MIKE: Good morning and thank you for listening to Decker Talk Radio’s Protect Your Retirement. A radio program brought to you by Decker Retirement Planning.
BRIAN: This week we’re talking about market top signals or signs as well as some estate planning tips towards the end of the show.
MIKE: The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Hello, hello, and good day, everyone. This is Mike Decker and Brian Decker on another edition of Decker Talk Radio’s Protect Your Retirement. Brian Decker, a licensed fiduciary from Decker Retirement Planning. Listening to KVI 570 and KNRS 105.9. We’re excited to have a great show lineup today, but before we get started, Brian’s got some fantastic information that will probably take the first 20 minutes of our show.
BRIAN: Well, I was going to take the first 20 minutes then I decided, Mike, to pare it back a little bit. I’ve got 20 pages of notes that I thought I’d just pare back to summaries here.
MIKE: [LAUGH] Yeah.
BRIAN: And they all talk, it could easily turn into a rant of what the signs are that we’re at or near a market top. These are kind of interesting. So, first off, let’s look at standard valuations of the market. The S&P 500 is trading right now at 25 times trailing earnings. At Decker Retirement Planning, we went back and saw that in the last hundred plus years of the market you look at all the 10-year segments going forward every time there’s been a change 25 or higher price-earnings ratio.
BRIAN: Mike, once you start at a price-earnings ratio of 25 and you go out 10 years, how many times out of those 10-year segments do you have any of those 10-year segments making money 10 years going forward?
MIKE: Zero.
BRIAN: Zero is correct. So, we are at a price-earnings ratio now where never in history have the future 10 years made money from this level. So, mathematically, which our practice is, Decker Retirement Planning, we pride ourself on being very mathematical. There’s never been one time ever in the history of the United States stock markets where the valuation of the markets at what it is right now, never one time has there ever been a time where markets made money.
BRIAN: The second type of valuation, actually, I’ve got these in my notes here. I am going to go back and grab this really quick. [COUGH] Other valuations are the Shiller, which is the adjusted PE ratio. They stand at 30 versus a historic median of 16. It’s only been exceeded by 1929 and 2000, which were both clearly, in hindsight, those were bubbles. The P in the price-earnings ratio is high today, which is price. The E is earnings, has probably been inflated by cost-cutting with stock buybacks, mergers, and acquisitions activities.
BRIAN: By the way, do you know, Mike, that since 1990- so, what is that? 27 years ago?
MIKE: Mm-hmm.
BRIAN: Do you know that the total number of stocks companies in capitalization of the stock market, not the capitalization. The number of companies has shrunk by 46 percent? The number of shares has shrunk by 46 percent because earnings haven’t driven the markets. They’re buying back stock at a very fast rate. I thought that was interesting.
MIKE: Mm-hmm.
BRIAN: The other valuation is called Buffett yardstick.
MIKE: [LAUGH]
BRIAN: The U.S. stock market capitalization as a percentage of GDP, gross domestic product, in the United States. It’s immune to company-level accounting nonsense, and it hit an all-time high last month at 145. 1970 to 1995, the norm is about 60. And 1995 to 2017 the norm is 100. The number of the Buffett yardstick hit 145, a record high.
BRIAN: So, by most all means, right now the mathematical valuation of the stock market is very, very high. So, that’s number one. The second is a measure of the market. It measures the fear that investors have or concern or whatever. It’s called the VIX, the Volatility Index. The Volatility Index is at the lowest level in its 27 year history where it stayed below 10 on the VIX for a record number of days.
BRIAN: So, that tells you that even though that the valuation is high in the stock market, people just are not worried about things right now. The next thing as a sign of a stock market being high is the elevation of a can’t lose group of stocks. So, in the 1960s it was the Nifty Fifty. And then in the ’70s it was the oil stocks. In the ’80s it was disc drive companies. In the ’90s, anything tech, media, telecomm related. Those all crashed. Right now, we have FANG. You know what FAANG stands for?
MIKE: That’s Facebook, what’s the A one? Is it Amazon?
BRIAN: Amazon.
MIKE: Apple. Google. And what’s the N? I always forget that one.
BRIAN: Netflix.
MIKE: Excellent. Okay.
BRIAN: So, FAANG is Facebook, Apple, Amazon, Netflix, and Google, which is now called Alphabet. Those are the can’t lose companies. You’re supposed to invest in them and trees grow to the sky and everything is good. So, we have that group, too. The can’t lose group of stocks. Now we also have as an indicator of a market top, the movement of more than a trillion dollars into what’s called passive investments.
BRIAN: Passive investments are ETFs, exchange-traded funds, that buy indexes. John Bogel in 1974 started the first company that bought indexes. He started Vanguard. And he also started First Index Investment Trust. So, those vehicles passive investing means that you buy the indexes and there’s logic into it. 85 percent of money managers and mutual funds don’t beat the S&P every year anyhow. Why not just buy the index? Well, if you’re in your 20s, 30s, and 40s, that makes sense. But if you’re over 50, the last 17 years tells you why you shouldn’t buy the indexes because 2000, ’01, and ’02, that index lost 50 percent.
