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2021 Child Tax Credit Payment: How Much Is Your Kid Worth?

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We apologize for interrupting your regularly scheduled podcast program. We have BREAKING NEWS! What is up with the new American Rescue Plan (ARP) CHILD TAX CREDIT payment?

There is a new increased Child Tax Credit Payment via the American Rescue Plan (ARP) that's paying out right now. Like many of us, you may have received a payment that you weren't expecting.

  • Will you have to pay it back?

  • Will it cause your tax bill to be higher in April?

  • Should you spend it now?

  • What's the difference between the new increased ARP Child Tax Credit and the previous version of the Child Tax Credit?
Typically, taxpayers with income under $400,000 MAGI, married filing jointly, received a $2,000 tax credit per child under the age of 17 to offset your tax bill. This year, instead of getting the credit on your taxes, a portion of the credit will be paid out in advance over the next 6 months. If you count on the tax credit to offset your tax bill, you could be in for a big surprise!

In this podcast, Leading Edge's Co-Founder and CFO, Kevin Gormley CFP®,CPA aka "The Professor" covers all the details of the new increased Child Tax Credit as well as the existing credit. Plus, everything you need know to NOT be surprised at tax time!

Check out this Wall Street Journal article on the Child Tax Credit!

Check out our recent post on Tax Deductions

Podcast Transcription:

Voice: ladies and gentlemen, welcome aboard the pilot money guys podcast, where our mission is to help clients build and protect wealth to achieve their dreams. And. This podcast is brought to you by leading edge financial planning without further ado, here is your host Robert equity

Rob Eklund: tip of the cap, Tia and welcome to the pilot money guys. Ad hoc special edition podcast regarding child tax credits. I'm your host, Rob Macklin. Joining me today. We are lucky enough to have certified financial planner and CPA. Kevin Gormley, nicknamed the professor. Which isn't too original as he used to be a professor, but still he's known to pontificate around the leading edge campus.

And he looks like a young Jim Gaffigan lives in Tennessee, loves long walks on the beach and usually has a good bourbon with it. Welcome Kevin.

Kevin Gormley: Hey Robin. Yeah. It's, it's great to be here with you guys. A big, big fan boy of the pilot money guys. First time, long time and all that other crap.

Rob Eklund: Perfect. Perfect.

We got a, of course we've got anchoring. The podcast is our financial wonder. Boy, Ben Dickinson. Welcome Ben. Good to be

Ben: here. Anchoring it down. Like keeping it anchored. I like it. Charlie is out. Charlie's out. Charlie's out. Kevin's in. And this is a good time.

Rob Eklund: Good crew the crew. Yeah. Yeah. Uh, let's jump into it.

We've got a little airline news. This is an ad hoc, uh, podcast. We just brought it out because the child tax credits, if you're getting payments from the IRS, or if you make less than $400,000, you might want to tune in. But first we're going to jump into airline news. Ben, what do you got?

Ben: Airline news. So I, this, this one might not, might be debatable whether this is airline news, but this is, this is sort of aviation news.

Uh, maybe more rocket. Our man rocket, the myth, the legend, Jeff Bezos, rocketed into space, debatable. Whether he actually made it to space. I think there's been some debate on that. I know he went fat farther than Branson. Well, what are you guys saying, Nick? Did he make a space?

Rob Eklund: I don't know. Did he? Well, I can tell you it's not an astronaut.

At least the FAA says he can't wear the wings. No, can't

Ben: agree.

Kevin Gormley: He's like, why not? Why not Rob? Why can't he wear the wings? He

Rob Eklund: says, uh, passengers can't can't wear the wings. And unless you've demonstrate activities during the flight that were essential to public safety or contributing, attributed to human space, flight safety, he wasn't a pilot.

He wasn't commanding it. He wasn't working on it. Really. He was just passenger. So no wings for him,

Ben: man. No rings for you also just couldn't. It had one button that they had to press just to get the wings. I mean, they could have, he really should've thought of that. If he's this genius, billionaire, come on, just add one button in there,

Rob Eklund: cowboy hat for crying out loud, you should get the wings.

Kevin Gormley: You should get the wings at the blue, the cowboy.

, Rob, I do have a question for you. Um, has he, has he been up higher?

Oh, yeah, it's a little it's a little bit. Yeah.

Rob Eklund: Yeah. Tap out about 41,000 for myself.

Ben: He, how high did he go? I mean,

Rob Eklund: I was able to make it Branson. That's always a good thing,

Ben: right? Yes. Yes. Um, the billionaires like to get after each other, which I appreciate as a, as a simpleton, uh, here, I, I, I don't mind, I don't mind doing this, this.

I dunno exactly.

Rob Eklund: Did he really get the space Branson that is? Did he really make it? I don't know.

Ben: W we, we were debating before this, about the Karman line, uh, that Kevin was talking about to us. Uh, the Karman line apparently is a unofficially official line of S of, uh, where space begins. Yeah. I'm not sure.

