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White Coat Investor Podcast
WCI #422: Parents, Children, and Relationships When Money Gets Involved
00:52:23
Today we are answering questions about finances and family members. We talk about when it is the right time to kick your kids of your car insurance, what to do when you are supporting your parents financially, how the gift tax works when your parents...
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- [00:00]
Jim Dahle
This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011.
- [00:16]
Alexis Galati
This is White Coat Investor podcast number 422. We're halfway through the year. While Vacation Mode is great, it's also the perfect time to review your tax strategy. Cerebral Wealth Academy has open enrollment for the Doctor's Four Week Guide to Smart Tax Planning, available through June 30th. As the spouse of a physician, founder of Cerebral Tax Advisors, Alexis Galati created a course designed for medical professionals with a side gig, locum tenens, or private practice. It includes 22 video lessons covering business entity setup, maximizing deductions, retirement planning, advanced tax strategies, and monthly live Q and A sessions with Alexis herself. My Code Investor podcast listeners can use code WCISUMMER200 for a $200 discount. Visit cerebralwealthacademy.com to learn more. All right, we're going to start off today's episode with a bit of a sad email. Okay, I got this email recently and I'm going to nominalize everything, but basically it starts out Dear Dr. Dolly, I hope this email finds you well. My husband recently passed. He was in his late 50s and still practicing medicine. He subscribed to your emails and really value your advice and in fact frequently sent it on to our children. I've looked through many of your posts seeking advice that would be applicable to me, but I can't quite find something specific enough for my situation. I talked to a couple of financial advisors who will charge me 0.9% on the value of my assets to 2 million, then 0.6% on the rest. I have around 4 million and won't negotiate, so I believe your expertise would be invaluable in my current situation. I'm hoping you'll be able to help. I'd really appreciate your guidance in how to structure my finances for long term stability income as well as investment strategy that would be appropriate for my age, now in my mid-50s, not working but with no debt and our children are both financially independent adults. I don't have experience in managing investments as my husband always took care of that. I'll be managing brokerage accounts, retirement accounts, life insurance proceeds, and real estate investments. Thank you for all you do. Wow, that's where it really gets real, right? I mean the first thing you say when you get an email like this is I'm sorry for your loss, right? But man, there's A lot of good news in this email, right? This is a white coat investor who'd taken care of business, right? Millions of dollars in assets and still millions of dollars in life insurance. This is exactly why we buy term life insurance. In case something happens to us before we're done earning, right? The life insurance has got to make up the difference between how much is enough for your spouse and maybe some things for your kids for the rest of their lives. It's about the same amount that it would take if you were still alive. So if you figure $5 million is going to be enough for you and you've got $2 million, well, you need $3 million in term life insurance as you acquire assets. Maybe you can cut that back a little bit. Maybe if you had $4 million already, you only need $1 million, right? But that's the way term life insurance works. And thankfully this white coat investor understood that and did not leave his spouse hanging. So those of you out there who have somebody else depending on your income but aren't yet financially independent, you need term life insurance. You can get that@whitecoatinvestor.com insurance. We've got some great agents we'll refer you to who will take care of you and help you get that in place. Term life is way easier to do than disability and frankly, it's much cheaper as well. There's no excuse not to have it. If you have a need for it, you probably have a seven figure need, so get a whole bunch of it, okay? One thing maybe this white coat investor could have done a little bit better with though. And don't get me wrong, right, he did 95% of what needed to be done. He took care of business, Right? He was saving, investing and doing everything right, and buying insurance and that sort of stuff. But maybe it might have been good to get a spouse a little more involved along the way, right? Because she's now feeling pretty lost. So she's feeling lost enough that she doesn't feel like she can do this herself. That's fine. I don't have a problem with people using a financial advisor. The issue is I want those people to be getting good advice at a fair price, right? And a lot of times if you need a financial advisor, you don't really know what good advice looks like. But a fair price is not complicated, right? A fair price for a typical white coat investor is 5,000 to $15,000 a year for a full service financial planner and investment manager. Right? And I don't care how you're paying that, Well, I do care. I don't want you paying in commissions. The problem with paying in commissions is you get bad advice. I want you paying fee only. So that means either an annual subscription of some kind, an hourly rate, or an AUM fee. But with an AUM fee, you got to do the math, right? For example, if you're paying a 1% AUM fee and you have $4 million, that's $40,000 a year. That's way more than 5,000 to $15,000 a year, right? You're dramatically overpaying. And in this situation, the person she'd run into is charging 0.9% on the first 2 million. That's $18,000 a year and 0.6% on the next 2 million, and that's another $12,000 a year. So $30,000 a year. The going rate is 5 to 15, and they're wanting to charge her 30. Okay? That's not a fair price. Thankfully. If you go to the white coat investor recommended list, you can find people that will charge you a fair price. Now, there are some people on that list that charge AUM fees. And those AUM fees are very fair prices when you have $300,000. They might not be fair prices when you have $4 million. So you gotta do one of two things. One is either negotiate the price down. And if they won't do that, then you go to somebody that charges a flat fee. And that's just the way it is. If you've got 4 or 5 or $10 million and you're paying 1% of assets under management, you're being ripped off. That's just the truth, right? So keep that in mind as you go looking for financial advisors. You can find our list@whitecoatinvestor.com financial advisors. It's under the recommended tab on the website as well. But do that