BRIAN: Oh, but wait. What if you bought the Qs? The NASDAQ in 2000, ’01, and ’02. Mike, how far down did the NASDAQ go in 2000, ’01, and ’02?
MIKE: It had to have been more. Was it about 70?
BRIAN: 70 percent. That was a 70 percent hit. But isn’t it smart to buy the indexes? No. Not when the markets go down. And then you got your money back in October of ’07. So, it took you seven years to get your money back. Hopefully you’re not drawing any money out of your portfolio. But wait, oh, yes, that’s what retired people do.
MIKE: [LAUGH] You gotta have money.
BRIAN: And then in ’08 markets went down from October of ’07 to March of ’09. That was another 50 percent hit in the S&P and it was a bigger hit for the NASDAQ. So, the wisdom of passive investing while the VIX is down and markets are growing to the sky and the valuations of the market have never been higher based on the Buffett, capitalization as a percentage of GDP, what could go wrong, Mike? What could go wrong? So, here’s another one.
BRIAN: I’ve got a couple more of these.
MIKE: I sense some sarcasm there. [LAUGH]
BRIAN: Yeah. And, by the way, when it comes to passive investing, passive investing, by the way, is a sign of the market top. Passive investing always peaks out right before the markets go down because people wisely say, “Well, I’m just moving my money into the indexes. I haven’t outperformed.” And then when their index drops 10, 15, 20, 25, 30, 35, now they’re not sleeping. 40, 45, now they’re sick to their stomach and they will cough up their indexes usually typically at the bottom of market because they just can’t stand it anymore.
MIKE: Well, something else to consider, these funds that they’re investing in, they can’t go to cash. The prospectus. What is it, like, eight percent at most in cash? So, if you’re in metro funds-
BRIAN: These are passive.
MIKE: Okay, these are passive.
BRIAN: Yeah. Active managers have those cash restrictions. ETFs, exchange-traded funds, are where you buy in the indexes, and the indexes represent the S&P or the NASDAQ or the Dow. Okay. Here’s another indication of a market top. And that is the bond market or the credit markets.
BRIAN: Do you know that there’s major financial problems with Greece? They almost went broke two years ago, right?
MIKE: Yeah. How are they doing these days?
BRIAN: Okay. These days, you can buy a 10-year Greek treasury for around four percent when our 10-year United States treasury is 2.1.
MIKE: Higher risk still.
BRIAN: Well, yeah, but 200 basis points doesn’t even start to define the difference in risk between buying a Greek bond and the United States treasury. Two percent or 200 basis points, well, actually it gets better.
BRIAN: So, as far as the bond market goes, you’re familiar with Netflix, right?
MIKE: Oh, yeah.
BRIAN: Okay. So, Netflix is called subprime. Not the best. So, Netflix is a company. They issued 1.3 billion of Euro bonds and they got 3.625 covenants [were few?]. Covenants protect you as a bond-holder.
MIKE: Mm-hmm.
BRIAN: Hardly any covenants. So, this is a stripped-naked, covenant-free bond, and the rating was B minus. Single B minus. One step back into triple C and then you have the Cs and then you go to DD. It stands for default.
BRIAN: So, this is a very low-grade. They call it a junk bond. Their earnings were 200 million for the quarter, but they just burned through as of March 31 of this year they burned through 1.8 billion in free cash flow, and people were clamoring to get aboard to buy this bond even though the risks are not very good. But here’s the amazing thing. 60 percent of bonds right now have few covenants attached to protect the shareholder. So, investors have grown so confident about their seemingly no problem corporate debt rally that they’re dismissing the likelihood of any bankruptcies or defaults.
BRIAN: But here’s the biggest one, Mike. In the emerging market debt side, do you know that Argentina goes broke, I don’t know, in its 200 year history, well, it’s defaulted five times just in the last 100 years. Most recently in 2014. Investors apparently don’t care because 9.7 billion in bonds were floated out and these are 100-year bonds at 6.25 percent.
BRIAN: So, since Argentina has defaulted five times in the last century, 9.7 billion went out with a 100-year bond maturity 6.25 yield and it was over-subscribed. They didn’t float enough. Now, let me say this again. If Argentina defaulted four times in the last 100 years, who in the world would buy an Argentina bond for 100 years going forward?
MIKE: Doesn’t make any sense.
BRIAN: Okay. And then we talk about another indication of a market top is what we call alternative investments-
MIKE: Wait, who is peddling these investments?
BRIAN: Argentina.
MIKE: But who’s buying them? Argentinians or people in America?