Kevin Gormley: Yeah. Ben, it's a, it's a little known fact. That Theodore Von Karman actually established the Karman line. And it's, it's somewhat, yes, it's somewhat of a nebulous, uh, amount, but it's 50 miles up or roughly 80 kilometers. I don't know, 80 kilometers. That doesn't sound like very much, but, uh, that's, that's where the space line allegedly begins.

And I know, uh, Bezos was making fun of Brandon. And, uh, you know, look, I'm afraid to go, uh, even 30,000 feet. So I'm not making fun of any of these guys. The interesting part for me though, is a lot of people are like, well, how does this space flight solve world hunger? Like, you know, how does this solve world hunger?

How does this solve other problems? And I'm like, I don't really care. It was pretty cool to watch.

Ben: Yeah. Yeah. I go hungry and watch the show.

Kevin Gormley: I mean, what are the aviators think? Rob? What's been the, what's been the scuttlebutt around, uh, aviators, as far as all this. Do you even care?

Rob Eklund: I don't think we care too much, but maybe I'm wrong. I have, I've only flown a few, a few, uh, flights, uh, since it's happened, but I don't think we care too much other than we like to make fun of.

Maybe the shape of the rocket and whatnot, but

Kevin Gormley: yeah,

Ben: it was a little Dr. Evil, Alaska, no one, but

Rob Eklund: he's got some big windows like it. Excellent. Anything else? Any other aviation S news. I know United bots and planes, or is it planning to buy a lot of planes? Like 200 Max's

Ben: yeah. So that's exciting. I mean, hopefully it happens.

There's always, always some risks around. I'm not even gonna say the name of the plane. I don't want to jinx anything, but don't say, but yeah. Yeah, besides that, I mean, we, we, uh, luckily we, we recorded, uh, our, our last podcast here. What last was it? Last week? I think it was last what? Yeah. And so, yeah. Yeah. I mean, uh, not too much going on since then, maybe some, some different, uh, different fuel shortage, potential issues I saw on the west coast, but, uh, for the most part, it looks like things are going pretty smooth.

Um, how are the flights in Southwest? So you're,

Rob Eklund: they're, they're busy. Things are crazy right now. Uh, you know, I think the airlines are hopping, so hopefully that continues, uh, through the, through the Delta variant and all that good stuff, but we'll see. Absolutely. We'll see. Absolutely awesome. Sounds good.

Let's move it along. Uh, before we get to the exciting stuff, let us remind you. This podcast is brought to you by leading edge financial planning. We are fiduciary fee only advisors, and we want to know what keeps you up. When you were thinking about your finances, what questions do you have about your retirement savings?

Life insurance policies long-term care options, or estate planning, or why we call it? Ben Caldwell, give us a jingle 8 6 5 2 4 0 2 2 2 9 2 2 8 6 5 2 4 0 2 9 2 2. It's up to you to get these facets of your life in order or not. You decide to get a handle on these issues. We can help that's enough of that.

Mr. Professor. Kevin Gormley let's get into the child tax credits.

Kevin Gormley: Yes, sir. Um, so I think I'll just start out by saying I had more conversations during this tax season about people's kids and basically what their kids were worth to them. Um, because we talked a little bit about if a kid's a, you know, when I say kids 17, 18, 19 years old should be claimed as dependence and or should file themselves.

All the kids want. That money that was out there. So when we talk about taxes, we talk about tax credits and everybody goes to sleep. Uh, if somebody mentions that you might get some of that free money, all of a sudden everyone wakes up and that's really what this is about. This is about, uh, either that free money or maybe having to pay back money if you are a high income person.

So, so that's really how I would frame this discussion. If you're high income, you may not be getting some of these, uh, these friends.

Rob Eklund: Yeah. I feel like Ben should insert the little clip from Jerry Maguire. Show me the money right there

Ben: to meet the money. I just cause we met just because you make a lot of money.

It doesn't mean you shouldn't get any free money. I mean, come on. Right? Right. Well basis to get some free money to

Rob Eklund: you probably don't well, I don't mean to sidetrack you here, but for our listeners, um, who don't know that much about taxes, can you just explain real quick, the difference between a tax credit and a tax deduction kind of different.

Kevin Gormley: Well, uh, I'll give it a shot. I hope I can explain it. Uh, but a tax deduction lowers your taxable income. So if you have a hundred thousand dollars of tax in taxable income, you have a $2,000 deduction, a hundred minus two is 98,000. And so you still have to pay taxes on that income, but a tax credit. Wow. A tax credit is if you have a hundred thousand dollars of income and you're going to pay $20,000 of tax.

The credit actually will reduce your tax dollar for dollar. So the credits is really where we come in and we say, uh, you owe a $20,000, no check that you owe $16,000. And so it can be like a four, $5,000 difference when you have credits.

Rob Eklund: Very nice. Excellent. Awesome.

Ben: So the tax credit, I've got a letter here that was sent by none other than the president directly.

Not me. That's a Charlie handwritten from what I can tell. Very good to handwriting, very clear, almost looks at times new Roman. Um, it kind of goes over some of these details, estimate some stuff. What's going on with this child. I don't have a kid, so this doesn't, this doesn't help me at all. But unfortunately, yet I'm thinking now though, I should start having a bunch of kids just so I can get these, these credits.

