make. Contact us. Get this report. We think it’s great information.
Jeff: It’s great. Even at $99, it’s still a good report. Now it’s free.
Patrick: That’s exactly right. It’s been a great show. You want to make sure that you get a copy of this show. You can always see it at doersucess.com in a few days. We’re so thankful for this time. We will talk to you next week, noon on KLIF.

Patrick: Welcome to Financial Fortress Radio. This is Pat Dougher. Richard Jordan, you are the Chief Investment Strategist for DFW, and it’s always good to hear from you and hear the things that we’re going to talk about. I know we’ve got a great show lined up to talk about an area that is – well, a lot of people think it’s real conservative investing, but you have a different opinion. Richard.
Richard: Thank you, Pat. We’ve got a bond bubble going on out here. Pat, it’s just a lot of fear that has driven people out of the market the last three years, and a record amount of money has been poured in the bonds, and the rates are 25-year low and these folks are set to be whipsawed by the market big time. They could lose as much or more than they lost in the 2008 stock market crash, and they’re not hearing about their brokers because their brokers are driven by commissions.
Patrick: Well, I know that there’s also a ton of just “stay where you’re at, hunker-down; don’t move because you’re afraid of making a decision anyway” is already out there – a lot of fear. Wouldn’t you agree?
Richard: I agree, but buy and hold quit working in the 1990s.
Patrick: Right, you’ve got to be a little bit agile now with everything is going on, don’t you?
Richard: You need a professional.
Patrick: I agree. Well, while we’re talking about, it’s always good to say, why are we doing the show, Richard?
Richard: Well, we do this show for a number of reasons. First, of course, it’s a way to get the message out there on how we’re different. So, let’s talk a little bit about Fortress’ mission statement.
Our mission statement is to demonstrate leadership investment advisory practices for clients driven by the golden rule standard – to treat others like you who’d like to be treated. What an idea.
Patrick: Yeah, really, go figure. I thought that was – it sounds like though that’s part of even the whole registered investment advisory format.
Richard: It is.
Patrick: In the 40s, it was set up as an alternative to the brokerage system, wasn’t it?
Richard: It was set up in 1940 by Congress because the wealthy people said, “We do not want to deal with stock brokers who are driven by commissions; it’s a conflict of interest. We want someone who will act as our fiduciary.”
Patrick: And that’s the big part of what Fortress is all about, wouldn’t you agree?
Richard: Exactly. So, we act as a fiduciary and a trusted advisor for all our clients, always putting their interest and needs ahead of ours. We advise clients on how to maximize their financial opportunities with the appropriate levels of risk and taxation that each client needs and no more, and how to avoid the common practices in the stock brokerage industry that result in poor performance and unnecessarily high fees and taxes.
Patrick: That’s good, having somebody on your side of the fence rather than conflicted opinion.
Richard: And we believe that all investors, but especially seniors, deserve advice that avoids these conflicts of interest. We believe all clients deserve factual information about the brokerage industry’s primary areas of conflicts of interest.
For instance, collecting both investment commissions and fees on investments from the clients is how the industry operates. The confusion comes in here because 95% of the Registered Investment Advisors also carry brokerage licenses creating this conflict of interest.
But, at Fortress, we don’t allow our people to carry both. We do not have that conflict of interest. Second, from recommending proprietary investments that are only available at the brokerage funds and that results in higher compensation and commissions for the brokers and their managers. Does that sound like a fair game to you?
Patrick: Well, it’s always good. It’s one of those things where if you’re not basically saying one thing out of, one side – well, let me back up and say this way: it’s consistent with what people really want and that’s someone that is on their side to do them good, not do them in – and I appreciate that.
Well, I know that we started off with talking about the bond market and I want to get back to that. I know there’s so much information available now in the bonds and in the bond market. Let’s get talking about that. What are you looking at there?
Richard: Well, we’re looking at a market where people have poured record amounts of money into the bond industry the last three years because they believe it’s safe, but we now have such extremely low interest rates and an oversupply of bonds compared to the history that, simply put, we’ve got too much cash that went into this and the bubble is getting ready to burst.
So, let’s look first at the bond is considered the safest – US treasuries. The average yield on five-year US treasuries this year is only 1.9% – the lowest rate in the last 25 years and the rate is going down the last three years.
In fact, if you’ve been buying five-year treasuries the last years, your average yield right now is 2.28% less than inflation. Does that sound like a great way to lose your money?
Patrick: Well, I don’t think anybody really expects that. They’re trying to live by the adage, “don’t lose your money,” but aren’t they really setting themselves up to be hammered with returns that are much worse than the stock market’s volatility in the last few years?
Richard: Exactly. Well, in the first place, they’re losing purchasing power because the inflation rate is higher than this for most people. The inflation rate that Uncle Sam publishes excludes food, energy and it limits all healthcare costs to 4% of your income.
Now, for seniors, those are the three largest spending categories in their budget. So, for seniors, when the government says the consumer price index is 3%, seniors are paying between 5% and 7% inflation.
Patrick: Well, that’s because the value of the dollar, I know, against those commodities, which they are, has weakened which means that it’s taken more of that to buy the same thing. And we all see it. Nobody’s pulled any wool over anybody’s eyes. It just sounds like funky numbers.
Richard: No, but when you’re only making 2% on US treasuries and you’re paying 5%inflation, you’re essentially losing 3% a year. So, these treasuries look safe, but look what’s happening with our budget deficits. We have record budget deficits and, sooner or later, the market is going to quickly push these rates back up and they’re going to go up to about at least the average for the last ten years’ historical average at 3.48%.
In fact, the Chinese and the Japanese, it was announced about a month ago, cut back about 50% on what they were going to invest in our US treasury bonds and the Federal Reserve is out there buying them for us. It’s robbing Peter to pay Paul. It’s absolutely crazy.
So, let’s just say that you’re buying these things at 1.9% this year and they get pushed back up to the ten-year average of 3.48% or the 23-year average which is well over 4%. But, just at 3.48%, if you have to sell one of those 1.9% bonds, the market value in a 3.48% market is 56%. You’ll take a 44% loss in about a year worse than you did with the 2008 stock market.
So, why won’t you hear about this from your bond broker? Because he’s only cared about making his commissions. He has no interest in acting as your fiduciary, and he’s not required to.
Patrick: Well, the other thing is that a lot of people have bought these treasuries in a position of kind of a buy and hold. They don’t like to mess with them. A lot of folks that invest in this area are older. They just don’t want to be bothered by it.
Richard: They think they’re avoiding risk. But, right now, if you’re reading a lot of things about bonds, you’re reading two extreme points of view; that whether they’re going to see hyper inflation soon because of budget deficits or, because of record unemployment and underemployment, 25% of the people are working for zero or for way less than they used to just two years ago. The discretionary income is drafting. We’re going to see deflation or hyper inflation.
So, the volatility on bonds, the potential volatility in the next year is going to be extraordinarily high. It’s going to make the stock market volatility of the last few weeks look like a calm sea.
Patrick: Well, I know, also, with the problems that we’re seeing internationally with things like Greece, England and some of the others that are out there, we’ve got some real problems when it comes to attracting buyers to our debt.
Richard: Yeah, the Chinese and the Japanese, like I said, have already cut back 50% and the only reason that we’re still seeing Europe investing is because a lot of the countries over there look worse, but we’re heading in the same direction. We’re the next Greece in about two years.
Patrick: Right. And what I’m saying is this that in order for us to attract someone to buy our securities, our debt securities, we have to raise our rates.
Richard: Exactly.
Patrick: So that we stay at least competitive in the overall market, right?
Richard: Right.
Patrick: So if we do that, that’s going to push it even faster and farther and a lot of these people are even going to be able to get out of this until the damage is done.
Richard: Exactly.