BRIAN: People that are yield-hungry. You got all this money that needs to find a home. Why buy 2.2 percent from the United States when you can get 6.25 from Argentina?
MIKE: Do you think the investors actually know the risk?
BRIAN: No. No. We’re going to talk about that in a second. Okay, here’s another sign of a market top, and that is where you have all this money seeking for higher and higher returns, and that’s typically through hedge funds, venture capital, alternative investments, private equity. These guys attract money, and the biggest of all, the granddaddy of all of these alternative investments is a Japanese company called SoftBank. SoftBank has an 18-year average annual return of 44 percent. That’s what they trot out. But at Decker Retirement Planning we always pull the curtain back.
MIKE: 45 percent is un-
BRIAN: 44.
MIKE: 44 is unrealistic. There’s no way that that’s sustainable.
BRIAN: Per year. Oh, yeah. But here’s how they did that.
MIKE: [LAUGH]
BRIAN: They were fortunate, I didn’t use the word lucky. They were fortunate enough to put 20 million dollars into Ali Baba. Now that 20 million is worth 50 billion.
MIKE: Okay. Well.
BRIAN: So, that explains a big chunk of their return.
MIKE: Yeah. They were fortunate.
BRIAN: Fortunate. We didn’t use the word lucky.
MIKE: [LAUGH]
BRIAN: So, now SoftBank is being tracked down. Can they place? They’re already through most of it right now. They’ve raised 92 billion of 100 billion dollars that they’re going to put in new technology companies right now at the market top.
BRIAN: So, I keep going.
MIKE: [LAUGH]
BRIAN: I’ve saved the best for last. One of the biggest market top signs to me is digital currency called bitcoin.
MIKE: Bitcoin is a fun thing to watch. It’s a curious investment. I mean, this whole idea of some sort of universal-
BRIAN: Curious is a kind word.
MIKE: I’m trying to be polite.
BRIAN: Okay. Do you know how much you would have made if you would have put your whole portfolio in bitcoin January 1 of this year?
MIKE: I don’t know. 40?
BRIAN: No. 400.
MIKE: 400-no. 400 percent?
BRIAN: Yeah. Your 100,000 is now worth 400,000, and we haven’t started the month of September yet.
MIKE: It climbed that much?
BRIAN: Wait. So, let me describe what bitcoin is. It’s a digital currency backed by nothing.
MIKE: Yeah.
BRIAN: Backed by nothing. It’s a digital currency. And there’s another one called Ethereum, and there’s other copycats, too. Vitalik Buterin started in 2015. He was a 21-year-old college dropout and he started Ethereum, which is another digital currency.
BRIAN: They are backed by nothing. They’re nothing. They’re whatever you want them to be. So, let me say this again: the popularity of the investment is the assignment of what the value is, but it’s backed by nothing. Now, some people could say, “Well, the United States currency is backed by what? It’s the government. It’s the faith and confidence in the U.S. government.” But it’s also what’s called a fiat currency. It used to be before Bretten Woods in the ’70s it was backed by gold.
BRIAN: It had a value attached to it, and they detached that. So, billions of dollars are now in digital currencies whose value has gone up incredible. And so, where are we today? The risk is very high. The prospective returns using math is very, very low, and people in retirement are in a precarious situation because their banks and brokers have all their money at risk and their plan for downside protection, Mike, it looks like we are going to use about 20 minutes of the show on this rant.
BRIAN: Their plan for people. Before I tell you what the banker-broker plan is, now that we’re at all-time highs the Buffett valuation has never been higher on the S&P right now today, and at 25 times earnings, the forward next 10-year investments, there’s never been a 10-year forward return that’s been positive. So, here were have, tell me if this makes sense to you, Mike.
MIKE: Okay.
BRIAN: At Decker Retirement Planning, we have a different plan we’ll show in a second, but the plan for people in retirement is when this market does come apart in the next 12 to 18 months, that’s my expectation, you are supposed to ride it out.
BRIAN: Take that 40, 50 percent hit, Mr. and Mrs. Jones, and wait four or five years to get back to even and it’s probably best that you not draw any money out of your portfolio because that would be financial suicide. So, figure out a way to not touch your portfolio for four or five years, ’cause if you draw on it [CLEARS THROAT], when the money comes back you’re drawing money out of a portfolio that’s going down which is financial suicide. That makes no sense to us. So, in the planning that we do at Decker Retirement Planning, we fully expect the markets to go down.
BRIAN: We have a plan so that the income that’s coming to our clients are laddered, principle, guaranteed accounts so that when the markets go down, our clients don’t lose a dime in their emergency cash. They don’t lose a dime out of bucket one, two, or three. So, their income for the first 20 years is set and their risk money is invested in two-sided models that are designed to make money in up markets or down markets.