Rob Eklund: Well, I'm absolutely be

Kevin Gormley: a bad idea. I'm absolutely not going to touch that one. Cause that sounds like a political hot potato. But, um, but yeah, the thing is, is, uh, you know, I don't know how much children crock cost to raise. Uh, Costa rays, but, um, you know, I've heard, I've heard a million dollars over your lifetime.

I've heard other numbers as well. And so at tax time, we actually might get something for having children and that's really what these tax credits are about. So, so Ben, when, uh, the tax law changed, I think it was in 2017 or 18. Uh, they changed things where people even making up to $400,000, married, filing jointly could now get child tax credits.

Now other things were lost, but I'm not going to go into that. But, uh, so it's $2,000 per child that are under the age of 17 or 16 or less at the end of the year. So, uh, when the kids are over, then set older than 17. Uh, you only get $500. So what ends up happening with a lot of our clients who are high income is one year, uh, they don't know much tax the next year they owe a lot of tax and then they say, I think our CPA did something wrong here, Kevin.

Yeah. And they call me and they say, uh, are you sure this is right? And I say, let's take a look at it. And then we find, well, uh, you have two children that are now over the age, so you're no longer getting all these calls. So, uh, so anyway, that's really, there is a great benefit to having the child tax credits you, you saved money.

Rob Eklund: And I think that was a, the tax cuts and jobs act of 2017. They raised it from a thousand to 2000. So we're already moving the right direction,

Kevin Gormley: right? I am. Yeah, that's good, man. I love when people pull out that, uh, uh, legislative language there. Thank you, Rob.

Rob Eklund: My brother's

Kevin Gormley: a lawyer. Yeah. Yeah. So, so really what's happened in, in 2021.

Um, and this, this sounds like I'm an infomercial here, but for one year only for just one year only, uh, you get, yeah, you get extra, you get extra money. So, um, but, but there's lots of caveats as always. So if you, if you are a single and you make $75,000 or less adjusted, gross income, Uh, head of household 112,500 or less, uh, again, just a gross income.

We won't go into what that is or married, filing jointly 150,000 or less. Uh, you will get per child. Now you'll get $3,000 if they are 17 and below in 2021. So for one year only, it's not 16. It's now 17. And then if the kids are five or younger, You would get $3,600 in a child tax credit. So, um, now that caveat of $150,000 married, filing jointly and single 75 or less, um, I don't know what you guys think about how many clients we have that actually, uh, make less than that.

But it ain't many.

Rob Eklund: No, not, not a lot for us. Uh, but you know, those younger pilots out there, they're hitting that. They're below that 150 in, in, during COVID times, you know, some of our other clients, I think might've been a hundred below, 150. And depending on what the IRS is looking at there, they might've thought, oh, well, they make less than 150 based on their 20, 20, uh, income and or their two.

Yeah. Or 2020, income. So we're gonna give them this, tax credit, something

Kevin Gormley: like that. Right. Yeah, Rob. So, uh, what was really interesting last year? Interesting to a tax geek that is so take that with a grain of salt, is that sometimes like 2000, right now it's 2020 tax return. If he didn't file a 2020 tax return, it's the 2019 tax.

Yeah. So for people that actually made more in 20, sometimes it's better to not file your tax return. And we did a lot of that. Um, I don't really want to call it gaming the system. I like to call it a tax smart planning, but, uh, some could perceive it to be gaming the system, but it's based on 2020 tax return.

If you did not file one, which I did not file my own tax return yet it then is based on 2009.

Rob Eklund: Gotcha. So just kind of to summarize a little bit the American recovery act, which is in 2021, raised it from that 2000 to 3000. If we're just talking, uh, 17 and under now.

So you can, uh, you got the tax credit of $3,000. If you're 1700, unless you're under six and it's 3,600. Is that per child? Is that.

Kevin Gormley: Yeah, exactly. So let me, let me take it a different way here. Uh, frame it a different way. You still get your $2,000 per child. If they're 17 or younger, you then get that super bonus 2021, a APA, extra thousand dollars.

So, and the reason why I say this and it's called an enhanced credit, Rob is because if you make over $150,000, that enhanced part starts to go away. If you're married, filing joint, But you need to make over $400,000 before that $2,000 starts to phase out. Gotcha.

Rob Eklund: Okay. Fantastic. Now for those people that did make under 150 or maybe didn't file in 2020, and they saw, uh, an IRS, payment in July, how in the heck did they calculate it?

Kevin Gormley: Yeah, I'm going to, I'm going to make fun of myself as I always do. And mentioned that on July 16th, I looked at my own bank account and said, what's this $167. And so, um, I, I didn't, I didn't expect it, but what the IRS ended up doing is they said, all right, you're going to get this amount of tax credit.

We're going to divide that amount by, of tax credit by 12. And then we're going to pay it over six weeks. So Ben, I don't know if there's an easier way to say it than that, but boy, that sure is confusing. How would you, how would you say that? Only the IRS.