math. If you're paying an AUM fee, do that math every year. And if you're getting outside that range of 5 to $15,000, it's time to negotiate or find a new advisor. Now, if you got some incredibly complicated situation, you got $30 million and all this other stuff going on in your life, well, maybe you got to pay a little more than $15,000, but you still shouldn't be paying $150,000, right? You start getting into those amounts, you can be in a, in a family office kind of situation. They can be doing a whole lot more than just financial planning and investment management when you're paying that much. If I was paying that much. I'd want them to come by and walk the dog too. Okay. The other option, which it sounds like she's at least considering, is learning how to do this yourself. Either way, whether you get a financial advisor or whether you do it yourself, you need a written plan. And I emphasize that over and over and over and over again. Yet on this year's survey, like 45% of white coat investors still don't have a written plan. You know what? This WCI could have left his wife a written plan and told her exactly what to do if something should happen to him. Right. It's very helpful. It's not just helpful for your spouse you leave behind. It's also helpful for you to have a written plan. So get a written plan. If you don't feel comfortable writing that yourself, get some help, right? We've got to fire your financial advisor. Course, the whole point of it is to help you write your own financial plan. We've got online communities. We've got the financially empowered women. We've got the WCI Facebook group. It's got almost 100,000 people in it. We got the WCI forum, right? And I think 30% of people on our recent annual survey have used the forum. We've got the WCI subreddit, which is our fastest growing community. It's about to pass up the Facebook group. I think it's going to beat the Facebook group to 100,000 members. We got all these communities you can ask questions on. You can take the online course and get your written financial plan. If you have some questions you can ask in the communities, you can even email me editorwhitecoatinvestor.com. you know, I'm not going to be your financial planner, but if you got some quick questions, I'll answer them. I answer five or 10 questions every day that WCI send me. Don't send me like 4,000 words in your question, but I'll try to answer your questions right if you're not sure if you can do it yourself. There are a few firms on our recommended list that kind of specialize in helping you learn how to do that yourself. And they have very low fees, often charge hourly fees or just kind of a flat rate or an hourly rate. And their goal is actually to help you fire them. And you can also try those firms if you think you're almost there, but just want a little bit of professional help. So again, sorry for your loss. All of you other wciers out there, make sure you're taking care of the people depending on you. They're depending on not only your earning ability but also your financial expertise. If nothing else, it would be great for you to pick a financial advisor for them to go to should something happen to you. All right, let's take another email question. This one's also about some family issues, some parental issues in this case email says I'm hoping for advice on speaking with family about financial advisors. I'm a second year resident. My wife's family have several successful businesses to the point where she's got hundreds of thousands of dollars in brokerage assets from previous UGMA accounts. So it sounds like you're married into a very wealthy family. The problem is all the money is with high fee advisors who her parents trust since they have either worked with them for decades and or are family friends. On top of the 1% AUM fee, they're constantly pushing whole life insurance policies for me and my daughter and I've chosen an array of 15 plus actively managed mutual funds with expense ratios ranging from 0.25 to 2%. Unsurprisingly, their funds underperformed the overall market over the past decade. We meet once yearly with the advisors to discuss the plans. As I've become more financially literate over the past two years and investing is relatively simple at this stage of our lives, my wife and I never have questions during these meetings. Overall, these advisors seem to be serving no purpose to us currently and I hope to move to Vanguard or Fidelity and invest in a simple low cost three fund portfolio. Problem is, my wife trusts me to handle our finances and is on board. But despite this technically being her our money, I think it's important to discuss this and get approval from her parents first since they built this nest egg as well as the relationships they have with these advisors and advisors should have been in quotes. It was not. We haven't had the conversation yet, but they likely will strongly discourage this change. So much so that I'm considering just continuing to ignore this money to avoid money becoming a strain on our good relationship. Do you have any experience or recommendations for gently showing the downsides of working with these types of financial advisors? And now it's in quotes, thankfully, especially when talking to people who have been convinced they're acting in their best interests despite investing in expensive, complex portfolios and whole life plans. I know this is an incredibly fortunate problem to have, but it feels stupid to be paying thousands of dollars per year for bad and expensive advice. Additionally, for parents who are against moving the money, do you have any recommendations for smart retirement uses of this money, for example, currently being in the 0% long term capital gains bracket we sold $23,000 to live off of for the year. And I'm maxing my work 401. We'll also be maxing our HSA and Roth IRAs at Fidelity. Sorry for the long question. Okay, so this is a WCR that's only a resident and is clearly already very financially literate. He's even done a little bit of tax gain harvesting here in order to get money into the 401k. Probably the Roth 401k, I guess, but he didn't say. So this is pretty cool. Cool stuff. But it's not a financial question, right? This is a relationship question. The emailer clearly already knows the right answer financially, right? It's his and his wife's money, it's not her parents money. And you get to do with it whatever you want and you don't have to ask permission. If they do ask, you can discuss why or you can give them a book or whatever. Certainly tax gain harvesting was a good move, especially in 0% long term capital gain bracket. And with the market down. When this email was sent to me, it's not down now, it's actually jumped back. That would actually maybe not be a bad time to dump some of these legacy investments that they don't really want. So I sent them