Patrick: Wow. That really is scary. If you’re listening, we’re not trying to scare anybody. We’re trying to say, look, somebody needs to tell you the truth. And the truth is that this area that seems to have been conservative, well, it’s not as safe as it used to be. one of the things that I really encourage you to do is make sure that you come to Richard’s workshop this Wednesday night, isn’t it?
Richard: Yes, it’s at Southlake Timarron Country Club this Wednesday night at 6:30 p.m.
Patrick: And I know the last Wednesday, I’m sure it was absolutely fabulous. I’ve been to this and I will tell you, it’s at least an hour of solid information, no sale speech and then a wonderful dinner afterwards. I know that people will enjoy it. They’ll get a great deal of information. Just register.
And the way that you register is just you call 972-325-1700 or if you want to get a hold of Richard direct, it’s just 972-758-4484. In the last set of numbers, I just want to make sure that if you’d like to join the call today or join the conversation, just call 972-299-5759 in the Dallas/Fort Worth area.
Join the conversation and make sure that you get your questions answered by a Registered Investment Advisor, Richard Jordan on Financial Fortress Radio. This is Pat Dougher. And we’ll be right back, Richard.
Richard: Thanks, Pat.
[commercial]
Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher, Richard Jordan and we just heard a great commercial at the break there about the veterans and, of course, this is Memorial Day weekend and we want to make sure that we honor them, that we thank them. I am so thankful. My son has just become a graduate of basic, so he’s on his way to becoming a ranger and I couldn’t be more proud of him.
I just want to say it’s one of those things where, for a lot of the veterans that are out there, my dad was a veteran and a lot of people in our families have served in the military one way or the other. And what they do is beyond a belief good for the country, beyond belief, in my opinion, thankful for the way that they serve all over the world. Many of them are spending years away from their family to serve this country, and it would be a benefit and a blessing. And we’re so thankful for that.
Richard: [18:34 inaudible] where the people that have served over there in Iraq actually came out of the Reserves and National Guard and had to do three tours of duty just to maintain the forces over there. That kind of a sacrifice for somebody that just thought they were going to be a weekend warrior to end up being over there for three years or more, it’s incredible.
That’s why we do this community service announcements for the vets every week on this station because we want to say thank you. And thank you was said back in 2006 by the Bush administration when they created a special piece of legislation and they funded it with about $25 billion, and it’s to help vets that are either disabled or over 65 with their high medical expenses, with the costs of home healthcare, assisted living, and nursing home care. And they can get up to $2,300 a month tax free.
Now, think about that. We just talked about US treasury bonds paying 2.28%. So, that would be like having a million dollars in the bank if you could get – over a million actually – compared to putting a million dollars into US treasury bonds.
That’s the kind of potential asset this means for vets, but they don’t know about it because the current administration is not advertising it and they’ve added a whole bunch of forms that make it difficult to apply for the program.
On top of that, if you apply and you’re not approved because you forgot to fill in a blank, or cross a T or dot an I, you cannot reapply for another year, and that’s the current administration’s stance on taking care of our vets. So, I think it’s insane and I think the word’s got to get out and Memorial Day is a good day to talk about it in great detail. So, I did want to talk about that a little bit today, Pat. It’s a passion of mine. Freedom is not free.
Patrick: It’s right, and it never has been. The other thing though is that folks can connect with you and get more information about that program, right?
Richard: They can call my trading desk directly and I will talk to them about the program, 972-758-4484. Keep in mind that I am busy with the market until it closes at about 3:00 p.m. Central, so I don’t return calls often till after 3:00, but I’ll be happy to continue to try and catch you until I catch you, or you can just try and catch me after 3:00.
Patrick: Sure, and it’s just 972-758-4484. That’s direct to you and, hey, can get a lot of real help on getting those forms filled out making sure they’re qualified and all that, correct?
Richard: We work with an affiliated company that has an over 95% success rate in getting the forms filled out correctly and getting the checks off to the veterans within 90-120 days, which I know doesn’t sound quick but….
Patrick: In the government’s kind of way, that is pretty quick.
Richard: That is lightning.
Patrick: Yeah. My son talked about that. He goes, “The military doesn’t move fast.” So, unless they’re in an operation, then it’s a whole different program.
Richard: Exactly.
Patrick: Well, that’s really good. I hope that people will take the advantage of that and come and visit with you, connect with you on that and just dial at 972-758-4484. We really want to say thanks to all of veterans for all that they do. I’m so honored to have them in my family. My dad was one, my son is one and it’s an honor. So, thank you.
Richard: And that’s why we’ve run those commercials ever since we’ve gone on the air. It was our way of saying thanks, but we just want to put a little more emphasis on it because it’s Memorial Day weekend and we want to thank the soldiers again.
Patrick: Well, one last question on that – does it cost anything to do that program?
Richard: No, there’s no charge. We’ll be glad to help you without charging you anything. It’s s an information service and we can explain how it works. It’s more time than we’ve got on the air, but we’ll be happy to set you up an appointment and talk about it or just give you some time over the phone.
Patrick: That’s great. Well, let’s go back to bonds – the most conservative investment in the planet.
Richard: US treasury bonds.
Patrick: Not.
Richard: Not looking good.
Patrick: Not anymore.
Richard: You could get whipsawed one way or another.
Patrick: You’ve been telling us about how the rate right now is so low and that in the next year…
Richard: 1.9%.
Patrick: In the next year, it could almost double which would mean that the value of your current bonds that you have, your current bond portfolio, if it’s relatively new, could get smashed to the tune of 44% of the principle, right?
Richard: Yeah, you could lose 44% to over 50% of the principle in one year.
Patrick: And most people don’t see them because treasury – I mean, you can’t get any safer in treasuries, right?
Richard: Well, yeah, but we’re at the 25-year low on the rates and you don’t want to be buying bonds when you’re at a low point. So, a lot of people, Pat, have decided, “I’m going to protect myself against that kind of inflation, I’m going to buy TIPS.” These Treasury Inflation Protected Securities.
And the five-year TIPS, oh boy, they’re paying 0.5% as a base rate and the inflation rate that the government is quoting for this is 0.9%, which means your combined rate on a five-year TIPS, or Treasury Inflation Protected bond, is now only 1.4%.
Patrick: So, it’s less than just buying a regular treasury.
Richard: Yes. Way less.
Patrick: Okay. And what’s the benefit if you can say it that way?
Richard: Well, the benefit is that if the government measurement for inflation, which is different than the CPI rate that gets quoted in the papers every month, it’s a more conservative rate. It’s lower. If that rate goes up, then you would get an additional percentage added to your check every year.
The problem is we’re in a really strange market. We’ve got over $3 trillion in cash sitting on the sideline still. We’ve got high unemployment, even though we’re supposed to be in a recovery. We’ve got high underemployment. We’ve got all these people that used to make $80,000 or $100,000 a year as engineers, CPAs, etc. in large companies now running Starbucks or McDonald’s for $30,000 or $40,000 a year.
So, that combination means that we have a tremendous risk for deflation. And what happens with the deflation is that the effective rate on the TIPS will actually drop below 0.5% and could effectively become negative.
Patrick: So, what would that mean for investors?
Richard: That means that not only will they not pay you any interest, the value of the principle on the bonds you’re holding could decline.
Patrick: So, is there any way to protect against that?
Richard: No. What you’ve done is you’ve protected against inflation, but you have not protected yourself against deflation.
Patrick: Deflation, right. So, again, the thing that I keep saying is that if you’re thinking that you can park yourself anywhere and ride out the storm that’s coming without proper advice, you will probably get your head handed to you financially.
Richard: Exactly.
Patrick: Man. Well, I hope that people will come to your Wednesday night workshop.
Richard: You bet. Southlake Timarron Country Club, 6:30 p.m. Just call 972-325-1700 to register, and we will talk more about the bonds and the market and how to make intelligent decisions, and how to get a professional advisor on your side that has your best interest at heart, not just a commission salesperson like you get with the insurance guys and the brokers.