Rob Eklund: Yeah.

Ben: Maybe I'm just trying to ask a question with this, but so you're you get, you get half of essentially what you should be getting as the credit, if you, if over the next six months and then at tax time, is that going to come in the form of a refund or, or potentially reduce the amount you owe?

Is that right? Based on half of what you should be

Kevin Gormley: getting well, that that's, that's sorta correct, but I'm not really sure what you said. Uh, Rob, where you, where are you tracking that? Um, yeah,

Rob Eklund: , I think I tracked it. You get 50% of the credit that you would've got when you filed your taxes the next year during April, or whenever you file, but you're going to get that over the last thing.

You're going to get a prepaid over the next six months from July to December, you're getting that 50% broken up. Six payments is that Kevin,

Kevin Gormley: is that what you're tracking? That, that that's perfect. So let's, let's give an example. Examples are always easy. So let's say that you're going to get $2,000. You're you're over the $150,000 in whatever tax return.

So you're going to get $2,000. They will pay you a thousand dollars from July till December, and then next year, when you file your tax return, you get the other thing.

Ben: But what is the cause I was hearing that there is the major confusion point with these are the big challenge for some people is you may be getting these payments and then not expect that you're going to owe more in taxes or, or get more money back. Can you explain that part of the confusion there?

Yeah.

Kevin Gormley: Yeah. So the, uh, the most evil words in taxes is claw-back claw-back is always things that, uh, make, uh, everybody upset. And it, it particularly makes people that prepare taxes upset because we always get blamed. So if you were to get that thousand dollars extra, or let's say it's 1500, let's say, let's say you made a hundred thousand dollars in 2020.

And now you joined Southwest airlines and you're flying a lot of premium trips. And so now all of a sudden your income is I'm just going to make this up 450,000. So, so you went from making a hundred thousand to 450,000. So that, that thousand $500 that you got an advance.

You got to pay all that back when you do your 2021 tax return. So not only do you not get that 3000, you have to pay back 1500 when you arrive at your final destination of filing your tax return.

Ben: Yeah. What about you think there would be any penalties or anything on that if, if you have to pay it back.

Kevin Gormley: So I told you the most evil words and tax, I'll tell you the most friendly words in tax and that's safe. And so there is actually a safe Harbor where you'll not have any penalties on that you're doing, unless, unless you're, uh, unless you're cheating the IRS and you lie about something. But no, there's, there's no, there's no issues with that.

It's again, it's going to be when you file your taxes, uh, the, if you're married, the spouses are going to look at each other and say, uh, oh man, we all, all this money.

Rob Eklund: If I'm, if I'm, uh, thinking of this correctly, Kevin and Ben, uh, if I'm gonna make, if the last year I made less than 150,000, and this year I'm going to make over 150,000 and I'm getting those IRS payments, then I better be real careful what I do with that money.

I might want to, you can go, there's a couple things you can do, right, Kevin, and you could go on and go onto the IRS website and register and do all that, uh, get through that process. And then. Or you can probably put that money aside and make sure you don't touch it. Maybe make a little interest on it and then get ready to pay that come tax time next year.

Kevin Gormley: Yeah. So my, my advice to everybody is not to do anything, not to go cancel it, especially now that it's after July 15th, because you know, people will say, well, I got to check in the mail. I'm going to send it back. Please. Don't do any of that. Just to just accept the money as an interest free loan. If you get them.

And then at tax time, you, you basically end up settling up at tax time. So, uh, but, but yes, to answer your question, if you're, if you're getting, uh, you know, too much money, quote unquote, you could save that money and be prepared to pay some taxes next year. But of course, Rob, no one does that. Everybody gets the money and spends it.

And that's the whole reason why we, uh, we are getting this free money, which is not at all free because it's going to be on our taxes next year. Yeah.

Rob Eklund: Well little savings account, then what would you do with

Ben: it? What would I do with it? You know what I would do, I would throw it all into

Rob Eklund: not dose

Ben: on the rise, but,, I wouldn't do that.

I don't know. I think maybe a person that would, that likes you to refund back and this is just behavioral, but, and this is another thing just to think about, some people just. Hate owing on th on their taxes. And I agree the interest free loan , is exactly what you probably should do.

Um, you know, really take it, take advantage of it. But, um, if you're a person that hates to have to owe money, I would definitely consider turning that off. Or, I mean, is it worth it maybe up in any sort of withholding at all, just in case, uh, if you are getting that, would that be smart at all?

Rob Eklund: That could be a tactic.

Kevin Gormley: Yeah. So the more money you withhold, the less money you pay a tax time. Uh, so, um, that is absolutely a tactic and for certain people, uh, if they, if they get, if they don't get a refund, they're very upset. So, uh, But, you know, like you said, Ben, you should never overpay your taxes. You know, you can never be too thin.

You can never be too rich and, uh, you should never overpay your taxes. I think I just made up a third one. Yeah.

Rob Eklund: Nice. So, uh, again, not too many people listening probably are in this category, but if you do fall into that category where you're making really close to that 150,000, you should probably think to get to take advantage of these child tax credits.