some posts that talk about legacy investments on the website as well as long term capital gains and tax gain harvesting. But I mostly just wished him luck sorting through the relationship issues. But done well, there's the possibility that not only does he save himself thousands of dollars in fees, but he might save his in laws the equivalent of millions. But what I've found is that you gotta wait till they come to you. When the student is willing, when the student is ready, the teacher will appear. That's kind of the approach to take. It's very hard to get wealthy people, especially your parents, to do something different with their money. They've got to really trust you a lot. You know it's the diaper syndrome, right? If they've ever changed your diapers, they're not going to take your advice. And so I wish him great luck in this. It's even more challenging because they're not his parents, they're her parents. But you know, the way to do it I think is to go gradually and maybe discuss things like fees and investing and how investing can be very simple and leave books laying around like the Simple Path to Wealth and things like that. But don't get all preachy. The last thing you want to do is something like this wreck a relationship. The relationship matters more than the fees. And the truth is if they're really financially illiterate enough to be using an advisor charging in this manner and this much, they might have made a much bigger mess themselves. So yes, it'd be better to get them to a real advisor. Yes, it'd be good to reduce their fees and get them some better investments and at least help them stop buying new whole life policies, assuming they don't have some great estate planning reason to have them or something. But the important thing is the relationship. So preserve the relationship first and you might be surprised what happens over a matter of years. Right? Both my parents and Katie's parents have very low cost, very simple portfolios and it didn't take a lot of preaching to get there. Okay, our quote of the day comes from Jack Bogle said learn every day, but especially from the experience of others. It's cheaper. A lot of truth to that and Bogle was certainly a big fan of it's cheaper as you can tell from Vanguard's priorities. All right, let's take a question off the Speak bite.
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Casey
Hi Jim, this is Casey in Texas but soon moving to Wisconsin. For my college age daughter who drives her own car at college, what are the pros and cons to keeping her car's title in my name versus transferring ownership to her or is there a benefit in having us both on the title? Similar question about auto insurance, that is should my college age kid remain on my auto insurance policy or should she have her own? And I guess I might ask similar questions about title and insurance for high school age kids. Does anything change when they hit age 18? The last thing on that note is that I have a $2 million umbrella policy. Would that cover issues that arise if my kids have a car wreck injury issue? And does having this policy change the answer to my previous questions? Thank you.
- [15:47]
Alexis Galati
Okay, what a great question and a timely one for us. We have one kid in college, another one literally graduating from high school this week and this is the approach we've taken. But I should also tell you it is not the most common approach. We get no benefit due to our income from our kids being dependent on us. Right. If your kids are dependent on you, you may get some sort of a child tax credit. We do not, we are phased out of any sort of benefit from having additional dependence on our tax return. So knowing that we want to make them not our dependents as soon as possible. Now just in general that's kind of our philosophy about life as well. As most of you who've listened to this podcast for a long time know our children receive a substantial amount of money from us basically upon leaving home or within a few years of leaving home. We call this the 20s fund and it consists of a Roth IRA we've been matching for them during their teen years. It consists of a UTMA account, it consists of a 529 for their college expenses. And it now also includes some HSA money. So they're no longer dependent on us. They've got all this other money, so they're truly not our dependents. And because of that, that not only allows us to put in a family size contribution into their own hsa, but, you know, once they're not your dependent, but it also allows them to at least have the option of not being on our insurance. So here's the upsides of having the title in your name. It may be cheaper, okay, Mostly the insurance is what's cheaper, but might be a little bit cheaper to have the title in your name, depending on your state, probably not. It's probably the same fee either way. But the big risk of having the title in your name, having your name on the title, is that you're responsible. They could sue not only your child, but you in the event of some terrible crash where your child maims a CEO and they lose 10 years of earnings or something. Right. Hopefully, either way you've got some decent insurance on it that would cover most things. But most children don't have that much in assets. And so their main asset protection technique is declare bankruptcy. Right. I mean, they carry insurance and they can take care of reasonable stuff. But if someone gets a $4 million judgment against them, they're going to declare bankruptcy. Right. And if your name's on there and you've got a $4 million taxable account, they might be coming after that. So from an asset protection standpoint, getting the title on in their name is a huge win. Right. Okay, so what's the downside? Well, the downsides on the insurance, right. It's generally going to be cheaper to have them on your insurance. And that means it's got to be your title as well. And so that's the approach that a lot of people take. It's pretty frightening just how much insurance costs. You know, my daughter bought a car this last year and she's not our dependent. And I said, you know what, I don't want the liability. This is going to be your car, your name's going to be the only one on the title and your name is going to be on the one on the insurance policy here. Call USA and see what it costs. And you know what, it cost a lot. It was close to $300 a month. It's 10 bucks a day for her to have insurance on her own car given her age. Now that'll go down as she gets older. As she gets closer to 25, that price will go down. She shopped around, it didn't get a lot better, but she did get a little bit better. I think she's still paying 240 or something, $240 a month for insurance, whereas she could probably get it for about half of that if she were on our policy. So there's substantial savings available to keep them on your