Patrick: That is awesome, 972-325-1700 to register for this excellent workshop on ways that you can protect yourself from this coming financial tsunami that’s going to hit – and hit really soon. Thanks so much for this part of the show. We’ve got so much more to come in just a few minutes.
[commercial]
Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher, Richard Jordan, the Chief Investment Strategist in the DFW area, and we’re so thankful for what you’ve been saying because, quite honestly, I think a lot of people do not understand the volatility of the bond market. They think bonds, treasuries, all is good, and then you were talking about TIPS. What is it, Treasury…
Richard: Inflation Protected Securities.
Patrick: Treasury Inflation Protected Securities.
Richard: Commonly called TIPS Bonds.
Patrick: And a lot of people are moving in there. In fact, we’ve got trillions of dollars moving in there.
Richard: Over the last three years, there’s been an overabundance of money put in that market. Anytime you’ve got an oversupply of money in a market, well, you know the lots of supply and demand.
Patrick: Exactly. The thing is this that there’s so much fear pent up in that money. They’re like, “I don’t want to lose any, I don’t want to lose any,” and yet, they’re about to get just slaughtered like sheep in the next year. Isn’t that true?
Richard: Just like they did in the stock market because the brokers have put them in in ‘07, knew the market was going to drop in ’08, but all they care about is their commissions this year.
Patrick: Well, you’ve got bills to pay, right?
Richard: Yeah, you’ve got to pay for the club, and the yacht, and the home in the Hamptons and the apartment overlook in Central Park. I mean, the guy’s got to live, right? That’s the way brokers live.
Patrick: I remember years ago, Donald Trump was given $400,000 a month to live after bankruptcy – wow!
Richard: Tough. How do you buy flowers for the apartment?
Patrick: I just don’t know how you survive in that; somebody could. But anyways, the point though is you’ve got a group of people, and a lot of people that are very afraid. You’ve got interest rates at an all-time low.
Richard: 25-year lows, absolutely.
Patrick: What is it?
Richard: 1.9% for five-year treasuries, 1.4% for Treasury Inflation Protected Bonds.
Patrick: Okay. And now, we’ve got the scenario where there’s a lot of volatility coming up – a lot of unsure people that when you look at what’s going on in Greece and Europe. You’ve got the Chinese and the Japanese going, “We don’t want this much of your debt as we used to carry.” That’s going to force the interest rate to come back up, isn’t it?
Richard: Right. So, guess what the bond brokers are pushing now?
Patrick: No clue; what’s next?
Richard: Because the rates are so low on the US treasuries, they’re talking about the next safest category historically – municipal bonds.
Patrick: Tax free.
Richard: Hey, they’re tax free, right.
Patrick: But, isn’t there a little bit of trouble in Dodge City.
Richard: Oh, my God. Let’s take a close look at this. Over 40% of the workforce in the city, state and federal government jobs, basically the baby-boomers, are set to retire in the next five years and collect their pensions. Do you think that’s going to put any stress on the system?
Patrick: Oh, absolutely. In fact, we were looking at our stuff the other day and we noticed that the tax rates for our home had actually properly evaluated our home which was, that was actually appreciated if they had actually said instead of inflating it by 30%, they actually stated about what the houses were selling for in our neighborhood.
Richard: And so, your value dropped over 20%.
Patrick: No, it was over 30%.
Richard: Wow.
Patrick: It was over 30%, as far as the tax basis, what they wanted to charge for taxes. Okay, so that means they’re going to get 30% less income as in the municipality.
Richard: So, let’s talk about where else they get income – sales tax. And sales tax collections are down 10% -30% across the Dallas/Fort Worth Metro and we’re one of the healthiest metropolitan areas in the country.
Patrick: Well, isn’t that directly related to the amount of available revenue to spend?
Richard: Yeah, it’s directly related to unemployment and underemployment.
Patrick: Right. People don’t have as much money, so they’re not spending as much. They’ve tightened their belt more than a few notches. So, they’re not buying the car, they’re going out to eat as much and that’s generating a lot less in tax revenue, right?
Richard: A lot less. So, that’s causing anybody that’s in this industry that’s got any brains to forecast that we’re going to have record amounts of defaults in the municipal bonds – record amounts compared to any time in the last 50 years, any time since the Depression.
Patrick: Now, historically, and I mean like since the Depression, there has not been many municipalities that have defaulted in their bonds.
Richard: No, take a look at California right now. Would you buy a California bond?
Patrick: No, I’d consider it more risky than a junk bond.
Richard: Well, exactly. And so, what we’ve got is muni rates are slightly higher than these US treasury rates, or Treasury Inflation Protected Bonds, and they’re tax free. And guess why they’re pushing them? Commissions.
The bond brokers don’t care about you. They don’t care if you get caught in a default and you’re, not collecting interest, but the principle that’s worth zero. They’re not going to tell you this information because they’re not required to. Oh, but it may be somewhere in the prospectus that you could risk and lose all your money. But, who ever reads a prospectus, Pat?
Patrick: Well, one thing about that, isn’t that the same – if you want to call it offense – that Goldman Sachs did?
Richard: Exactly.
Patrick: I mean, they were selling securities that they knew were garbage.
Richard: Well, the money that they were investing for themselves, for their company, they were sorting the mortgage securities that they were selling to some of the largest banks in the world and it ended up driving the eighth largest bank in Germany into bankruptcy, and another large bank here in the US.
Patrick: That’s what I’m talking about. So, when you look at the municipalities – I look around and I’m not a Registered Investment Advisor. I’m a host of a radio show’ I’m helping to make this thing more popular on the Internet and other things. But, my point is this that I can at least look around and go, “California is in a boatload of trouble.” You look at Florida.
Richard: All the states are. All the states.
Patrick: Well, you think it’s all? Because there are some that are like real key, like Arizona and Florida and New York.
Richard: Well, yeah, those are the worst. Those are going to have the lowest ratings, but all the states have this problem. You’re not seeing surpluses anywhere. The most conservative states, like Texas, are even having to cut their budget.
And when you start looking at budgets getting cut because sales tax revenues are down and property tax revenues are down, and now you’ve got record numbers of commercial properties going into default which means record numbers of commercial foreclosures coming soon, which is going to reduce the commercial property values, which is really a much bigger hit for municipalities, where are they going to get the money to pay for these bonds?
Patrick: Oh, absolutely. In fact, looking at the commercial real estate investments that are there and the adjustable rates that are – loans, mortgages, whatever – that are out there, those are sledded to go through a massive default in the next two years.
Richard: They are.
Patrick: Okay. So, just like you say, when those things default, they’re sold for dime on the dollar or whatever or a lot less many times, and then they get to where it’s a dime on the dollar.
Richard: it could.
Patrick: That’s horrible. So, what can they do about munis?
Richard: Well, I wouldn’t ask a municipal bond broker for advice. I would ask someone that has a fiduciary responsibility to you to be your trusted advisor which is what we are. We’re one of the few; we’re in that top 5% of the Registered Investment Advisors that don’t carry the brokerage licenses and we’re not driven by commissions. We’re driven by the desire to please you, to meet your needs and goals for your retirement and for your investments.
Patrick: Now, with that in mind, you’ve got a workshop coming up this week.
Richard: We do.
Patrick: And it’s at Timarron Country Club, starts at?
Richard: 6:30 p.m. on Wednesday, June 2nd.
Patrick: Okay, any cost involved in this thing?
Richard: No cost. It’s a one-hour educational-only seminar – no selling. We’ll serve you dinner for the trouble of you coming on out and if you’ve got some questions, we’ll be happy to answer them afterwards; just an opportunity to meet with me and some of our staff.
Patrick: Now, I will say that your clientele does tend to be, I would say, a little bit more affluent, so who should be here?
Richard: They’re either smarter than the average bear or they’ve got a little bit more saved than the average bear. So, our range of investors’ account failures are from roughly $250,000 up to $7 million. So, we would like to talk to people that have at least $250,000.
Patrick: Very good. And to register, it’s real simple. It’s just 972-325-1700, right?