So you want to get your ink. Lower than that 150,000. If you're close, if you're within, you know, maybe 10,000, maybe you've got a better number there, Kevin. Right.

Kevin Gormley: So Rob, the phase out starts, uh, at 150,000 and I think, I think that's just a great point for tax planning. Is, uh, you know, you don't always need to know their tax rules, but find yourself a tax geek that knows the tax rules.

And there are times that by, you know, and maybe you put a little bit more, more money in your 401k, or maybe you do something, maybe you give away a little bit more money in that year to lower your adjusted gross income. So you can be eligible for certain things. I think that's always a good thing.

Strategy.

Rob Eklund: Yeah. Things like IRA contributions, health savings accounts, those kinds of things. Yeah. Key. And that's where professor Gormley can really help all your tax for bedroom. Like it. Awesome. You haven't what else you got on this topic? Yeah, I know. It's really dense and there's a ton we could talk about, but uh, what

Kevin Gormley: else you have?

Yeah. So just a few things, maybe the top five things to know about this is, uh, if you're, if your kids are older than 18, Uh, you're out of luck. They're only worth $500 to you. Uh, maybe, maybe they're worth a little bit more, but if they're 18 or over in 2021, it goes back to 17 and 22, they're only worth $500.

, if, if children are claimed by another person, Sometimes we have mixed families. Well, obviously you're not going to be getting the tax credit in advance, but you would still get it. If you're going to claim that child, if you yourself are dependent on someone else, I would love to be a dependent on Jeff Bezos if he's listening.

But if you're a dependent on someone else, Yeah. Uh, if you have a brand new baby, uh, you're not going to get the advanced tax credit because the IRS is not aware. Congratulations on your brand new baby. Uh, you do, as they say in the tax business, you have a new deduction and in this case, a new child tax credit.

Um, and then the other thing is if your children are five or younger in 2021, you could get this, uh, you know, $3,600. You know, some of the websites where I've read, they talk about winning the lottery. If you have a really young child and you could get that 3,600, but for the most part, and here's the final takeaway point is most of our clients that we work with, Rob, this will not affect, right?

Because they make too much money and I'd love to discuss in another podcast, what making too much money means, because I sure say it a lot and nobody ever knows what the heck I'm saying. When I say it, you make too much money. They're like, Yeah, put it on the

Rob Eklund: books. Gavin, I like it. Ben, any, any final thoughts?

Ben: Just, just rethinking, uh, the new kids situation now. Um, I'm really seeing the dollar value in them. Um, you know, feed them cheap. That's what I'm going to say. And that way you can really, really make some money off of this tax credit. Um, but, uh, but no, no. It's good, great information.

It's that? And the fact that it's automated is definitely something to be aware of. You're getting it whether you want to or not, you have to pay it back.

Rob Eklund: So, yeah. Kevin, did you finish your, finish your thoughts there? You got some more,

Kevin Gormley: well, I have 16 more cards to go through, but I think, um, I think I'm good, Rob.

Rob Eklund: Perfect. All right. That's it. We're going to leave you with an anti quote today because we've been doing a lot of, uh, regular quotes, financial. This, one's not so much of a financial quilt, but it could be. And it's this from Mario Andretti. If everything seems under control, you're just not going fast enough.

Anyways, anything, any thoughts on that? Ben,

Ben: you know, just, I guess I, maybe I just don't get it. Maybe I'm not smart enough, but I'd rather be in control than going too fast where I'm out of

Rob Eklund: control. Definitely not a way to fly a plane.

Kevin Gormley: I don't think. Yeah. For, for our younger viewers, um, Mario Andretti was a race card. Yeah.

Ben: Yeah,

Kevin Gormley: I've used, I've used quotes from Mario Andretti and people have said, ah, what the hell is he talking about?

Ben: . That's it? We've reached our final destination on this ad hoc special edition of the pilot money guys podcast.

Rob Eklund: If you like, what you do. Hit the subscribe button. If you have any topics you want us to cover, you can contact me@robertleadingedgeplanning.com or info@leadingedgeplanning.com. Remember, as Emerson said, the world makes way for those to know where they're going. So you may want to plan accordingly. Thank you for listening.


Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this Podcast will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 08/02/2021 and are subject to change at any time due to the changes in market or economic conditions.
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I’ve Inherited Money, Now What?

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Hello folks! We are excited because this is the first podcast in a 3-part series called “I’m Dead, Now What?”. That’s right, we are covering the exciting topic of death!

  • I've Inherited Money, Now What? – Should you spend it, save it, tax implications, your family legacy?
  • I’m Dead, Now What? – A discussion on estate planning. How can you pass on money to your heirs in the most tax-efficient manner possible?
  • I’m Disabled, Now What? – A discussion on becoming disabled during your career. What if you lose your medical? How much income will you have to live on? For how long?

    Although a very difficult subject to face, these topics are important to plan around. In this first podcast of the series, we discuss what happens when you inherit money. We talk about the emotional decisions that must be made, the tax consequences, and how we believe inheritances should be handled.

