Make It Last – Ep 69 – The Importance of Working With a Private Fiduciary & Legal Asset Protection of the Home and IRAs

In the first half of this episode Victor share the news regarding Wells Fargo’s wealth management services. The advisors working at Wells Fargo were technically fiduciaries but they were pressured by their corporate bosses to make the most money for the company- rather than looking out for the best interest of the client. In the second half of the episode, Victor gives insight on legal asset protection, specifically two difficult assets to protect, the home and IRAs.

Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and Certified Elder Law Attorney (CELA®) and Certified Financial Planner™ professional (CFP). Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.

For more information, visit Medina Law Group or Palante Wealth Advisors.

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Click below to read the full transcript..

Victor Medina:  Hey, everybody. Welcome back to Make It Last. I’m your host, Victor Medina. I’m so glad you can join us this Saturday morning.

I’m excited for today’s show because I am going to get back on my pulpit. I’m going to rant and rave about fiduciaries and financial advisors screwing you over. I got new information. I got new ammunition. Then I’ll get off the pulpit. [laughs] I’ll talk about something that might be more interesting to you because this one’s interesting to me.

I can’t stop talking about this because it’s crazy to me that this goes on as rampantly as it does. I was just meeting with a client this week. It was one of these things where we started the legal engagement. We helped them with their estate‑planning and elder law asset protection planning.

I said to them, “Look, are you interested in having a conversation about your financial matters with me because we have this expertise? We can do that for you.” They said, “Well, sure. We’ll be happy to have a second look.” I met with them.

The first thing that I do when I have that meeting is I set the table with what we have right now. I make an assessment over what they have and what I think about it. It’s more like a diagnostic. I’m acting a little bit like a physician. I’m essentially looking at what they have.

I said, “OK. Let’s run a few tests to see what you have.” Before we can prescribe what you need, of course, I need to figure out what you have first. We did that. Look, it’s a pretty standard story these days. They had some very expensive investments. These investments were ill‑positioned for them in retirement.

We ran some illustrations and, essentially, were able to show that if they stayed in these investments, they weren’t going to make it through retirement.

When I asked them about that, they said, “Well, this is what we were told was in our best interest.” I said, “Were you working with a fiduciary?” If they were working with a fiduciary, and they were told that this was in their best interest, then they were sold this product, it was wrong.

I have some recourse. They have some recourse. A fiduciary has to be looking out for their best interest.

When we investigated, of course, this person was not a fiduciary. They were a broker. They were nothing more than a salesperson. That meant that they could sell them whatever they wanted as long as it passed at a very low bar of suitability. If it did that, then everything would be OK’d by the regulators.

That’s what happened. There were all kinds of problems with it. First of all, it was a terrible strategy for retirement. It was also a terrible product. It was a high expense variable annuity. They had to clear about three‑and‑a‑half percent a year before they would make any money.

There were surrender charges. They were fees in the investments themselves. It was a mess. It was a complete mess. That was our first diagnostic step. I said it a little bit more delicately [laughs] than that, but I did say, “It’s a mess.”

After that I said, “Maybe, when you come back. Now that we know it’s a mess. Maybe, when we come back, we can help illustrate for you what a better solution would look like,” and we did. We moved forward then because that was better for them.

Did I start today’s show thinking about that particular client? “No.” I came out with an article that was on Yahoo Finance that was published earlier in the week. It has to do with Wells Fargo.

Look, Wells Fargo has been absolutely pummeled in the news. Crazy stuff that’s going on, people opening fake accounts, things like that. They had to pay out a one billion dollar fine to settle allegations of abuses and auto‑lending and mortgage business.

In the spring, the bank also disclosed that its board was conducting a review of what they called “certain activities” within the bank’s wealth management unit, which is, essentially, their investment branch, which their filings describe as including fee calculations of fiduciary accounts.

In mid‑July, Yahoo Finance reported on the increasing sales pressure in the wealth management sector of Wells Fargo’s private bank. Then, late last month, the Wall Street Journal also reported that four Wells Fargo advisors had sent a letter to the Justice Department and the SEC, which is the Securities and Exchange Commission, essentially detailing long‑standing problems.

What they called “long‑standing problems” in the wealth management business. Now former advisors in the wealth management area of the private bank which sort of caters to their high‑end net worth investors.

If you’re doing banking, and you got a thousand dollars in there, you got nothing else. They’re not going to be targeting you, but if you got enough money in there, they’re going to be asking you to not only trust them as a bank, but trust them as an investment advisor.