policy. And for that reason I think a lot of parents do. Now hopefully most white coat investors have got a big fat umbrella policy anyway that's going to cover that additional liability. You're not going to get into some sort of above policy limits asset protection situation. But that is an area where you can reduce your risk. And frankly we think with the 20s fund we give our kids, they can afford to take that risk on themselves. I think it's a big step in them becoming financially independent, becoming adults, et cetera. In fact, I think we threw her off our cell phone plan too. At least our 20 year old, our 18 year old's still on that. So you know, unless you want them living in your basement at some point you got to start cutting strings and it's up to you when you decide to do that. But if they're still in high school, if they're still living at your house, in fact, if they're within 40 miles and they're still your dependent, you'll probably have to keep them on your policy. The college has got to be a certain distance away before you can take them off your policy. And there would be some savings in that situation. And of course if they're on your policy, they're covered by your umbrella coverage. That was the other issue. Partly why my kid was so expensive when she was living at home. Even not being our dependent, she was at home for a few weeks, they wouldn't let her not be covered by my umbrella policy. And so it was a little more expensive in the beginning. Then she saved a little bit of money when she, when she actually went back to college. So dive into it. You can go to whitecoatinvestor.com insurance and you can even look into Ottawa and property. We've got some people who do Ottawa and property kind of stuff there, umbrella policies that you can price out and see if you're getting treated fairly there as well. Hopefully that's helpful. Like I said, most people do keep their kids in college on their own policy because it's so much cheaper. We decided not to. One of the things I guess you can do when you're wealthy is make decisions not based on the very best financial outcome and we chose to do so. So good luck with your decision. Okay, let's take another parental gift kind of question off the speak bite.
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Steve
Hi Dr. Dally, Steve from the Midwest, longtime listener, first time caller. My question pertains to gifts as a down payment for a house. My wife and I are both physicians. I'm about one and a half years out from fellowship. We've begun saving a down payment for our house and have about $100,000. My father in law recently read Die with Zero and offered my wife's inheritance early as a down payment. This is roughly $100,000 itself. Will he owe gift taxes on the money if given to us as one large lump sum? I know the annual gift tax exclusion for 2025 is $19,000 per person per year. So theoretically he could give me 19,000. My wife 19,000 as well as her mom repeating the same process, bringing a grand total to around $76,000 and still remaining under the exclusion limit. I was reading some random financial blogs recently by quote unquote financial advisors who mentioned that the annual gift tax exemption is actually overridden by a lifetime gift tax exemption, which I believe in 2025 is something ridiculous like $27 million. Seeing as my father in law is not a billionaire, this will not come into effect. Just wondering if my in laws will give tax on the remaining $24,000, which I think would be around 20 to 22%. Thanks in advance.
- [23:02]
Alexis Galati
All right. Thanks for what you're doing out there. You know the reason why code investors generally have high income is because they do hard work and it never feels harder than when you're in training or shortly out of training. So thanks for what you're doing out there to start. Secondly, it sounds like you understand almost everything about this issue very well and in fact I think this sort of thing is going to become more common. It used to be that the thing people your kids really needed help with was their educations, right? That's no longer the case with home price appreciation over the last few years. What people really need help with is housing. You know, there's a realtor in our local area that comes around, looks at, you know, all the houses in our zip code or whatever and the ones under contract, the ones up for sale and puts the flyer on our door and hopes that we'll hire him to, to sell our house. And, and I went down the list, right? And I think the cheapest one I saw was $800,000, you know, and there are plenty of seven figure homes on that list and that's here in Utah. Right. We're not in the Bay area, we're not in D.C. we're certainly not in Manhattan. Right. And so I know there's a lot of other areas out there in the country that have really expensive housing. And you know, even small towns sometimes white coat investors are surprised just how much it costs to buy a house in a small town. And so I think this has been going to be more and more of a trend where parents are helping their kids with down payments. And by the way, if your parents are fairly well to do, this is an exceptionally good Christmas or birthday gift to give them. Die with Zero. Right? Die with Zero is my favorite book for those of us that have trouble spending. The book's not perfect. I've got a few little qualms with it, but for the most part I love it. I think it's a great book that helps those who are having trouble spending their money realize that they're not immortal and that they can probably do more good, generate more happiness by spending now and giving now than they can by doing so later. One of the things the book talks about is it talks about the average inheritance is actually received at about 660 years old because that's when your parents die. But people think an inheritance would be most useful between ages 26 and 35. Now you might think 26 is a little early, that maybe it'll screw them up by getting a bunch of money then, well, fine, make it 38, make it 42, whatever. It's better than 60, right? So a great gift to give to your wealthy parents or your wealthy in laws, if only for self interested reasons. But it might help them be happier too. Okay, so let's talk about gifts. Okay. You can give $19,000 a year to anybody you want to everybody you want, right. Without having to file any paperwork with the IRS and without having to pay any sort of taxes. That is the annual gift tax exclusion amount. It typically goes up most years. It'll probably be 20 grand next year. And you and your spouse can each write that amount. Right? And if you're giving it to a couple, you can write that amount to each couple, right? So it's $19,000 from dad to junior. It's $19,000 from mom to junior. It's $19000 from dad to junior's wife. It's $19,000 from mom to Junior's wife, right? So