We’re thankful for the feedback we have received on the Pilot Money Guys podcast. We are striving to bring useful insight on important financial topics to you. If you have suggested topics, questions, or comments for us, please email us at info@leadingedgeplanning.com.

See you next time!

I've Inherited Money...
Charlie: ladies and gentlemen, welcome aboard the pilot money guys podcast, where our mission is to help clients build and protect wealth to achieve their dreams and goals. This podcast is brought to you by leading edge financial planning without further ado. Here is your host, Robert.

Rob: Tip of the cap to you.

Thank you for joining us at the pilot money guys. Welcome to you. We're going to be doing a new, uh, series and it's gonna be a three-part series. So hang with us here. It's called I'm dead. Now. What? Part one of that we're going to be doing again, three of those, the second uplifting,

Charlie: uplifting series.

Rob: Yeah. I can tell everyone's really excited on the edge of their seats right now.

Click, turn it

Charlie: off.

Rob: Darn it. Um, episode two or flight two, if you will, will be I'm dead now. What, excuse me, let me back up episode ones. I've inherited money now. What? But it's all part of the somebody

Charlie: dead. If somebody. Yeah, I'm inheriting money. You're not

Rob: dead and I'm dead now. What? And the third one is I can't now what?

We're, I'm disabled now. One. Yeah. Wow.

Charlie: That's it. Which is, yeah, maybe it's wrong. Maybe I'm just messed up, but I'm excited about this year.

Rob: Well, we all know you're a little messed up then. Yeah, that's perfect. All right. Hey, I'm your host, Rob, back then. We've got been depicted. The advisor, Mr. Cowbell. And of course Charlie Mattingly, certified financial planner, the godfather, we got it.

We got us all here. All three of us. Uh, we're missing mark today, but uh, we're ready. Ready? What do we got for aviation news? Ben. Charlie, what do you got? Ben, Charlie

Charlie: Ben. Well, first we've got to one of these days. We'll have to give you a call sign. I've just been thinking about that. Well, that's Lisa, she's the bullet.

Oh, she's bulldog. Yeah. You're the MC MC hammer. Oh, there we go. That might be all right. Hammer. The hammer

Rob: standardization, evaluation pilot. So, oh, I

Charlie: need a hammer for sure. Yeah. So

Rob: a soft hammer. Yeah, exactly.

Charlie: Like a rubber mallet

Rob: or something. Santa Claus,

Charlie: wherever from the ballot. So Ben, you start us off today because you've looked more into this one than I have, or so you've said anyway, about this trans air flight 8 1 0 that ditched in the water in Hawaii.

What's up with that? Yeah, no, uh, pretty crazy. I was, uh, when I woke up in the morning, uh, after the, I think it was like July 2nd or something, I woke up and saw, saw the news. Uh, pretty, pretty wild. Um, it looks like it was a cargo plane, um, out of Honolulu that, that crash had it, or had a ditch into the, uh, the water at about one, uh, one or 2:00 AM local time there.

And luckily the two people on board, the captain copilot were, rescued and were safe. First officer. Yeah, first officer, I'm sorry. You know, I'm still learning guys. I'm still learning. Um, but they were rescued by the coast guard. So good on them, obviously, a pretty crazy experience. I was telling you, you guys, before we started that.

You know, one thing as me just not being a pilot or knowing much about it, I was like Landon water. I didn't realize it would tear up the plane like it did. And, uh, give them such a hard time, but it looks like there was debris field, a huge debris field and everything, uh, that for the coast guard to have to spot them in.

But, uh, yeah, pretty crazy. Thank God everybody survived. Um, absolutely double engine malfunction. I, I don't, I'm not exactly sure. Yeah. Is that, does that, what you all T engine? Yeah, they lost one. And then, uh, they S they were talking to air traffic controller and they said, Hey, we're going to lose the other one.

We think we're going to, you know, I guess it was overheating. Plus the plane was like 30 years old. I believe it was. Boeing 7 37, not 200, not a max, not a max, not a max. Uh, that's what the article kept saying. Stressing, not a max. Yeah. So those things and, and I'm thinking maybe that's why it broke apart as well, you know, but anyway, no, I think it's very difficult on an airplane when you hit the water because you're hitting it at an angle.

It's very, very difficult to land completely flat, which is what you might be envisioning. But, um, we rarely practice. Um, multi-engine or, or a complete engine failure, Robin. I think they, they, I, it, Southwest. Anyway, they talked about doing it. You may have just done it at your recent SIM, but when I was there, we never did it.

We had a, like a memory item, but we never practiced it. So you all just practiced, right? Yeah. Yeah.

Rob: In the air force, we practiced it quite a bit. It seems like. Yeah. But for Southwest, we just practiced in this last AQP

Charlie: session. Yeah. Are, are there, uh, are there emergency exits in the cockpit? It's called a window.

Yep. There's window windows.

Rob: Yeah.

Charlie: Yep. You got windows. Do you have ropes ropes coming out, coming out of the windows? Oh my God. Yeah. The technology they got these days. It's crazy. It's crazy.