These former advisors are shedding light on what some of those long‑standing problems may be. They ended up expressing additional concerns to Yahoo Finance, including the fact that Wells Fargo encourages fiduciary advisors to put client money in higher fee options.

Requiring advisors to, in effect, cross out products like mortgages and financial planning, and push what several of these advisors viewed as unnecessary financial planning fees on clients.

Essentially, they shared some internal documents with Yahoo Finance to corroborate their concerns. This goes back to my client from earlier this week. I said if they had a fiduciary relationship, they might have some recourse.

Here was somebody with a fiduciary relationship, but because they had this sort of corporate overlord that was telling them what to do, even though they were in the fiduciary section of whatever they were being treated, they were being cross‑selled inappropriate products all along the way which stinks.

The Wall Street Journal actually also reported that a broad class of Wells Fargo advisors were encouraged to funnel wealthier clients into the private bank’s wealth management area because the fees were higher there than they were in other wealth management.

If you’re in the private bank apparently, I don’t know, maybe, they give you a gold watch and a limo ride somewhere. In addition to that, they’re going to charge you a lot more for their services. They’re going to get higher fees. Look, in general, Wells Fargo’s interest in boosting its advisory revenue is in step with most of the industry.

In a low interest environment out there, banks are not making money on depositary strategy. They’re lending. They’re not making money on what they have to credit out there and the gap between that.

For them, obviously, wealth management products were an obvious choice for expansion. Rather than doing it the right way with their clients, they basically are selling these higher fee products.

According to the report, Wells Fargo encouraged its advisors to put money in a variety of more complex products from alternative investments, like hedge funds and private equity funds, to separately‑managed accounts which essentially is a portfolio of individual’s securities but you layer some additional fees on top of that.

They were encouraged to use financial tools like options. Do you need options? Of course, you don’t need options. You are not a day trader. If you were doing banking with Wells Fargo and you’re having to manage the money, you do not need complicated investment vehicles.

Investing is simple, but it’s difficult. Let’s make sure that we’re clear about that. The strategies on here are difficult to stick with, but they’re not complicated. We don’t need hedge funds, and private equity funds, and unit investment trusts. If you’re looking at your portfolio and you have a RIT or UIT, you should run.

You should run away from that advisor because, essentially, all they did was stick you into a really complicated product for no reason other than the fact that it had paid a higher commission and an ongoing commission. Now if you put me to the test, can some of these products be in a client’s best interests?

I suppose if you have filled every other bucket of what they needed and they’re asking for something more complicated above that. The idea here is not that these advisors were making the independent choices for what was in their best interests, there’s was the corporate overlords.

The overlords were telling them what to do. They were part of their quotas and things like that. This report came out and it made me angry because here is another umbrella, Wells Fargo doesn’t have the greatest reputation right now.

People still like them. People still want to do their banking there. They’re in business. It’s not like everybody has run away from them, but here they are within the context of a fiduciary relationship.

They’re still screwing their clients. They’re still doing things that are not in their client’s interest because it generates money for them. That money is really important to the bottom line in their shareholders, and so on, and so forth.

What do you need? You need somebody who’s a fiduciary but is also independent. You need somebody that isn’t beholding. One of the best things that happens is that within the context of my financial services business nobody pays for my notebook and pens except me. I don’t have to answer to anyone but my clients. That makes it very easy to do the right thing.

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Victor:  All right. Time to get off of the [laughs] soapbox. When we come back, I’m going to share more information with you generally about legal planning and estate planning. I’ve got some new stuff to go over with that especially in the asset protection world. Stick with us we’ll be right back on Make It Last.

Victor:  Welcome back to Make It Last. I wanted to talk today a little bit more about asset protection strategies and, specifically, ones in the legal realm of how to protect your assets.

We’ve talked a lot about financial planning strategies and how to protect assets with certain kinds of products, but we haven’t spent a lot of time focusing on specific kinds of assets that are protectable within an elder law context for somebody that’s getting on a little bit more and is concerned about the cost of long‑term care.

I want to focus on two different kinds of assets and discuss with you the protection strategies for them. I want to talk a little bit about your home. I want to talk a little bit about your IRA.

These are very distinct, different kinds of assets. They require different planning strategies to do that. Let me set the stage for this and understand what’s going on when we engage with the client on these asset protection strategies.