BRIAN: In 2008, the six managers that we currently have, five of the six managers made money. One manager lost money. So, collectively, they all made money in 2000, ’01, ’02, and ’08. Now, try to find a planner, a banker, or a money manager that will protect you in the next 12 to 18 months. We at Decker Retirement Planning are a mathematical-based firm, a math-based firm, and we want to draw your attention to what’s happening right now when it comes to valuation.
BRIAN: The market is precariously high. It isn’t a problem until it’s a problem, but at some point these markets are going to roll over and Warren Buffett has this great quote. “It’s when the tide goes out that you can see who’s swimming naked.”
MIKE: [LAUGH]
BRIAN: And, so, your banker and broker [LAUGH] probably doesn’t have-actually doesn’t have a plan for you.
MIKE: Markets are topping. Signs are there. If you didn’t catch it, go to deckerretirementplanning.com to listen to this radio show via podcast on the website. Anything else? Just a quick recap for what anyone who’s just tuning would’ve missed?
BRIAN: There was a ton of information in the last 20 minutes. I hope they go to our website and listen to it. It’s mathematically all the different ways that we know we are at or near a market peak as far as the stock market. Now, some people are saying that when interest rates are this low you can justify valuations that are higher. I get that. [LAUGH] What happens then when the central banks around the world have announced that they are going to be raising rates?
BRIAN: What happens to the market when what used to be a tailwind is now going to be a headwind? We’ve spoken to Decker Talk Radio listeners extensively on this topic about how the market is valued very highly. Okay. I want to just mention two other things about the stock market, and then, Mike, it’ll be interesting. We’ll take the rest of today’s show and talk about wills, power of attorneys, living wills, trust documents. Estate planning is what we’ll talk about the rest of the show.
BRIAN: But I wanted to talk about newsletters. We had a guy [LAUGH] come into the Kirkland office at Carillon Point and he was arguing that his newsletter that he paid 900 dollars for told him to do this and that and this and that. I wanna mention something about newsletters that Decker Talk Radio listeners should know. They’re unregulated. They’re not regulated by the Securities and Exchange Commissions. You don’t have to be licensed to create a newsletter.
MIKE: [LAUGH]
BRIAN: You don’t fall under the umbrella of [OVERLAP]
MIKE: Wait. Can we just say that one more time? You don’t have to be licensed to… [LAUGH]
BRIAN: To be a newsletter writer.
MIKE: I mean-
BRIAN: So, let’s extend that.
MIKE: Would you go see a doctor that’s not licensed?
BRIAN: No.
MIKE: [LAUGH]
BRIAN: You can say whatever you want. You can say that you started your newsletter whenever you want. You can say your returns are whatever you want. There’s no oversight. But I wanna mention how newsletters work. By the way, at Decker Retirement Planning, we are fiduciaries, so guess what? We have our finger on the pulse. I personally pay money and subscribe to several newsletters just so I know what’s out there.
MIKE: [LAUGH]
BRIAN: Let me tell you how newsletters work. They tell you that you should buy these 30 stocks. I’m exaggerating to make a point.
BRIAN: And then in next month’s newsletter, let’s say one or two of these stocks actually did spectacularly well. Well, guess what we talk about? We’re going to talk about why you’re stupid if you didn’t buy those one or two stocks. We make no mention of the 28 that tanked and didn’t do anything. We just talked about that. One of the biggest newsletters we are a subscriber to has recently done this in the last couple of months. They had one subscription that talked about how the market is going to go on a absolute tear.
BRIAN: They called it a blow-off tear, and the stock markets are going to race to the upside. And then, a week later, they talked about how that’s the melt up before the meltdown and they covered all the reasons why the markets are going to fall apart. Now guess what? They got their bases covered. If the markets go up, they’re going to refer to how brilliant they are because they called it. And then if the markets tank they’re going to be referring to how they saw it and you should have listened because they knew that the markets were going to go down. They play both sides. It’s not right. It’s not fair. I listen to some of the people that write in.
BRIAN: I read some of their comments and they are furious and frustrated that they make very little money on the recommendations of these newsletters because if you take one of their recommendations, you don’t have enough money to buy all their recommendations and very few work out very well. Anything you wanna add on newsletters?
MIKE: No. Know where your information’s coming from. We say this often in the office here, but get the transparency you deserve, not from some guy that’s writing some newsletter or just some random advice. Know the quality of the information. That’s a big part of why we do this show.
BRIAN: All right, here’s another thing that cracks me up. Some people look me in the eye and say, “Brian, well, I’ve got it all figured out. I’m going to use stop losses.”
MIKE: [LAUGH]
BRIAN: So, just to tell you what stop losses [LAUGH] are before we talk this through again, stop losses are where you put in, let’s say you buy Netflix. Buy Netflix and then you put in a trailing stop loss 10 percent down. Well, if the market drops 10 or the stock market drops 10 percent, it automatically sells you out. There’s two problems with stop losses.