that adds up to $76,000 that a couple can give to another couple every year. No paperwork required, no taxes due. That's the way the gift tax exclusion works. So it's a pretty cool thing. It helps keep things simple. And truthfully, I'm not sure that the IRS keeps very good track of any of this. Right. I mean, if you cut somebody a check for $150,000, I don't think the IRS has a real good way to find out about it, let's be honest. So I think people probably don't follow this law a lot and get away with it. But the way the law is written, if you give more than $19,000 in a year, you have to file a gift tax return. And we've had to do a gift tax return one year when we funded our trust and used up a bunch of my exemption. But what that gift tax return does is it starts burning your lifetime estate tax exemption amount, right? And you're right, that amounts like 13 or 14 million apiece. You double it if you're married, and it's portable between spouses if you're married as well. So that's what you start burning into. And it's not until that is all gone, until you've literally given away More than $14 million during your life that you have to start paying gift taxes. Now, gift taxes are pretty expensive. The first million kind of ramps up, but after you've given away a million, it's like 40% that's federal. Now, there may be also state estate taxes, so check and see if your state has an estate tax. And maybe they have a gift tax thing going on as well in your state. Mine does not. My state does not have an estate tax, so we didn't have to worry about that. We just had to worry about the federal estate tax, so we had to do a gift tax return. The gift tax return is not terribly painful. Our estate planning attorney took care of it. So I've never actually filed one, but I've looked at them. They're not terrible. It wouldn't be the end of the world to have to file that yourself. And certainly if you're giving away that much money, you can afford to pay somebody else to file it for you, but that's the way it works. So to answer your question, no, the parents will not owe any taxes. Yes, they will have to file a gift tax return if they give you more than $76,000. One way to do this is just do it at year end, right? So you get $76,000 in December, you get $76,000 in January, and nobody has to file any gift tax return. So you might consider that as well if the timing works out for you. All right, those of you with student loans, it's been a crazy, crazy, crazy year with lots of changes and proposed changes coming all the time. If you're not sure how you should be managing your student loans, we recommend you book an appointment with studentloanadvice.com and if you do it during June, we're going to bribe you. We're going to give you a copy of our online course, continuing financial education 24. That's a 789 value. After you meet with one of the consultants@studentloanadvice.com so not only do you save hours of research and stress and get answers to all your student loan questions, you get CME. You get like, I don't know, 35, 40, 50 hours of material that was originally presented at WCICON 24, and you can digest that on your own time. It's yours forever. You can listen to it in podcast format in your car. It's a really great course, so it's actually worth more than the console even costs you. So, I mean, if you're interested in the course, you probably ought to just pay for a console. That's cheaper than buying the course itself. But you can save hundreds of thousands of dollars with your own customized student loan plan. Just go to studentloanadvice.com, book it during June, and you get the free course. All right. Our next question comes in via email. Says, my spouse is an emergency doc. Six years out of training, the two of us recently reached the millionaire milestone thanks to what we learned from you and are now able to focus on our kids. That's great. The question I have for you is how best to help my parents get their finances in order. Oh, good luck with this. I think this is a common theme in this episode, isn't it? Growing up, my parents gave me a good start managing money. Awesome. They helped me open a bank account in elementary school. Great. Taught me to work hard, live within my means, and save for the future. As my dad climbed the corporate ladder, they continued to build their wealth and hired a financial advisor. The plan was working well enough for them to completely pay for undergrad for my sister and I, but shortly thereafter, the train jumped the tracks. Oh, this is not going well. A few years ago they got divorced. It was messy. Thankfully they didn't drag my sister and I into it, but it was a stressful and scarring time for the entire family. At the time, my wife was finishing her training and we were about to become parents and I was drafting our written financial plans. I tried to sit down with each of these divorcing parents and create their own financial plans, but didn't get very far reflecting back on it. Everything was just too raw for that to have ever been successful. Today, both of my parents have new partners are in much better mental space. In the last few weeks, both have sought me out to help them get their finances in order. They're nearing retirement, haven't had any guidance for the last eight years, and don't know where to start. I feel confident in what I've learned as a DIY investor, but I don't know the first thing about retirement and the decumulation phase. I want to help them each find a good advisor. I started to look through the list of recommended advisors on your website, but a lot of them seem to target my demographic early career high income. Neither of my parents are doctors and their peak earnings years are behind them, so they're skeptical and I forwarded the link to them. Are there any in particular that you think would be a good fit? My mom is a validator, my dad is definitely a delegator. I know that you've mentioned on your podcast before that you help your parents to some degree with their finances. As someone who's walked this path of is there any other general advice you can pass along? I really want to help them stop doing dumb things with their money. My dad has a bad habit of buying boats that rarely make it to the water and my mom is writing offers on houses close to us with thoughts of borrowing from a retirement account. All right, well first of all, sorry you had to go through that, right? Relationship issues, family issues are the hardest things in personal finance. It's 90% personal, 10% finance. And that 90% is certainly the hard part. So a few things to consider as you think about this. First, financial planning is hard. Investment management is easy, right? I am my parents investment manager. I literally spend less than an hour a year managing their portfolio. But if you're going to be their financial advisor, you've got