Rob: Crazy. Yeah. That was funny. It's a 7 37, 200. Thank goodness. Both pilots survived

Charlie: They were the only two people on there. So that was. You know good because who knows what would've happened? Had somebody been in back because it did break apart, like you said. .

Rob: Yeah. What else, what else? You got anything? So,

Charlie: so the next bullet here, I'm looking at my notes and, um, I guess these are shown notes, right? As what we'll call these things. Yes. So I've got what's going on with the airlines and why do they suck so bad?

Right?

Rob: Oh, I'm not lying.

Charlie: Oh my goodness. It's uh, it's pretty crazy out there. Let me give you. Rob the non-pilot perspective now in, and a passenger being Ben or passengers now. So then you can give us the, the insider, but, um, you know, we were stuck in, when we came to visit you if a couple of weeks ago, you know, we got stuck, right.

We got, I suppose, to take off, we're supposed to land at our, uh, in Knoxville at 1130. We in Atlanta, I think I walked into the door, Ben and his. Girlfriend were kind enough to drop me off. I've walked in and got in bed probably about 5 38. So that was painful instead of about in 30 minutes. But anyway, that was, that was whether there was a lot of weather in the Midwest.

There was weather and yeah, so, uh, it was painful, but people are, you know, testy in the airports. Uh, now, especially they have mask on everybody's kind of angry, whatever, but I will tell you that. I'll look at this as like a business kind of thing. And then you can give me the other side, but I just can't imagine running a business.

And at one month it seems like you're trying to offload as many employees as you can, to, to stiff arm bankruptcy, to, uh, just not run out of money. And in fact, every airline would have run out of money. It had it not been for the government, but, um, so one month you're doing that. The next. You got full airplanes again?

I mean, again, I'm exaggerating a little bit with this full, , next month thing, but man, a laugh, can you imagine not to mention getting everybody back instantaneously, it's not going to happen. There's still lots of unemployment benefits out there that people are on and, um, maybe affect the motivation to return to work.

However, getting a bunch of pilots. You know, is, um, is not easy because everybody needs to get retrained. Yeah , I made the call to get all the captains back. What, when was that call maiden? April, may. And then they said, come back in July. So there's some lag time just on the callback alone, not to mention the training, but right.

Rob: Yeah. It's, it's, it's crazy out there right now. Uh, Ben, you, you were in the airport, you saw it, right?

Charlie: Yeah, it was so crowded. I mean, everyone's, everyone's going on vacation traveling around right now, schools. I mean with school out and everything too, I think. Uh, but yeah, it, it was wild. We saw some, some altercations, actually a flight I had before this one to Denver.

Uh, the last one that was a couple months ago, but there was a mask incident on, on my plan. Uh, and it was just like people. Are so wild up right now. It seems like with this, uh, everything that's going on and, and I mean, like our flight, Charlie, luckily we had you there cause I was probably getting pretty frustrated, but uh, you know, I mean, it's weather.

I mean, what, what can you do? There's nothing that you can do. I mean, they have to wait, wait it out. Luckily we got to get to our destination that night, but,

Rob: um, you know, it's tough, right? It's not cool. You got to kind of have the perfect storm. Uh, you've got, yeah, you got weather and those kinds of things that we're used to dealing.

But use most of the time of the airlines is fully, you know, fully functioning. And right now they're not even close to fully functioning. You've got that. Then you've got the airports that are packed. Cause there's all this pent up demand, like you said, vaccines are going great. Everyone's recovering. Um, so you have all that pent up demand.

And like you said, summertime kids, right school. Let's go. Unfortunately, the flip side of that is that, like you said, there's so many benefits out there from code. That you know, the airports aren't, aren't fully functioning either. Not, not, not to talk about the airlines, but also the airports are, I think, I think the airports are actually functioning worse than the airlines.

If you can even imagine that. Um, and it's an index across the board. It's not just, I would love to point the finger. Yeah. One airline or another, but I think it's across the board. Um, I don't know anyone who's doing really, really well right now.

Charlie: Yeah. It's a matter of who can. Who can suck them the least, right?

Yeah. In the airline world, who's the least terrible. Who's the least terrible, but, but you're right. And you go to the airports. There's no, you can't get food. , some of these places aren't open because they don't have any workers in there

yeah. It's a tough time. We're gonna have to just, just suck it up for a while. Right. But it's a wall street journal article that, uh, that I was looking at to prepare for this as, uh, aviation consultant at McKinsey said, airlines had to make choices about summer staffing before they knew how quickly the man would come back.

Many of those decisions were made at a time when we, as a country, Optimistic about the recovery of air travel. That's, that's his, uh, his opinion now, Rob, you know, you, and I've talked to that day was like, well, you can't necessarily just give the airlines a pass either, you know?

Rob: Yeah. .

That's one of those things. Well, if that were true, why did you schedule so many flights? Like, yeah, I mean, yeah, up at the top, it's a different ball game, but you're trying to, you know, schedule flights and then you can pair back and obviously you don't pair back when there's all that demand. So yeah, it's tough.