Essentially, what we’re doing is we’re meeting with a client that has reached out, because they’re afraid that the cost of long‑term care, whether it’s something that is present or something that might be out in the future, is going to devastate their estate.

They have good reason to be concerned about that. The cost of long‑term care is very, very high. I know coming up in a few weeks ‑‑ I think September 9th or so ‑‑ there’s going to be Assisted Living Week.

If you’re looking at assisted living, you’re looking at between $5,500 and $8,500 per month, depending on your level of care. When you start extrapolating that out for a number of months and a number of years, that is very, very expensive.

If you have a loved one that goes into a nursing home in Central Jersey, you’re somewhere around, I don’t know, $9,500 and up. We might be crossing that the average is well into $10,000 or more. That’s every month.

People have an appropriate concern for the cost of long‑term care. They should be worried about it. Many times, they’ve got assets that are difficult to protect. Now, why are they difficult? They’re difficult because either their tax structure or they’re difficult because of their illiquidity. That’s our big bonus word for the day.

We wanted to talk about both of those. If you’ve got money in a checking account and it’s just sitting there in a checking account, that money is easier to protect, manipulate, do what we need to do in order to get it in a protected status.

If you have a home or if you end up having an IRA, those are harder because of either their illiquidity or their tax structure. Let’s go through that. The home is illiquid. It has value.

I don’t know how much your home is worth, but it’s probably worth a few hundred thousand dollars. Most of the clients that we meet, maybe, they bought it for 40. It’s worth 400 now, so it is worth a lot of money.

Because it’s worth money, you have to take steps to protect it. Otherwise, it has to be spent down. You can’t access its value. Unless you’re sitting there with an already existing reverse mortgage, which by the way doesn’t give you access to all of the money anyway, unless you have some form of that, you can’t tap the equity.

Your home, though it’s worth something to somebody if you were to sell it, is only on a piece of paper, which we call a deed. How do we protect it? It’s important to realize that we should protect it.

The mechanism to get onto Medicaid or something similar to help you pay for care ‑‑ let’s say, you’ve run out of all your money ‑‑ is they’ll essentially let you keep that home without selling it.

They’re not going to force you to sell it but they are going to park a Medicaid taxi cab outside your house with the meter running, counting up all of the money that they’re paying out for care.

Then they apply a lien on that home, and that lien gets satisfied at its eventual sale. That could be that it’s being satisfied when you die and your spouse sells it. It could be it gets satisfied when you sell it while you’re still alive and on Medicaid. It could be that you and your spouse have both died and your kids are selling it later.

At some point in time, Medicaid is at the closing table with you. They essentially have got their hand out and they say, “Look, all of those benefits that we paid out in your favor, we’d like our money back please.” They essentially are there with that lien.

It’s important to protect the home, because otherwise there is essentially an open lien on that home that basically needs to be satisfied, and that erodes the value. The issue with the IRA, of course, is that within the IRA you have tax consequences.

Remember that an IRA is money that you put aside pre‑tax. You didn’t pay any tax on it, so it accumulated value. Not only did you not pay tax on it when it went into the IRA, you have not paid any tax on it since then. It has accrued value essentially on a tax‑deferred basis, which means that when you take that money out it’s all taxable.

Unlike a checking account which we could move around however we need to, we are not going to be able to just move the IRA around. We’re going to have to do something else with it. That gets us to our strategies.

Now, we’ve already set up why it’s important to protect something. We’ve talked about why, specifically, we want to talk about the home and why we want to talk about the IRA.

I know this is a little bit of a shorter segment, but when we come back from the break, I’m actually going to go into the specific asset protection planning strategies. Then you’ll kind of understand how to do it.

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Victor:  Now, I’m going to tell you right now. You’re probably not going to be able to do these on your own. You’re going to need an elder law attorney to help you with this, but that’s OK.

We want to engage professionals when it’s appropriate to do that. I just want you to understand the point I’ve made, so you’re just not putting everything over into these elder law attorneys’ hands and not understanding what’s going on.

Anyway, that was a little bit of my old caveat. We’ll be right back on Make It Last, where we’ll talk about these asset planning protection strategies. Stick with us. We’ll be right back.Victor:  Welcome back to Make It Last. We’re talking about asset protection and planning strategies. One of the things we want to focus on or two of the things we want to focus on are your home and your IRA, because they’re so difficult to protect.

How do we protect your home if you end up needing long‑term care? The answer is going to depend a lot on whether or not you’re married and whether or not you need care today or, maybe, some time off in the future.