Richard: Absolutely. No salesman will call. You will have the opportunity to hear me speak and we’ll talk a lot more about these bonds and smart ways to invest without getting so emotional about the market; smart ways that produce higher rates of return with lower fees and no commissions.
Patrick: I am really thankful for what you do because I’ve heard you speak and it was excellent. I was really surprised at how much information you cram into an hour, how valuable.
Richard: Bring your pen and paper.
Patrick: That’s really good too, 972-325-1700 to register for this workshop this week with Richard Jordan of Financial Fortress and we’ll just tell you, it is worth the time. 972-325-1700. We’ll be right back.
[commercial]
Patrick: Welcome back to Financial Fortress Radio. This is Patrick Dougher, Richard Jordan, Chief Investment Strategist in the DFW area. I’m getting a little tongue-tied here at the end of the show. It’s been good. We’ve talked about a lot of different things. We talked about securities that have to do with – and I really should say treasuries and bonds.
Richard: Bonds; things called bonds.
Patrick: Things called bonds.
Richard: That are thought to be safe, but right now, you’re set to get whipsawed in one direction or the other with this volatility coming up in the bond market. It’s going to make the volatility in the stock market the last couple of weeks looked like a cakewalk.
Patrick: But, a lot of people are going to fight you on that. They’re going to say, “It couldn’t be that bad,” but you’re talking 40% plus.
Richard: Yeah, you could lose 40% or 50%.
Patrick: And that really has to do with where the interest rate is and where it’s expected to go for multiple reasons. And it’s not like it has to jump a lot; it’s just effectively doubling. It’s 1.9% to – what do you say?
Richard: Well, 3.48% I believe is the ten-year average. That would result in a 44% loss for you.
Patrick: And that’s in the principle.
Richard: Right.
Patrick: Okay. So, you take all this money that you think is safe, you drop a million dollars into the bonds that are out there and you could have potentially close to half a million next year. It could be pretty bad.
Richard: It could get ugly fast.
Patrick: Okay, and that’s the thing that we’re just trying to emphasize. Then the funny thing is this that we went on to look at what’s the next kind of safest investment, which are TIPS you call them.
Richard: Treasury Inflation Protected Securities.
Patrick: Okay, but they’re not much better.
Richard: They’re only paying 1.4%.
Patrick: Okay. And if we do have inflation showing up, fine, but the real risk is in deflation which we could have that for a year or two, and that would mean even more mess.
Richard: Yeah, the face value of your bond could actually drop while you hold it.
Patrick: Okay. Then we went on to the next most conservative investment which is…
Richard: Municipal bonds.
Patrick: Right. So, we’re looking at municipal bonds, but most of us look around and go, “Wait a minute. We’re looking at 30% plus in a reduction in the income to the municipalities just from the changes that have happened in the last few years in property valuations, in the amount of unemployment or underemployment that’s out there,” right?
Richard: Yes, and sales tax revenue is down 25% -30% around the country as an average and in the very best municipalities in the Dallas/Fort Worth Metro, which is one of the healthiest, they’re still down over 10%.
Patrick: But, the point that that really amounts to is this that when these bonds are offered in the marketplace, they’re going to become increasingly more risky.
Richard: A lot of municipal bonds were rated AAA a year ago are going to end up being junk bonds in the next two years.
Patrick: And that’s because there’s just not any income coming in, or not enough to even service the debt that they’ve created.
Richard: Until the unemployment rate drops fast and the underemployment rate, what I call the hidden underemployment rate, we’re not going to see these sales tax revenues come back, we’re not going to see these home values come back, and these municipalities are going to be hurting. And they’ve got huge pension cost coming with over 40% of the baby-boomers set to retire in the next five years. So, imagine that – what do you think that’s going to do to city services? They’re going to drop while costs go up.
Patrick: Absolutely. It’s going to be one of those things where cost continues to rise and the only way that they’re going to be able to pay it, essentially, is print the money.
Richard: But cities and states can’t print money; they just go bankrupt.
Patrick: They just go bankrupt and, at that point, we’ve got all kinds of services that are falling out. It could be a rough ride.
Richard: Remember the Orange County bond default.
Patrick: Right.
Richard: It’s going to happen all over the country.
Patrick: Well, the thing that’s so important that I’m seeing is that if you don’t have a good advisor that really understands this, well, I would say they should be talking to you.
Richard: Absolutely. We take the clients’ needs and we treat them like our needs. We put the clients’ needs ahead of our own needs because we’re fiduciary.
Patrick: Well, as a Registered Investment Advisor, there is a huge difference between an RIA, Registered Investment Advisor, and a broker.
Richard: A broker is driven by commissions. The SEC thinks you know what, but a lot of people don’t realize that brokers are driven by commissions first and it’s caveat emptor, buyer be aware, that’s what the SEC says. And the category of Registered Investment Advisor was created in 1940 for the wealthy and the smart people – the educated people – and that’s all they use.
And 95% of the registered advisors, unfortunately, also carry brokerage licenses which creates the conflict of interest. At Fortress, we do not carry the commission-based licenses because the only purpose to carry those licenses is to collect commissions.
So, if you’ve got a Registered Investment Advisor and he’s got a Series 6 or a Series 7 license, it’s only to collect commissions. It’s real simple, folks. If they’re operating under a conflict of interest, you don’t have the most trusted advisor you could have.
Patrick: Very good. I know that you’ve got this workshop coming up this week. I want to make sure that people know about that early, that you’ve got a – it starts at 6:30 – about an hour of good information and I will say I’ve listened to it and it is excellent, it’s a ton of information when it comes down to it.
And it’s not a sale speech which is really unique. I really was actually taken back by that. I thought, “Wow. This is not a sales pitch.” It’s a presentation of information that will help investors make better decisions.
Richard: Absolutely.
Patrick: I know that they can connect with you just by calling the 972-325-1700 or they could connect with you at your desk, correct?
Richard: Yeah, the 325 number is to register for the seminar. So, to register, call 972-325-1700. If you want to call me direct, try my desk 972-758-4484 and, of course, I’m busy during the day with the market, so I would recommend you call after 3:00 or wait for a returned call after 3:00 if you want to leave a voice mail.
Patrick: Very good. Now, I also know that you’ll have time for question and answer afterwards, and then if somebody wants to meet with you, they can do that as well after they’ve been to the workshop.
Richard: You can schedule an independent objective evaluation of what you’re holding anytime you want by calling my desk or coming to the seminar, and if you decide you like me, you can do with that.
Patrick: Great, it’s awesome. And again, it’s at Timarron Country Club over in Southlake. It’s just actually about a mile off 114 on 1709. You go that way typically to get to Timarron.
Richard: Yes, where 114 and 121 come together, just west to the airport.
Patrick: Very good, so people from all of Dallas and Fort Worth could be a part of that. 972-325-1700 to register. No salesman will call; they’ll just get a confirmation, and then if they want to connect with you, 972-758-4484. As we’re going into this next few weeks, what should people be looking for with the interest rates and bonds?
Richard: Well, again, there is so much material out there from the analysts that the bond market could head either direction fast. The volatility is going to be going up in the next year. I’m not sure it’s going to change much in the next two weeks.
Patrick: Now, I just figured to look for, what should people begin to do?
Richard: I would pay attention to the US treasury rates. They’ve been dropping, but I think they’re going to bottom again. The only reason they’ve dropped is because the Federal Reserve has chosen to buy our own paper, which means we’re robbing Peter to pay Paul.
Sooner or later, we’ve got to toss that money into the budget deficit and pay for it. It’s absurd to think that we’re doing that. That’s never a long-term strategy, and the Chinese and the Japanese are just going to weight us out.
Patrick: I understand. I know that next week, one of the things we do want to cover is the whole Roth IRA conversion. That’s such a big decision. There’s so much money that it has been coming out of the 401Ks in retirements. People just don’t know whether to taken that or not. I know that’s coming up.
I would encourage you that as we move into this next week, go to Richard’s seminar. It’s Wednesday night. It starts at 6:30, ends at about 8:00ish; great dinner, great information. 972-325-1700 to register or 972-758-4484 to connect with Richard at his desk. Thank you so much, and we’ll talk to you next week.
Transcript by:
Lainie Lord
www.magiscript.com