BRIAN: On the chalkboard it makes all the sense in the world, but in reality here’s what happens: you put in your 10 percent stop loss and that stock goes down 10 percent at least once or twice a year, so you get stopped out. On a regular basis, you get stopped out. And then you turn around. You’re out. You’re in cash and you watch the stock turn around and make new highs without you in it. So, you have to buy it back higher and then you put in your stop and it keeps taking you out. So, problem number one is you get whipsawed. You get taken out and that’s problem number one.
BRIAN: Problem number two is when to get back in. So, when you get taken out, you don’t know, most people don’t know, when to get back into that stock or the stock market. They don’t know when it’s the quote-unquote “big one.” So, here’s what happens to people that use stop losses. They get burned enough times that now they move it to a mental stop. A mental stop is where you can look and assess the situation, and then if the markets go down you can assess and see if you want to take it out or not so you won’t get actually whipsawed out.
BRIAN: Well, let me tell you what happens every seven or eight years. Every seven or eight years, let’s say, Mike, I’m going to use you as the guinea pig, okay?
MIKE: Let’s do this.
BRIAN: All right. So, you’ve got your portfolio, your risk portfolio, and your 500,000 is down 50 grand boom just like that. 10 percent. And you think, “Gosh. I think that this might be the one. So, as soon as my 500,000 portfolio goes back to 500, I’m going to sell some.” But guess what? This time it doesn’t happen.
BRIAN: So, this time, it goes down. Now you’re down 10 percent. Now, in a heartbeat, you’re down 20 percent. So, your 500,000 is now worth 400,000. And at that point you think, “Jeez. I really can’t afford this kind of a hit. I’m going to definitely lighten up when the markets go up a little bit.” But this is every seven or eight years. So, now this time it doesn’t come back. It just keeps going. Now you’re down 25 percent, and to justify your stupidity for doing nothing, you call yourself a quote, “Long-term investor.”
MIKE: [LAUGH]
BRIAN: So, that’s what we call putting lipstick on the pig, and that’s where you can sleep at night because you pat yourself on the back and say that you’re a long-term investor and you’re wise and you’re going to ride it out. But now, Mike, you’re down 30 percent. And then 35 percent. Now you’re not sleeping. Now you have a stomach ache. Now it’s down 40 percent. 45 percent. And now your portfolio that was once 500,000 is cut in half. You’re down 50 percent. You can’t sleep anymore. The headlines are terrible.
BRIAN: The news is so bad that now you just sell. So, now you sell and go to cash. You’ve got 250,000. You took a 50 percent hit. Now, in your 20s, 30s, and 40s while you’re getting a paycheck you can do that. But when you’re over 55, 60 years old, you can’t do that anymore. So, that’s the game that the bankers and brokers play. They tell you to ride it out. So, on these stop losses, we don’t put a lot of credibility in the stop losses because how they’re used and how they’re abused.
BRIAN: All right. I want to talk about-we’ve used up half the show. And we’re not attorneys, but we see in the planning that we do a lot of train wrecks in clients’ documents. Their will, their power of attorney, their living will, community property agreement, their trust documents, and we’re going to talk about those documents right now for the rest of the show.
MIKE: Well, and you’ve seen some of these experiences when you talk about the planning and their inheritance comes up and people go dark. Whatever had happened happened wrong and it ruins relationships. It drives wedges between siblings. And it’s all preventable. So, let’s.
MIKE: If you’re just tuning in right now, this is Decker Talk Radio’s Protect Your Retirement. You’re listening to Brian Decker, a licensed fiduciary from Decker Retirement Planning.
BRIAN: All right. So, let’s talk about some of these. Right off, the most destructive document, in our opinion, is the will. The will is where when we talk about how assets are divided, by the way, typically there’s four different parts of someone’s estate with different instructions on how to pass assets to your children or your beneficiary. One is your retirement accounts. You retirement accounts have instructions that TD Ameritrade or Schwab or wherever you’ve got your IRA.
BRIAN: And those retirement accounts have primary and secondary beneficiaries. So, upon your death, Mike, your assets would go to whoever you wrote down as primary beneficiary, which is usually your wife. So, your wife gets your IRA. If you and your wife both pass tragically then your second beneficiaries, usually your children, receive your IRA assets upon presentation of a death certificate. They receive those funds lump sum. So, that’s instruction number one is your retirement account. Separate from the will, those instructions are beneficiary instructions separate from the will and the trust.
BRIAN: Number two: you have instructions on how to distribute assets from your will. You will gives instructions to the executor or the secondary contingent executor on how to distribute your tangible and your liquid assets. Third is your trust. Your trust also gives instructions on how to distribute assets. And fourth is any community property agreement that defines how assets are to be distributed or kept separate.