to think about More than just investment management, you got to think about stuff like insurance and estate planning and asset protection and budgeting, withdrawal rates and strategies and that stuff too. Okay. The second thing to consider is you need to be sure that this is okay with your siblings and any other interested party, particularly anybody who's likely to receive an inheritance from your parents. You can avoid a lot of blame by telling them they have to get someone else to be the financial advisor rather than you doing it. It's relatively easy. Okay, third point. It's relatively easy to find a good advisor for delegators and it's much harder for validators on our list. We have a few people that are pretty good for validators, which I recommended in this email to this folk to this person. But just about everybody on the list can work well with delegators and almost all of them, a lot of them do have people that are white coat investors, right? A big chunk of them, some of them, the vast majority of their clients came from the white coat investor. But pretty much everybody on the list has people who came to them who aren't docs. So I don't think that's a big issue to worry about. Right. Yes, they like having doctors get doctors have high incomes and usually become wealthy eventually. And there is a little bit of specialization on the list and people that work with doctors, but they've all got people that aren't doctors. So I wouldn't worry about that too much. Okay, fourth point. If you're going to do their investment management management, you better make sure they bought into your preferred strategy. If you end up putting money into bonds and REITs and international stocks, right. And then they have years like 20, 23 and 20, and they're really PO'd at you because you trailed the S&P 500 so much. That isn't going to be very good for family harmony. So whatever asset allocation mix you use, whatever investing strategy you use, they've got to be bought in. If they're not bought in, you don't want to be involved. Right. Because the last thing you want is for them to bail out of the strategy when it's not performing awesomely and they end up buying high and selling low. But if you want to function as their advisor, you're going to have to read up on withdrawal strategies. We've been publishing lots of this stuff over the last year or two and in fact I just published one a few days before I got this email and sent them a link to that. And we have more coming on it. It is a little more complicated in the decumulation stage. It's not dramatically more complicated, especially for a lot of white coat investors that have more than what they need. They can just spend what they want and they're going to be fine. But if you're going to be functioning as your parents financial advisor and they're in the decumulation stage, you're going to need to know something about the decumulation stage. But I think you're probably better off in both of these situations, most of the time hiring somebody else to help. So just make sure they're getting good advice and are paying a fair price and leave that relationship up to to the advisor. Okay? Got another email. This one refers to a Milestones podcast we did recently. I appreciate the married finances talk on the Milestones podcast this week. My question is how to merge finances. After a long time, the military separated me and my spouse for our first six years of marriage. With two incomes and two households, it didn't make sense to combine finances. But we had a general awareness of each other's situation. Now it's the logistics of merging accounts and the like that seems to be the obstacle. Where are the nitty gritty day to day finances now? But there's an inertia after six years as well. Any thoughts on how to start tiptoeing things together? Okay, I don't buy this one. All right. I am a big fan of managing money together. I think separate finances is usually a bad idea. Certainly completely separate finances, pretty much always a bad idea. But you know, there are some situations where it can make sense. For example, so let's say you're worth $10 million and you get married to a new spouse at age 62 who has nothing. Okay. You know, you probably need some sort of prenup. You probably may manage finances a little bit differently than a couple that got married at 22 when they were both flat broke. Alright. So there are some times I think where having finances separate, at least partially separate, you probably ought to both be putting something into some sort of combined account can make sense. But I'm not hearing any reason why this couple ought to have separate finances. In fact, I don't even think the military having you live in different places is a reason to have separate finances. So there's two mortgages or there's a rent check and a mortgage check. There's two sets of utilities. That's not a reason to have separate finances. Right? I mean, I guess if you were, you know, living completely separate lives for some reason, maybe you have separate finances. But it makes me wonder why you're married if you're living completely separate lives. Presumably you're still working toward the same goals. You have the same children. You see each other every now and then. I think you can manage money together even if you're not living together. So I think getting this together now is a wise thing to do. The first thing to do is convince both of you of the merits of doing it. You got to both be on board and going, oh, okay, we should do this. This will be a lot simpler. Instead of having two sets of credit cards and two bank accounts and all this other stuff, we're just duplicating. This would be way better. So just bite the bullet, right? Do this all over the course of a month or two, right? Ditch one checking account. Put the other person's name on the other checking account. Move over anything that's being paid out of that account. Move over anything that's paying into that account, right? Get another debit card for the person whose name wasn't on that account. Get another checkbook, right? Combine any taxable accounts with in kind transfers and start looking at your portfolio as one big portfolio. You know, you probably ought to get on the same cell phone plan too, and those sorts of things get on the same insurance plan as well. But I don't understand why you haven't been doing this for a while, number one. And number two, I think you're right. I think it's just inertia. Just go do it. If for nothing else, it's going to simplify your financial life. And just imagine that one of you at some point in the future becomes disabled or, heaven forbid, dies, right? You don't want to be having all these accounts to keep track of. Simplify now. Don't leave it to your kids. Okay, let's take a question about this newfangled thing, the 529 to Roth IRA conversions.