Tax Talk 5-23-10

Pat: And welcome to Tax Talk. This is Pat Dougher, Jeff Pickering CPA, Rex Hogue of Bollinger and Hogue in the North Texas area. We’ve got your tax answers. You know a lot of people listen to this show, they get so much information for their business, their personal information as far as how to lower your tax bill. I mean when you really get down to it, the more you know the more you get to keep. That’s what the show is really out to give you and help you with. Jeff you’ve got some deadlines coming up, why don’t we go right into those.

Jeff: Right. So our first deadline is actually a retroactive deadline. We reported that on the 17th if you are a nonprofit, if you’re a small group like a PTA, your gross receipts were under $25,000 a year, then previously you were required to file a Form 990 for Nonprofits. And this year that changed because of a law change back in 2006 and so we were telling people you need to file your extension. And the IRS has told people, you need to file the extension or you need to file your nonprofit form if you’re one of these little bitty nonprofits. And lo and behold, the IRS has recognized that many of them did not get the word and so Doug Shulman, the Commissioner, has said it don’t worry, we’ll figure something out for those of you who didn’t.

Pat: That’s really good. One of the things that I want to make sure is that people know they can call and get their questions answered at 214-787-1570, that’s 214-787-787-1570. If you’re outside the DFW area, it’s 800-583-1570 or #KLIF on your Sprint wireless phone. I know that there’s so much information people can get from us here on this, a lot of people wonder “can I call and with a question that’s not being covered on the air?” Yes. Taxes, estate planning and estate taxes, those are things that come up incidentally sometimes, and so if you’ve got a question, if you got a concern, if you have something that’s changing in your family then you want to call in at 214-787-1570. I know we’ve got more stories from…

Jeff: Sure. And I’d like to remind people on property taxes protests also are coming up, at least here in Collin County, the due date is May 30. Other counties have their own due dates so you might just check it out. If you want to protest your property taxes this is the month to do it in. Okay so we’ve got an American Jobs and Closing the Loopholes Tax Act. So this is an act that is designed to close some loopholes and some other stuff. So this is in Congress right now and it looks like it has some good legs on it, so it looks like many of the provisions are going to, it hasn’t actually passed yet, but it looks like it’s going to. There’s not a lot of discussion about the stuff that’s in this bill. So what we have on the good side, we have a year or more for the research credit, 15 year write-offs for lease hold improvements for restaurant buildings and improvements, the five year write-offs for farm equipment that’s extended. We’ve got the, people were able to deduct charitable contributions from their IRA and that’s saved them money; that’s in there another year. The enhanced deduction for food and book inventories, so that’s out there. On the bad side, let’s talk about the bad side, what loopholes are being closed, there’s a thing called carried interest and people in the real estate and the hedge fund business know what that is because that’s how they get paid usually. They get paid by having a share of the business, instead of getting paid in cash so they are going to close that loophole. Most people were getting their money in capital gains because they had a share of the business. That’s going to go away. Now that carried interest is going to be converted into ordinary income, at least 75% of it is.

Pat: Explain exactly what that would mean, as far as who’s the person, if they are in the real estate business, you’re saying they own a part of something? Clarify that a little bit.

Jeff: Yes. It’s easier to do it in the hedge fund example. So the hedge fund manager gets a bunch of people together and they put their money into this hedge fund. And the guy says okay, I’m going to get compensated based on however much the performance of the hedge fund does. So the hedge fund makes $100 million, the guy gets $15 million. And everybody’s happy because he made $100 million; maybe he started off with $50 million. So, the hedge fund guy gets $15 million as capital gains. Well this law is going to change that so that he is going to have much of that be ordinary income, so he’s going to be taxed at the highest rate.

Pat: Ow.

Jeff: So for people out there who have carried interest, or know what they are, watch out because this is going to change your tax rates dramatically.

Pat: Wow. Are there any safeguards against that or anything anybody can do?

Jeff: You know so far, it took a long time for these people to come up with the idea of carried interest, so I don’t see any…

Pat: The longer it boils the worse it gets.