BRIAN: Okay. We want to make sure that each one of these are very clear and state your intentions. I told you that the will is the most destructive document. Here’s why. Two thirds of the way down page one is the most divisive, ridiculous, boilerplate comment that’s in most every will document that I’ve read, and I’ve read many hundreds of them. And that is under tangible assets it says quote, “All tangible assets are to be equally divided.” Well, problem is you can’t do that. Tangible assets [LAUGH]
MIKE: [LAUGH] You say that very lightly. You can’t divide a Steinway three ways.
BRIAN: Yeah. So, you got three kids. You got three piano players, and one Steinway. And you’re supposed to divide that equally. You can’t do that. Tangible assets are your house, your car, your furniture, your bling, your jewelry, your gun collections, your clothes. All that stuff. That’s supposed to be equally divided. That sentence is the most divisive, destructive sentence and it divides families because you can’t divide those.
BRIAN: Let’s say you’ve got three daughters and all three daughters want your momma’s wedding ring or the wedding dress. Those are typical requests. You can’t divide tangible assets equally. So, let’s talk about a solution. A solution is the following. First off, let’s say that you’ve got three kids. We recommend that you put a sale provision in for the house and the cars right away. Assets that you can’t equally divide a house or the cars. Just tell the kids that you’re selling those. Now, some parents will say, “Well, wait a second. Our house has been in our family for generations.”
BRIAN: Here’s what typically happens. You have three kids. One is doing very well financially. One’s doing okay, and one’s not doing well. And when you pass away, you have this house that you haven’t said anything about other than assets are to be equally divided and the one son or daughter that’s doing well financially wants to keep the house ’cause he or she doesn’t need the money. They just want to be emotionally attached to the house that’s always been in the family. The middle one doesn’t care. Is not really affected. But the youngest one wants the money. Needs the money. Needs the money now.
BRIAN: And so there starts World War III with your kids because you didn’t take care of a situation. So, here’s what we recommend that you do. We recommend that if, and, by the way, there’s major resentment if, well, I won’t even go there. So, what you do is you gather the kids either at Thanksgiving or Christmas or you send an e-mail out, say, “Kids, we’re not going to be around forever. Speak up now or forever hold your peace. Other than the house and the cars, if there’s something that you want, put your name on it. We’ll reference an Appendix A to our will under tangible assets and we’ll put your name on it and make sure you get it upon our demise.”
BRIAN: That is called Appendix A. That does two things very important. Number one: the kids can’t say that it wasn’t fair, they didn’t have time to speak up, number one. And number two: if there’s a problem and both of them claim the same thing, they can work it out. You can step in and referee it if you need to, but let the kids work it out. That way, all the assets that they want will be equally divided and quote, “Everything else will be sold and proceeds then can be equally divided.” So, we talked about the house and the cars getting sell provisions automatically.
BRIAN: You also have a third part of that sell provision, house, cars, and everything else that’s not claimed. It’s very awkward, so, Mike, you’re going to have to do this. [LAUGH]
MIKE: [LAUGH]
BRIAN: In my will. You walk in your mom and dad’s house that are now passed away and you see your dad’s suits and ties and shoes and socks and you see their furniture and their beds and artwork, and what do you do with that? So, if you don’t state this in writing and one of the kids who’s the executor pipes up and says, “All right, call Salvation Army. Let’s bring them in and clear this out.” The other kid, and this is what we want to avoid, says, “You heartless SOB. You can’t do that. That’s mom and dad’s stuff.”
BRIAN: So, this is something we have to be very sensitive to and make sure that you, mom and dad, put in your will the sell provision on everything else that’s not claimed, and then ideally you say that Deseret Industries or Salvation Army or whatever…
MIKE: Value Village?
BRIAN: Value Village. That’s what I was thinking of. You call those people. They come in. They take everything and it goes to Goodwill, Salvation Army, Value Village, Deseret Industries. They clear out the house.
MIKE: Aren’t there estate sale companies, too, that can just take care of it for you?
BRIAN: If you’ve got valuable stuff, you know, if you’ve got very valuable stuff, hold that out for the estate sale. But you should state that in the tangible asset section. Have people come in and bring their wills, power of attorney documents. We can go through and help them. We’re not attorneys. We’ll help them and then send them back to their attorneys and make sure that we button this up so that their kids still love each other after the parents pass away.
BRIAN: All right. So, the proper tangible asset section in our opinion should be spelled out by saying that sell provisions are in place for the house, the cars, and anything else that’s not referenced in Appendix A where proceeds are equally divided. Appendix A is an appendix to the will. It can be a Word document that is updated as needed on a regular basis and is signed and dated by the husband and wife whose estate it is. But the will and wishes of the kids are honored and anything that’s of value to them is specified and listed and noted.
BRIAN: Now, sometimes it’s kind of cool to see the requests are a casserole dish that they remember seeing that mom would always have on the table. Those great memories that go with that. And that’s something that’s typically requested that comes up in these Appendix As that we review. All right. So, on the will we want to see the appendix or the tangible assets cleaned up. We also wanna see a logical succession in the executors.