- [39:11]
Marci
Hi, Dr. Dali. I am a physician, parent of a recent college graduate who has a 529 account that still has some money in it. So the recent changes for 529 conversions to Roth IRA has come up. And if my son gets a job with a 401k plan and a match from his employer, does this affect how much money he can put in the 529 to Roth IRA conversion period? Thank you very much for your help.
- [40:03]
Alexis Galati
Okay, so it's not even that recent. Now, it's been a few years since this law was passed, but people are still kind of clarifying how this is going to work, okay, if you've only overfunded your 529 a little bit, one of the best ways to take care of that is to use money from the 529 for the beneficiaries. Roth IRA contributions. Right. So Junior gets out of college. There's still $18,000 in that 529. Junior's making $50,000 a year or whatever. And now as earned income, can make Roth IRA contributions, but doesn't have that much money because he's only making $50,000 a year. Well, you can take the $7,000 that Junior now can contribute to a Roth IRA and that can come out of the 529. Right. Totally tax free, no penalty, no taxes. It goes in. The Roth ira, never gets taxed again. It takes the place of any other contribution and is subject to the annual contribution limits. And the total you can do over the years of this is $35,000. And that's not indexed to inflation. So as the years go by, it might only be four years worth of contributions eventually that $35,000. But that's how it works. Now, I suppose if Junior was making so much money that he can't make direct Roth IRA contributions and has to do his Roth IRA contributions via the backdoor Roth IRA process, I don't think this is an option. I don't think you can go through the backdoor Roth IRA using a 529 to a Roth IRA method. I'm not 100% sure you can't do this if you're high income, but I think that's because nobody's actually said. I don't think it's been clarified by the IRS whether high earners can do it, but I'm presuming they cannot. They've got to do regular backdoor Roth IRAs. So if you're going to do this, get it done before Junior becomes an attending physician or something and can't make Roth IRA direct contributions. Hope that's helpful. Other issues people have, I mean, this is becoming a bigger and bigger problem, right? Because all of you white coat investors out there think Junior's going to go to Harvard and then he's going to go to dental school and Junior ends up going to State U and doesn't go to dental school. And now all of a sudden you got $200,000 extra in their 529. Well, this conversion isn't going to fix that problem. Right? You're going to have $200,000 in there. And even after you take 35,000 out. You probably still got $200,000 in there because it grew over the years as you took that $35,000 out. The best way to deal with these overfunded 529s, in my opinion, is change the beneficiary to the grandkids. You can change it to siblings as well, but presumably your kids is going to have some kids. And now you've basically already done their college savings, because by the time they they're born and they get to college age, it's going to have been 25 years. That money's going to compound. And even if there's only enough for, you know, one kid go to college part of the time, after 25 years of compounding, it might be a whole lot more. So I think that's the best option. You can always just pull the money out and spend it as well. Right? You got to pay a penalty. I think it's 10%, and you got to pay taxes on the earnings. But that's also another option. Our next call, I think is going to be talking about another way to get money out of a 529 if you don't end up needing to use it, pay for college. But before we get to that, I want to make sure those of you out there who are interested in this opportunity have heard about it. We have a conference every year called the Physician Wellness and Financial Literacy Conference, AKA wcicon. And we need a number of speakers every year at this conference. And we try to bring back really popular speakers that did a great job from time to time. But we also try to have new speakers every year. So this is your call for speakers if you would like to come speak at WC Icon. We pay you a little bit and you get an all expenses paid trip to wcicon. It's a lot of fun. You get to come to, you know, the premium speaker dinner and meet the premium attendees, and they get to meet the speakers. You know, it's a lot of fun to be speaker, but you can sign up now for that@wcievents.com be aware, it's a competitive process. All right, so not everybody who applies gets chosen. In fact, I think we turn down like 80% of the applicants every year. So keep applying, give us multiple options for your topic, and hopefully we can eventually bring you there as a speaker at WCICON. WCevents.com is where you sign up for that. Okay, let's get to this question about scholarships and 529s.
- [44:40]
F
Hi, Dr. Dali, this is Marci from the Midwest. My husband and I have a relatively good problem to have in that our high school senior who just graduated received a full ride scholarship to the college of her choice. She has a fully funded 529 with over $200,000 in it, with no plans for moving that over to her brother because he also has a fully funded 529. I'm interested in learning about the quote unquote scholarship loophole where you may be able to at least move some of the money from the 529 over to UTMA accounts, potentially while not paying the penalty for withdrawing from the 529. Can you explain the nuances for doing that? And timing? Do we have to do all of that year by year that the scholarship is used, or do we do that all at the end of her schooling, assuming that she uses the entire scholarship? Thank you.