Jeff: Yeah. I don’t see any on the horizon as a solution. But eventually some people will. Usually what happens is they pass a law and then the loophole closes and eventually we mull over it for long enough we figure something out. So that’s going to close the carried interest loophole and then there is a new tax on S corporations engaged in professional service business.

Pat: That’s going to affect all three of us.

Jeff: Hey that’s right, that’s going to affect all three of us. So this is a tax, it’s like a Medicare and Social Security tax on business. There are two types of S corporations. One is based on the skill and reputation of three or fewer individuals, so that’s one kind of S corporation that’s being taxed, and then an S corporation where there is a partner who is a partner in a professional service. It also closes a loophole for professional services that have limited liability corporations or limited partnerships. So for many people, that was just a strategy for professional service businesses. It was just a normal everyday meat and potatoes tax strategy. People with S corporations, they probably are doing this. So this is going to close…

Pat: Now what does it do, like, when I’m sitting here and thinking about speakers that I know, financial planners that I know, people that have structured their business with an S Corp.

Jeff: Right.

Pat: How is it going to affect them directly?

Jeff: Well, it depends on how they define, I mean this is the language; it says it’s a professional service business. So we have a question, how are they going to define professional service business? We don’t know that yet. The skill and reputation, what is that? We don’t know that one yet either so when it really comes down to what the wording to this is.

Pat: That’s good. I tell you, if you want to join the conversation today it’s 214-787-1570, 214-787-1570 or 800-583-1570 if you’re outside the DFW area, #1570 if you’re on your Sprint wireless phone. This is Tax Talk. We’ve got the answers to your tax questions. We’ll be right back.

Pat: Welcome to tax talk. This is Pat Dougher, Jeff Pickering CPA, Rex Hogue attorney in the North Texas area with Bollinger and Hogue. If you’ve got questions about estate taxes, estate planning, taxes in general, your business taxes, anything that is really holding you back from knowing the right information, because we do believe that the more you know the more you get to keep. Just call in, it is 214-787-1570, 214-787-1570. And I know that many of you might not know that these guys are local. Jeff is out of the Plano area at 6533 Preston Rd. Suite 300. You can contact his office, and actually, there’s somebody standing by now at 972-378-5200, that’s 972-378-5200. I would encourage you to call and here’s the reason – They have agreed to offer a 45 minute consultation with anybody that calls in this week. And a lot of people might think “well taxes are done.” No, you know what? Here’s the thing you need to remember, tax planning can save you tons. Tax kind of cleanup from last year is really difficult if you didn’t plan for it. I know Rex and Brad have offered the same thing. You call their office at 972-309-0104, that’s 972-309-0104. They are up in Frisco at 2595 Dallas Pkwy. Suite 100 at Bollinger and Hogue. The crossroads there are Gaylord, between Gaylord and 121 and they can call you this week, connect with you and set up an appointment so they can really go over some of their tax implications and find out exactly what other ways you can help them prepare for the tax tsunami that is coming. Wouldn’t you agree?

Rex: Yes.

Pat: I know we wanted to clarify something on this tax, that loophole…

Jeff: It’s the Closing Loophole Act. And also want to remind our listeners that our consultations are for people who have a business, or interested in starting a business, it’s a free 45 minute consultation. So we were talking before the break, we were talking about the American Jobs and Closing the Loopholes Tax Act. We were talking about specifically the loophole they are closing, which is a very popular loophole for people who have small businesses, that’s on the S corporations. So this is a reminder for S corporations, you get your money in two ways. One is through wages and the other is through the residual ownership of the S corporation, which doesn’t have Social Security or Medicare. It’s the passive part of your S corporation. So what this act is going to do, this Closing Tax Loophole Act, is going to tax the people who previously were not paying Social Security or Medicare on the stuff flowing through.

Pat: Oh, that’s going to cost a lot of people a lot of money..

Jeff: Oh it will.

Rex: It’s going to cost people jobs too.

Jeff: It probably will.

Rex: Because people like me, if we have to pay that kind of tax on distributions, the bottom line is there’s just less money there to hire other people.

Pat: That’s right. And the number of people that have just a small S corporation professional services, that’s a huge part of the population. That’s really good. We’ve got a caller. Let me go to Jerry. Jerry, you’re on the air, you have a question about Social Security?

Jerry: Yes I do. I know that a person can end up paying up to 85% on their income from Social Security. My question is, is there a difference between the income that a person has from a job that’s impacted to that, or is there a difference for income that they are getting from a pension?

Jeff: It’s basically for the purposes of Social Security it’s a modified AGI computation and they are both considered the same under that particular computation.

Jerry: Okay, can I ask you a second question?

Jeff: Sure.

Jerry: Okay, I work as a retiree in the Texas Municipal Retirement System in the state of Texas, in a city that withdrew from Social Security in 1983. I understand because of the windfall profit elimination that I would not receive full income from Social Security, but I get my statement showing that I’m going to get “x” number of dollars per month. And actually, I’ve been told that it’s going to be about 25% of that. Are you familiar with this?

Jeff: It sounds like the same kind of thing that the Texas teachers are getting.

Jerry: Yes.

Jeff: So it’s the same issue really.

Jerry: At one time there was something that was a loophole that closed that for us as municipal employees was the same thing that impacted the teachers.

Jeff: Yes, that’s right.

Jerry: All right, well you’ve answered my questions.

Pat: Thank you so much Jerry. And again if you’ve got a question 214-787-1570, 214-787-1570 I would encourage you to take advantage of this opportunity. And the reason I say that is look at Jeff Pickering CPA, Masters in taxation. One of the things that Jeff is really noted for is helping people reduce their IRS visibility for audits because he pretty much fills out the applications and forms in a way that makes you, I don’t want to say audit proof, but you are really prepared. And then I know Rex and Brad, I know Brad has a background as a CPA as well, but it really has to do with estate taxes and estate planning.

Rex: He’s also got a Masters in tax, an LLM degree which is an advanced law degree. So Brad’s really got some amazing credentials when it comes to tax.

Pat: And Brad’s your partner at Bollinger and Hogue. Again, I would just encourage you to take advantage of the opportunity you have here to call in at 214-787-1570 and get some answers to the questions you might have. Now, at this point I know we wanted to cover guardianship and probate. And I know that a lot of people, probate and death, all of that is just one of those topics we tend to avoid. But when it comes to guardianship or probate, clear up the confusion for us Rex.

Rex: Well guardianship is the court supervised management of assets for somebody who has become incapacitated, while probate is the court supervised transfer of assets for somebody who has died. So guardianship, another way to think of that is a living probate. And that’s while you’re alive.

Pat: Right.

Rex: and here’s the reason they exist; what you have is a person that has assets in their own name and they either become incapacitated or they die. If you own assets in your own name, you are on your way to probate court because at some point they’re going to need your signature and you’re not going to be able to give it. You’re either going to be incapacitated, you’re going to be dead, or you’re going to have disappeared. So when we run into that, we have to go to court and get a judge to basically provide a substitute signature. And that’s really why we have probate and guardianship and we tell people that guardianship is one of those 12 step programs and we all know what 12 step programs are like. Nobody wants to be in one. I’m just going into take off the 12 steps of guardianship right quick. step one, hire an attorney; step two, file an application; step three, give notice to interested parties; step four, the court appoints what’s called an attorney ad litem; step five, the petitioner obtains a doctor’s report; step six, the attorney ad litem either adopts that report or they go get their own; step seven, the petitioner obtains a social study; step eight, the attorney ad litem either adopts that social study or gets their own; step nine, you go to a hearing (several things happen at that hearing); step 10, you have an order approving the Guardian that the Court appoints; step 11, the Guardian gathers asset and files a guardianship inventory; and step 12, the judge signs the order approving the inventory and then you have guardianship in place. Now…

Pat: Hold on one second. I am sure that for those of us that have not taken Ron White’s memory course, I would encourage you to contact Rex and, actually you could probably get a copy of that somehow, that information.