Now, the reason why the answer is going to change is obviously because this home is essentially a deed. That deed is what’s going to need to be transferred in order for us to take advantage of any planning strategies.

You can’t keep the home in your name if you’re going to go apply for long‑term care benefits later in the future, so we need to get it out of your name. What we do with it depends a lot on where you are in life and whether or not you are married. Let’s go through a couple of these strategies.

One of the things that we can do if you are healthy with lots of time to plan is we can take that home and we can put it inside of an asset protection trust. That asset protection trust has got a lot of bells and whistles on it.

Going into the details of that trust is way beyond what we have left in this show to talk about, but essentially that trust is going to allow you to preserve your tax planning advantages.

If you were to sell the home, you could exempt the gain up to $250,000 per spouse. If you were to die, you could get a basis adjustment in that home. You’ll have life rights to be in there. No one can sell it out from underneath you. You could buy another home as an exchange. You could keep the money from the house to the sales.

There’s all of these benefits to using this asset protection trust, and that is the cleanest and simplest option with people who have time to plan. We don’t always encounter that scenario as we now.

I tell people my crystal ball in the office is broken. I am not paying to get it repaired. It’s really super expensive. Since we don’t know what’s going to be going on in the future, why don’t we do something to help protect this now that we know that you’re healthy and we’ve got time to plan? That could be the case.

If you’re not so healthy, first of all, that asset protection planning strategy for putting it into the trust, it takes five years to mature which is OK. We expected that to happen, but more importantly it works regardless of whether or not you are single or whether or not you are married.

If you got five years of plan and you’re healthy, we can put that protection trust in place and help you protect the home. As I said to you, that’s not always possible. People aren’t healthy all the time.

I will tell you this as well in my practice. It is not even the majority of the people that would be, “I wish we really got the opportunity to see people while they were healthy with plenty of time to plan.”

It happens sometimes, but most of the time we encounter somebody in crisis. They either were meeting with the entire family that’s coming in because their last remaining parent just went into a skilled nursing or assisted living facility.

Or we’re dealing with one of the spouses that just can’t handle the other person at home any longer. Something’s going on with crisis. What we do with that will depend a lot on the kind of care you’re receiving and whether or not you are single or married.

If you are married, one of the planning strategies that we can use as a temporary Band‑Aid is to take the home and put it just in the healthy spouse’s name. It doesn’t protect it forever in all purposes, but it will sidestep the estate recovery Medicaid lien from accruing, and it is a first initial step.

That is good, because it allows us to, very simply with a deed, just to protect the home by putting it in the healthy spouse’s name. We do trade off some tax planning that happens on there.

If a person lives too long, we may not have both spouses’ exemptions on that. We’re putting it just in one spouse’s name, so we have to be mindful of that. Of course, we’re not protecting that home for the healthy spouse if they get sick in the future. We’ve only protected it for the currently sick spouse.

Another strategy that we might use is we might transfer that property away with reservation of a life estate. That’s a legal technical terms that essentially grants somebody life rights into the home.

The life rights are not what we’re after in this planning strategy. They’re good. It’s good to have, but it’s not where the strategy’s advantage is created. Its advantage is created in the reduction of the value of the home.

When you transfer something away but reserve a life estate, you both have shrunk the value of the home as a calculation of a gift. I gave away less because I reserved something. Does that make sense?

At the same time, what you reserved is a fraction of the overall value. Essentially, what we’ve done is a form of discounting on that. We’ve discounted the value of the home. That is a powerful strategy, because it essentially shrinks the target.

Your home is this big large target. It might be worth $400,000. When we’ve used this strategy, we have shrunk down that target so that it is, maybe, only $200,000 large. That’s a very good effective plan.

There’s some complexes to that. We’re running out of time for this show generally, so I’m going to move over to IRA planning strategies right now. Understand that there is always an opportunity to protect the home. If all you have is a home, get to a certified elder law attorney as soon as possible.

As for the IRA, the IRA is difficult because not only is it tax deferred, which is what we’ve talked about, but it is individually owned. What I mean by that is that if you’ve got a married couple and the sick spouse has a super large IRA, that is that sick spouse’s assets. It’s nobody else’s.

One of the things that we have to be mindful of is that we’re going to have to un‑IRA this account. We’re going to have to take the wrapper off of it in order to be able to protect it. That means we’re going to have to pay the taxes.