- [45:43]
Alexis Galati
Okay, this is a perfect example of what I'm talking about. So many of you people out there are putting a gazillion dollars into 529s. Quit doing that, okay? It's unbelievable. People think they need to max these things out. Well, the maximum for a 529 is like $2 billion, right? You can open one in every state, the other parent can open one in every state. And you can put four or five hundred thousand dollars into these things, right? There is no maximum on how much you can put in a 529, but any maximum there might be is certainly way more than any kid can spend, okay? So realize that you don't have to save up entirely for college in advance. Your kids are smart like you. They're probably getting some scholarships. They're probably intelligent enough not to pick the most expensive college in the country. And you know, you probably don't need a bazillion dollars in your 529, right? They can work during the summers, they can work a little during the school year. They may get some scholarships. You can pay a little bit out of your current cash flow while they're in school. I mean, heaven forbid they have a student loan, right? You all paid for your school with student loans, but you think your kids can never have one, even if they go to dental school? No. Use a multi pronged approach so you don't end up with $200,000 too much in a 529. I mean, heaven forbid you got to use a little bit of your taxable money to pay for school instead of a 529. It's not that big of a deal. Okay, so what are your options? Here. Well, there is a scholarship loophole, right. That allows you to take money out of a 529 in the amount of the scholarship they received without paying the 10% penalty. But guess what? You have to pay the taxes on the earnings at ordinary income tax rates, which for you is probably more than the 10% penalty is. Right. So this is not a great option for them getting a scholarship. It's like an okay option. There are a few ways you can work around it. Right. There's not like a 529 Utma rollover that's somehow tax free. No, that's the Roth IRA rollover. It doesn't go to Utma tax free. But here's something you might consider doing. You can change the owner of the 529 from you to the kid, and then the kid might be in a much lower tax bracket than you. So when they pay taxes on the earnings, it might be taxed a lot less. So maybe what you ought to do is change the owner to them. And then every year during college and for a few years after, they can take a little bit out each year in amount equal to that scholarship. I don't think it has to be the same year they got the scholarship, but it might be. It might have to come out in the same year they got the scholarship. So look into that and then move that into whatever. Right. If they want to invest it, they can do that. I mean, I guess if they're young enough, it could be a UTMA account, but by the time they're done with college, it's just going to be their taxable account they're investing it in. Or maybe they can use it to fund a 401 or Roth IRA if they've got some earned income and have those plans available to them. But maybe they just need to spend the money. Maybe that becomes their 20s. Fund that instead of putting it in a UTMA like you should have, you put into a 529. It's really up to you. Other options, of course, rolling it over to cousins, rolling it over to nieces and nephews, rolling it over to yourself and going to cooking school in Italy, changing it to their kids, which I think is one of the best options out there for. For overfunded 529s. But that's the way the scholarship loophole works. All right, I think we've answered all the questions we got for this episode, so I hope you guys have enjoyed that. Lots of family stuff today. Kids with overfunded 529s, parents that need help. People dying, unfortunately, lots of relationship issues today, so I hope this episode has been helpful to you. We're halfway through the year and while Vacation Mode is great, it's also the perfect time to review your tax strategy. Cerebral Wealth Academy has open Enrollment for the Doctor's Four Week Guide to Smart Tax Planning, available through June 30th. As the spouse of a physician and founder of Cerebral Tax Advisors, Alexis Galati created a course designed for medical professionals with a side gig, locum tenens, or private practice. It includes 22 video lessons covering business entity setup, maximizing deductions, retirement planning, advanced tax strategies, and monthly live Q and A sessions with Alexis herself. My Code Investor podcast listeners can use code WCISUMMER200 for a $200 discount. Visit cerebralwealthacademy.com to learn more. All right, don't forget about the promotion with student loan advice. Book a consult in June. You get a free CFE 2024 course. Thanks. For those of you leaving us five star reviews telling your friends about the podcast, we had somebody email us recently. I said I'm a practicing Durham, Pa for the last 11 years. I've been an avid consumer of all your content since 2019. Prior to discovering WCI, my financial literacy was far from sufficient. Through study of your content, increasing my income and lots of hard work, I've almost reached 2 million of net worth at the age of 35. I would have a fraction of this if not for you. Unfortunately, just several days ago on Easter, my family's home was directly hit by a tornado. No warning at all. In 60 seconds our lives change dramatically. Praise be to God that my family, a wife who is seven months pregnant and a three year old son run harm. The same cannot be said for our house. It sustains significant damage and will be uninhabitable for the next three to four months while under construction. The reason I send this email is to say thank you. Despite the terrible circumstances and future obstacles to overcome, financial concern is not one of them. My wife and I have put ourselves in a financial position that removes this worry completely and I owe that to the White Coat Investor. I pray for your continued physical recovery from your accident and continued growth of the White Coat Investor that may positively impact the lives of others like myself. What a nice email. Thank you for sharing that. We wanted to share that with WCI podcast listeners as well. This stuff does matter. It matters when the excrement hits the ventilatory system in your life. And if you're like most of us, that's going to happen at some point. So keep your head up, keep your shoulders back. You've got this. The entire WCI community is here to help you. We'll see you next time on the White Coat Investor Podcast.
- [52:02]
Jim Dahle
The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.