Rex: Yes.

Pat: Okay. Is it in a report or something?

Rex: Yes we are offering a report this week, our Family Estate Planning Report, What Everyone Should Know about Effective Planning for Incapacitation or Death.

Pat: Very good. Well I want to take this next call, Eric, real quick and just get your question and then we’ll be going to break right after. So, Eric, you’ve got a IRA Roth question?

Eric: Yes. If you roll over a traditional IRA in 2010 to a Roth IRA, do the Roth conversion, and you spread your tax out over 2010 and 2011, if you rollover another, or do another conversion in 2011 at much higher tax rates or lower tax rates next year, is the portion that’s converted next year treated on its own tax basis and do you add whatever tax you are spreading from 2010 to 2011, is that the way that works?

Jeff: Yes, so Eric actually it’s into 2011 and 2012. So you convert this year 2010 and you pay the taxes in 2011 and 2012. Now you can do multiple year conversion and each of those will just tack on to whatever you’re doing that year.

Pat: Eric can you hang on for the break here? Or do you want to just listen to the answer afterwards?

Eric: Yeah I could hang on because I think I have another question based on what you just said.

Pat: Very good. Well, I want to thank you guys for listening to Tax Talk and the next half of the show is going to be more about guardianship and probate and your tax questions at 214-787-1570 here on Tax Talk.

Pat: And welcome back to Tax Talk. This is Pat Dougher. We have a great show going. We’ve been talking about taxes that you feel, loopholes that are closing in the near future and how it’s going to impact you. We’re also covering things that have to do with guardianship and probate and answering your questions on the air. If you want to join us at 214-787-1570, 214-787-1570 to connect with Jeff Pickering CPA, Masters in taxation, Rex Hogue, attorney-at-law with Bollinger and Hogue. And Eric, you are on the air and you had more questions about the Roth IRA conversion?

Eric: Yes. If I convert in 2010 and I have very low income in 2010, and that tax is not due until, it’s spread out until 2011 and 2012, is the value of the tax set this year and is added to any supplemental or subsequent Roth conversions or do I get the tax assigned to the year in which its due, in other words in 2012, if I have a lot higher in count is it taxed higher then?

Jeff: The tax is the thing that you pay in 2011 and 2012. So it will be set. We were talking about that in the break, we were saying dealing with the devil that you know is better than dealing with some unknown future tax devil. So that’s a good reason for doing it and getting it done in 2010.

Eric: Do I have the option of paying it in 2010 or in spreading it out?

Jeff: Over 2011 and 2012. So that’s a strategy that people do, they do multiyear conversions. In order to do a multiyear conversion, it takes more planning, but you should be able also to save more money.

Eric: Alright. If you have more income in 2012, then how is that going to save more money?

Jeff: Well, that’s where the planning comes in. That’s something you have to map out and see if it’s actually going to work for you.

Pat: Well, one of the things I would encourage Eric, sit down with Jeff and do some planning. It‘s 972-378-52002 to get with Jeff and you might do that. Anything else?

Eric: One other one. If I have one IRA and I only want to convert a portion of it in 2010, because I think that’s the amount of tax I could pay, then can I convert another 15% of that IRA in 2011 and continue to do multiple conversions?

Jeff: Yes.

Eric: Whatever tax is due that year…

Jeff: Yes. You’ll be able to do it that way.

Eric: Okay. Thanks a lot.

Pat: I’ve got another caller on the air. It’s Robert, you’ve got a question about Texas Tomorrow Plan?

Robert: Yes sir. I appreciate you taking my call. In 1996 I bought a four year Texas Tomorrow fund it’s going to be coming up, she’ll be going to college about this time next year. What are the tax implications on that?

Jeff: Well, you’ll take the money out and use it for tuition, room and board and none of the income will be taxable to you. So, I can tell you that my clients that have had the Texas Tomorrow Fund have been very happy with it. I think it’s a great program and I think you’ll probably be happy with the results as well.

Robert: So we’re making sure we’re talking about the same one, this is the one that was back in ‘96 it wasn’t the one that is current.

Jeff: The prepaid tuition one, right?

Robert: Right, you buy four years and so I paid that money out so there’s no tax implications at all?

Jeff: There’s no tax implications on it at all. Actually for that one, the money is just used for tuition and you are even Steven.

Robert: Wow, okay then. Thank you.

Pat: Thanks Robert. Well, that was excellent. If you’ve got some tax questions that you need answers for, just call into 214-787-1570, 214-787-1570. Let’s go back to guardianship and probate, Rex?.

Rex: Well, once you put the guardianship in place, people think “Now we’re done.” But actually, I tell people that’s really the beginning of troubles because on an ongoing basis, the Guardian has to manage the assets according to the Texas probate court and what that means is, you can’t have investments that aren’t government-backed securities. Well, that can really foul up your investment planning, because you may not be able to invest in things that can earn as much money. And right now, with CDs paying 3%, 3.50%, something like that, people can see income seriously go down. Another thing that I don’t like is court requirements, such as having to go to a hearing to be able to do a garage sale. Everything is controlled by the court. And on an ongoing basis you also have to have a social study and doctors reports, and a hearing every year, do an accounting every year. So it’s a very expensive process. We find the more that we tell people about it, the less they are interested in doing it. And you have cases where people think may be a power of attorney will avoid it. Actually, it may not. We had a client one time who signed a power of attorney and then decided to rearrange his brains with a .38. Fortunately he did not die. But he wound up a vegetable. Nobody would take the power of attorney because they said the guy’s mental capacity when he did it, they questioned that, kind of a reasonable question if the guy shoots himself three days after…

Pat: Yeah, it was kind of a planned thing. Well one question, just for people that joined us since the last time you gave a definition, guardianship is for the living, probate is for the deceased?

Rex: Correct. Guardianship is what happens while you’re alive, probate is what happens after you die.

Pat: Okay

Rex: So probate, in Texas, a lot of people have said they’ve heard of probate is pretty easy and generally that is true, but there are exceptions. We find in our office, and we do a lot of probate, probably about half the time probate is generally not bad at all. In about half the cases it’s more complicated than people anticipated. Probably 10 or 15 maybe 20% of the time it turns into an out and out nightmare for the family. There’s all kinds of things that come up in probate, there are a lot of legal requirements, you have to notify people, just a lot of opportunities for things to go wrong. It’s a very complex process, that normally, things go through the system without too much difficulty, but when things go wrong it can be a nightmare.

Pat: Now is there anything that, like any guidance as far as…I would imagine that the more problems show up with the more assets that you have. Is that a factor?

Rex: That’s a factor. A complicated family situation is a factor. Second marriages…

Pat: Estranged or something?