BRIAN: So, husband and wife are executors to each other’s’ will as primary. What about the contingent? So, let’s say you have one child. Well, that’s easy. That one child is the contingent executor of your will. If you have three kids or four kids or five kids or whatever, you should pick the one that the other kids would say, “Oh, yeah. Johnny. He’s the best choice.” Ideally, you pick someone who’s a left brain thinker, extremely organized, with some financial background. Those are typically the best personalities to be an executor because it’s a lot of work.
BRIAN: Do you have something to add?
MIKE: Well, I mean, these are just suggestions but if you get a left brain person that has a lack of integrity, you gotta make sure the integrity is there. You gotta make sure the integrity is there. You gotta make sure that they’re going to do the best for your wishes and hold the will as best as possible.
BRIAN: Right. Well, so some parents, what they do is they have Johnny, Sally, Suzie, Mary, and Frankie, five kids, all co-contingent executors.
MIKE: That’s an issue.
BRIAN: Yeah. That doesn’t work well.
MIKE: Think about family dinner when they argued.
BRIAN: Yeah. So, that doesn’t work well. The attempt was to try to provide transparency so all the kids are involved, but now you’ve created World War III again by having all the kids because they don’t think the same.
BRIAN: You have the left brain thinkers with a task to do wanting to complete the task. You have the right brain thinkers that are very emotional and say, “Gosh, can’t we just not do this task and mourn for a while longer? We’ve only mourned for a couple of weeks.” And I’m not making fun of this. This is an emotional, sensitive time. But the kids need to be able to work together, and if you put two personalities that can’t work together, you create lifelong animosity and you destroy relationships, and that’s not the purpose of choosing.
BRIAN: You wanna choose your executors wisely so that they can work together and get the job done. It’s a lotta work. You’ve gotta be organized. And it’s stressful and emotional. Okay. The last thing on the will is the compensation clause. Sometimes, I would say that 30 or 40 percent of the time it’s in the will and it says this, quote, “Reasonable compensation is due the executor/executrix that’s processing the estate.” Mike, guess what reasonable compensation means.
MIKE: Whatever they feel like.
BRIAN: Whatever they want. It’s a blank check.
MIKE: [LAUGH]
BRIAN: And if there’s Johnny who’s in there, one of the three kids, guess what? There’s no oversight. None of the kids will know when Johnny strokes a 30,000 dollar check to himself. None of the other kids will know it. So, this is an abuse that we see almost all the time. We hope that you strike the compensation clause on the will. It’s okay to have a reimbursement clause in there but strike the compensation clause. So, that’s the will. If you can button that up, that typically is the most divisive, destructive of all that we’re going to talk about.
BRIAN: The next one, now, the will addresses when a parent is deceased. What happens when you’re incapacitated? Those are your power of attorney documents. Power of attorney healthcare and power of attorney finance documents we’ll talk about. Sometimes there’s a durable power that encompasses both of them. Many times, there’s a split. Power of attorney finance and a power of attorney healthcare.
BRIAN: And we’ll cover them separately but there’s the same three issues that we have. One is succession. We wanna make sure that husbands and wives are agents to each other, primary agents. The secondary agents are the kids again, typically. If you don’t have kids then you’ve got to have friends that are of a lower generation than you. It doesn’t make sense to have an agent who’s your same age that when you die now you’ve got someone who’s in their 80s and 90s and they’re on the verge. So, ideally, you try to find, if you don’t have kids, a generation or two younger that you know and trust, have confidence can be your agent in processing your healthcare and financial decisions.
BRIAN: But back to the kids. Power of attorney finance and power of attorney healthcare documents, there needs to be a logical succession with your kids. Again, ideally, someone power of attorney finance has a financial background, is a sequential left brain thinker and can get things on. On power of attorney healthcare, ideally someone with a medical background, ideally. Is also a logical left brain sequential thinker who can process under stressful conditions and can make important decisions in a stressful environment.
BRIAN: So, the first thing on those documents is a logical succession of primary and secondary agent choices. The next thing is very, very important. It’s an activation clause or the trigger clause. How do you trigger a power of attorney document? There’s several ways. One very popular way says that it’s activated on signature, which is very handy and nice. So, Mike, let’s say that you’re-I’ll throw myself under the bus. So, I’m married to Diane and if I have power of attorney documents that are activated upon signature, Mike, guess what can happen if we have an argument?
BRIAN: She can take my power of attorney finance document, go down to the bank, clear out all my investments, sell the house while I’m at work, clear me out, call me from Cabo, and say, “Hey, Brian. I’m done and I’m gone and-”
MIKE: Yeah. You’ve got loaded bazookas at each other.