Whether or not we pay a lot of taxes at once or smaller taxes over time depends on what the cost of care is and what the incremental cost of the taxes are. There are all of these tax brackets out there. There’s 10, 12, 22, 25 percent, 28.

You’re going to have to pay taxes on that account sometime. If you don’t pay it, your kids are going to have to pay it. It’s not as though the taxes are completely avoidable, but we might want to steer into the skid a little bit if we know that we’re going to have to pay some taxes.

Right now, if you’re in the 22 percent bracket, in order to protect some money, we have to move more money out of the IRA and have you start to pay 25 percent. The cost to you isn’t 25 percent, because you were already going to need to be paying 22 on that.

The cost to you for this strategy is the additional marginal three percent. If that gains us the opportunity to protect more assets, we might want to steer into that skid a little bit, cause more money to come out of the IRA.

Once we get it out of the IRA, we can do other things with it. We could put it into a trust. We could annuitize it. We can put it into the spouse’s name. We can use different planning strategies with it that are not available when it’s inside of the IRA.

If you’ve got plenty, plenty, plenty of time to plan and you’re healthy, we can make small conversions at a lower rate. We call that filling the bucket. There are prior shows you can go back onto Spotify or onto iTunes.

Look up prior shows and look for a term called proactive income tax planning. We talked about this. You can fill the bucket to the maximum amount of your tax bracket right now.

For instance, if you are making $50,000 a year of taxable income, you can make up to about $77,000 a year and still only pay 12 percent in taxes on that. It might be worth it for you to convert out an extra $27,000 a year and fill that 12 percent bucket on an annual basis.

That will give us every year about $27,000 that we can protect and transfer into a trust and transfer it in a way. You’re seeing how your health and planning earlier ends up making a huge, huge difference for you.

I have a friend of mine. Essentially, he’s waiting for retirement. Everything that they own in their retirement is in his name. He was basically the only working spouse off of that. He’s got over a million dollars or so that’s saved.

If he were the one to get sick, they’ve got a problem coming down the road. Since that money’s all in his name, in order to put it into her name or do something to protect it, we essentially are going to have to cause a whole bunch of taxes that are going to need to be paid all at once or most of them are on, like a million dollars.

Can you imagine the taxes on $500,000? It’s like you made $500,000 a year. Have you ever made $500,000 in one year? Imagine the taxes that are getting paid on that. That becomes one of those things, those obstacles that needs to be navigated.

We want to make sure that with enough time we’re able to protect more and more and fill that bucket slowly with money that has been converted out of the IRA at an appropriate tax bracket.

Then after that, we use our traditional planning techniques. Think about a trust. Think about annuitization. We transferred to the other spouse’s name, things like that. Those are a couple of strategies that you can use when you are going to be dealing with difficult to plan for assets, like your home and your IRA.

All of them are going to require you to essentially be working with a certified elder law attorney that can help you with this planning. This is not something that the person that does your real estate closings is going to be able to help you with.

It’s not going to be something that a traditional estate planning attorney is going to know anything about. You really do need somebody that has practiced in this area. By the way, you certainly shouldn’t be doing this on your own.

You’re going to need somebody who can help you in this area essentially put these protections in place. I recommend always, always, always a certified elder law attorney. You can find one at, N‑E‑L‑F. That’s the National Elder Law Foundation. They are the certifying body for certified elder law attorneys.

Of course, I am one. There are others in New Jersey and in Pennsylvania. Find one. Work with one. That’s who you need to be working with to protect your assets.

That’s it for this show. Thank you so much for joining us. If you like and love the show as I know you do, please share this information.

It’s as simple as sending an email to a friend saying, “Hey, I think you should subscribe to Make It Last. It’s a 30‑minute show talking about retirement planning in legal and financial strategies. You should listen to it.

“Not only can you go and listen to it every Saturday morning at 7:30 AM. If you subscribe to the podcast, essentially you’ll be able to listen to all the prior shows it’s having. It’s like having a little library of retirement planning that you can access at any time.”

You’d be doing this friend a world of good by suggesting that they do that. Certainly, leave any fantastic reviews on Apple iTunes. That’s it for Make It Last.

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Victor:  This is where we help you keep your legal ducks in a row and your financial nest egg secure. We almost made it to the tagline [laughs] that time without stumbling. It’s only 70 shows. Who knows? We’ll be back next week on Saturday. Catch you next time. Bye‑bye.