Rex: Or the couple has the yours, mine, and ours kids. The Brady Bunch. That gets more complicated because you’ve got multiple issues that quite frequently have not been planned for. And so they get settled in probate and that could turn into World War III unfortunately. There is a great book that we use that provides a lot of information. I don’t know if it’s still available, but it’s called How to Live and Die: Texas Probate. It was put out by the Texas Bar Association a few years ago. And we’ve been using the things in that book for years, even though the requirements have changed, we now have greater notice requirements, greater accountability in the process for executors and administrators. But in Texas, we have several different probate procedures for some of them, they’ve tried to make them as simplified as possible, which is a good thing. By the way, I’ll also make a little plug for probate judges. They generally are very kind to the people who are in their courtrooms; they try not to make the process more stressful. So when we talk about problems in probate, we’re really not talking about mean and nasty judges, were talking about a system that’s just difficult to administer. And there’s no easy way around that. There is a chart that we have, I showed it to you little while ago, really two of them. One of them we call the “estate settlement cross funnel.” And if you think of everything that you have is basically going through this funnel, there are three types of expenses that come out of it. There is administrative expenses; you’re always going to have those. Unfortunately you don’t get to die for free. They don’t charge you, they charge your family. But administrative expenses, and then there is estate taxes. Probate and estate taxes are 100% voluntary taxes. And the last thing that I will tell you is who gets paid first at probate. There are 11 people in line in front of your family when you go through probate.

Pat: 11 people. Okay, well I know that you can get that information by calling 972-309-0104 and request, what’s that report called?

Rex: The Family Estate Planning Report, and please leave it in our general mailbox.

Pat: And leave everything, especially a phone number and say it a couple of times because electronics will mess anything up. Anyways, we are coming up on the next break. It’s 214-787-1570. One more opportunity for you to get your tax questions answered here on Tax Talk.

Pat: And welcome back to Tax Talk. This is Pat Dougher. We’ve got a great show going. We’ve got several questions about Roth IRA conversions, which I know a lot of people are looking at and evaluating if that’s a potential for them and then also we’ve been talking about guardianship versus probate with Rex on some of the ways that Texas is a more friendly state than most but there are some obstacles to hurdle over, so to speak. We’ve had a number of calls and I just encourage you, if you want to get in you’ve got about nine minutes 214-787-1570, 214-787-1570. And Rex, you had a couple of other things you wanted to add on the…

Rex: Yes. We’ve been just discussing what these two procedures are, guardianship while you’re alive, probate after you are dead. And here’s the thing I want people to get about this, Guardianship and probate are not problems. They are the solution to a problem. The problem is you need a person’s signature and you can’t provide it anymore because they are either incapacitated or they are dead, or they have disappeared. Probate and guardianship are the solutions when they haven’t done other planning to create a better solution.

Pat: Right, and that’s what you guys specialize in.

Rex: Yes.

Pat: So connect with Bollinger and Hogue. Their website is easy to get to Bigtexlaw.com, that’s just bigtexlaw.com and then also in order to connect with Jeff Pickering his website is PickeringCPA.com, that’s PickeringCPA.com. And I want to make sure that we go back to talking about the Roth IRA conversion, a lot of people are looking at that right now.

Jeff: Yes they are very popular. There are so many reasons that you should do it. The old way to look at it was, if you know the tax rate is going in and going out then a Roth and a Regular would be the same. But that’s not really true. You know you’re dealing with a shifting environment of tax law and probable increases in tax rates and also one of the best reasons I can think of to do a Roth is give yourself options. If you’ve got options, if you want to have all your money tax-free one year, if you want to go buy a lake house you can take all that money out of your Roth and you won’t bump yourself into a higher tax bracket.

Pat: One of the things that, just for the general listening audience, they’ve probably heard the term Roth IRA conversion. What is a Roth IRA conversion? What’s the difference in the benefit?

Jeff: So, is normally you wouldn’t be able to do the Roth conversion, convert your money from a regular IRA to a Roth because there was a $100,000 adjusted gross income limit. If you made over $100,000 you can do it, but they got rid of that rule for 2010 and beyond and there is also another special rule that says you can pay the taxes on that conversion and in 2011 and 2012. So that makes it, and in the face of increasing taxes which is what we need to pay for all this deficit spending, it looks attractive for people to do the conversion. When you look at what a conversion is, you shouldn’t just go out and do it though; you’ve got to look at the tax impact. You should look and see what is the most sensible way and how much to do it. You’ll want to figure the effect on your Social Security, Medicare, like our first caller he mentioned that he was talking about the 85% Social Security. A conversion would cause your Social Security to be taxable. You’ve got to look at if you’ve got company stock in a 401(k), you want to leave that there; you don’t want to convert that because it’s net unrealized appreciation and there’s a special tax benefit of leaving that there. Your beneficiary designations, those are all things you need to look at when doing a conversion.

Pat: So it sounds like somebody could get some good benefit from sitting down with someone like you to do some planning.

Jeff: Planning is the thing. Planning is key.

Rex: Yeah and the Roth, what it basically does is, it’s an IRA that is not subject to income tax as the money comes out. Just in case people don’t know that.

Jeff: Yes thank you Rex, sometimes I assume too much.

Pat: I’m not in y’alls industries but if you’ve got an IRA now, you can essentially pay the tax on the money that they have and then you’ll never be taxed on that money again, even with growth. That’s pretty cool. But it’s again, sitting down with Jeff and doing some tax planning, it would make all the difference in the world. They can call you at 972-378-5200, 972-378-5200 up in Plano; you need to go visit with them. Again with Rex and Bollinger and Hogue it’s 972-309-0104. Anything else?

Jeff: Well, that’s it. We were talking about loopholes, and I’d like to continue on a little about loopholes. One of the loopholes we were talking about is we have a hiring your children to work in the family business can be a loophole.

Pat: Ah, child labor (laughing).

Jeff: Child labor. Make them work for it (laughing).

Rex: Tax while you’re still not refer to those as loopholes. They are legitimate tax strategies.

Jeff: They are legitimate tax strategies. But, they’ve been on the take for so long, the kids, you need to get them to work around the office and pay them, and you could do some income shifting, they call that income shifting, that’s the legal name for it. If they are working in your sole proprietorship then you don’t have to pay Social Security and Medicare if they are 18 under and you could also, for some of my clients, they have some of their kids working and they give them an IRA. So the kid as a teenager in these already have an IRA and it’s an incredible idea, once that kid is retirement age.

Pat: So it’s just basically planting a good seed for them.

Jeff: Exactly.

Rex: And you might point out that they can be an amount up to $5700 per year per child, tax-free.

Jeff: Right, but if you add the IRA on top of it.

Pat: That’s great. Well I really encourage you guys to connect with Jeff Pickering or Rex Hogue with their offer this week of a 45 minute consultation about your business or your enterprise and your estate. To get a hold of Jeff, it’s 972-378-5200, it’s 972-378-5200 and with Rex it’s 972-309-0104. Rex is giving away a special report in its called…

Rex: Family Estate Planning Report.

Pat: Family Estate Planning Report. Thanks for this week and you can always catch the show at PatDougher.com or doersuccess.com. Talk to you next week.