BRIAN: Yeah. That doesn’t work. So, there’s a problem with having too much convenience. It makes it too easy to actually use the power of attorney finance. Or one that cracks me up also is power of attorney healthcare. She can check me into a facility because she has power of attorney healthcare and can start making decisions for you. It’s kinda silly.
BRIAN: So, what we recommend is two doctors. The activation clause of the power of attorney document, not your primary care physician because you might be in Italy or in Costa Rica or in Texas or whatever. You might be away from home when you’re incapacitated and you can find two doctors in any emergency room or any hospital. When you have two doctors that activate your power of attorney documents, that’s probably a better idea, and I would say 90 plus percent of the time that’s what we recommend. We’re not attorneys. We run this by your attorney after we talk you through, but a lot of clients switch their power of attorney documents trigger clause to read two doctors for that reason.
BRIAN: Now, the logical exception to your power of attorney healthcare is this. Let’s say, Mike, that you have dementia and Alzheimer’s and it’s a slow, long, horrible road. Well, after diagnosis, you wanna maintain your identity and your independence and you’re trying really, really hard. It is a heartbreaker for your spouse to say, “You know, you really can’t operate and function, but I can’t get power of attorney until I haul you in and get two doctors to tell you that you can’t function.” So, guess what? Mike, we haul you down to the doc and you put on your best show.
BRIAN: You have a good day and they say, “No, he’s good.” It makes it hard. So, in those cases, power of attorney documents have been changed to read a family council. No one knows you, Mike, better than your family. This is your spouse, your kids, and they as a family council can trigger or activate your power of attorney documents when they see day-to-day decision-making starting to fade and slide.
MIKE: Now, how do you prevent that from being abused?
BRIAN: The people that love you and are very interested in your independence are in a good spot to not abuse that and to be very sensitive and to trigger and activate those power of attorney powers when needed. But that’s the second part. One is succession on your power of attorneys. We walk you through that. Second is power of attorney trigger clause. The third is to make sure that the compensation clauses are struck.
BRIAN: For the same reason as the will, the language reads under compensation clauses for power of attorney documents it says that, “The agent is due reasonable compensation for his or her work as agent on power of attorney.” We recommend that you strike it because it’s vague. If you want a dollar amount in there, then write a dollar amount in there. But don’t leave a blank check like that. It’s abused in every instance that I’ve seen. Okay, the last thing is kinda interesting with your power of attorney documents that there’s one document that needs to be notarized out of your will, power of attorney healthcare, power of attorney finance, community property agreement, and your living will.
BRIAN: Out of those five documents, one of them needs to be notarized and it is?
MIKE: I actually don’t know this one.
BRIAN: Power of attorney finance for reasons that you said. It’s like a bazooka pointing at each other. It’s been abused in the past and so it’s the only required notarized document. Okay. Now, when it comes to the community property agreement, I think we have time to bang this out. Community property agreements are redundant in community property states like Washington, for example, is a community property state. Everything that’s of the husband’s is assumed to be shared with the wife.
BRIAN: The property is shared equally. Community property agreements are used in community property states to specify separate assets. Let me give you an example. Let’s say, Mike, you have an inheritance that comes from me, your dad, and it comes down and you for some reason wanna keep it separate from your wife and children. I can’t think of a, well, let’s say that you remarried for some reason and you want your original kids, my grandkids, to receive my inheritance.
BRIAN: So, you would keep those assets separate from your wife, and she and you would agree on that community property agreement that those assets are separate. You can never comingle those assets or you destroy the protection that they have under a community property agreement. So, you always keep them in single accounts, never a joint account. You can never comingle separate property or else you destroy the power and ability to keep them separate. So, that’s a community property agreement. We only have two more minutes.
BRIAN: So, what I think we’ll do is the last document is the trust document that I wanna talk about, and this is a major player in estate planning. I’ll just say that-
MIKE: Let’s just go through it and we’ll get as much out as we can.
BRIAN: We’ve got two more minutes. All right. The trust document typically, and, again, we’re not attorneys. I have to keep saying that. We work with your attorney, but when we’re talking it’s not at 400 bucks an hour or 300 bucks an hour.
BRIAN: We put a plan together and then we get your attorney on the phone and in 10 or 15 minutes we can make the changes that you need for our clients, and we help you with your documents to say the things that you want them to say. On your trust, typically there’s three reasons to have a trust document. Typically very generally. Number one: you have children with different spouses. Two is that you have real estate outside of the state that you reside in. And number three: you have assets, very large assets, that you don’t wanna lump sum on your children.
BRIAN: So, we’re going to go into detail next time
MIKE: As a quick recap, this is Decker Retirement Planning’s Protect Your Safer Retirement Radio program. To catch this show or other shows in the past, go to deckerretirementplanning dot com. You can also go to iTunes or Google Play and catch this show at your convenience via podcast. And until next week, have a good one.