And

Charlie: it's not easy. You may have to start flying again. Yeah. Sorry. No, they're not that desperate. I promise you.

Rob: , . All right. Anything else on the, uh, aviation news? Okay. Well, moving along, we've got, uh, you know, just a quick break here. We're before we jump into the I've inherited money.

Now, what we're fiduciary fee only advisors. This is brought to you by leading edge planning. If you need, if you have a question you need, uh, some financial planning help re you can reach us at 8 6 5 2 4 0 2 2 9 2 or that good old electronic mail we've been talking about. At info@leadingedgeplanning.com.

All right. Okay.

Charlie: Right on. I bet. Ben, I've been, your phone has blown up since the last podcast, mostly with spammers spam calls, but yes, it has your stuff. Love it. Yup. Yup. You can't talk to a lot of people that have inherited money from princes. Exactly what money from you? Yeah. Yeah. That's always interesting.

They always want my credit card.

Rob: Mother's maiden name. All right, let's do this. I've inherited money now. What Charlie, what do I do

Charlie: now? All right here. Here I go. Let's say you inherit a million bucks, man. I'm going to quit my job. I'm going here.

I inherited a million bucks. Well, that's a, if we, if we look at the 4% rule, what's that about $40,000 of income per year before tax. So, you know, a million bucks, that's a lot of money. It really is. And I'm not scoffing at that bunny by any stretch. But sometimes I think in our minds we might go, oh my goodness.

That's, uh, that it changes everything. I'm quitting, I'm quitting. I'm going to print a vacation will not really right. , I think that is the emotional thing that sticks out in my mind for the most. What about, what about you guys?

Rob: Yeah, I, I think it's one of those things.

Yeah. A lot of times you get that, you get that windfall, if you will. And people are thinking, okay, I've got this money. I'm also hurting because I probably was pretty close to the person I just lost. Yeah. And they wanted me to have this money. So, um, it seems like a lot, like you said, that 4% rule in the millions 40,000 that's, that's not a lot of money, but you can't think of it like that.

Most people are thinking, oh, I've got a million dollars. This is great. And I think that's where people can get themselves in. Um, one of the statistics I came across was by it from, uh, Elizabeth O'Brien, I guess one study found that a third of the people who received an inheritance had negative savings within two years of the event.

So even if they were great savers beforehand, you get this money, this million dollars and the budget they were on and their spending habits kind of go out the way. Because they've got this million dollars, they maybe don't have an exact plan for it. So they're just kind of spending and going along and you can outspend your income easily, even when it's an inheritance.

So yeah, I think they, they get into that trap. And then all of a sudden, you know, at some point that inheritance has gone and not only have they lost that inheritance money, but they've lost the good spending habits. So they really get themselves into kind of a bind. They're being deliberate with whatever inheritance you have.

Charlie: , , I think you have to write down your goals I've got to send my kids to college. We have his house payment when they really start digging and going, these are all the expenses that I'm going to incur in my lifetime. You can almost attribute, , that money to the, to the goals and. And again, you get to see how far it goes or doesn't go.

And then you get a real, a reality check on how much is it. We really have, how much is it? We really have left over to spend after all those goals are accounted for. And part of that goal process is going, whoa. If I save this money and invest it , at a reasonable rate, how much income will I have when I am ready to.

You know, I think those are just absolutely critical to do.

Rob: Yeah. I think you're exactly right. I think you, if you've already are talking to a, you know, a good fiduciary financial. You're probably on some kind of a financial order checklist or a financial order of operations or whatever you want to call it, that goes through those priorities. And you can just fit that money right into those priorities, if you want, you know, um, it, it's a, it's one of those things.

If you've already thought about it, you already have goals written down. Like you said, Charlie, and you already know what you're working towards this money. It can go right towards it. It doesn't have to be anything new or special.

Charlie: I think the closest thing I've seen to this , and again, we've we just had clients last week told us they inherited some money, but they're like you said, they're the ones you just said, Rob, they are on track.

They've got their goals, all laid out. They knew exactly where this is what really a surprise, but they're not going to go. You know, do something too crazy. They're going to have some fun enjoy that. That's great. But the closest thing I've seen to this, um, in a negative way is someone that I was close to.

And in fact, a family distant family member, their husband, her husband passed away at an early age and they thought he had plenty of life insurance, , Hey S 500,000 sounded like a ton of money and it is a lot of money.

. But when you start to take inventory, , her kids are going to private high school. That was very important to her. That's what her family had done for generations. Then they got to go to college. She needs to retire at some point and she needs, , she's, doesn't want to cut her lifestyle in half or have to sell it.

That $500,000 was, was accounted for really quickly, ? And, it was pretty amazing, , that's just one of the things that I saw firsthand, a couple other things that I think are really important if this happens, , and if you're anticipating this happening is that things may become important.

Now, planning wise that weren't important before, such as uh, estate planning. You know now, uh, have this inheritance, is it going to be protected when I pass away? Maybe that was an issue before, maybe it wasn't, maybe it just became an issue because now, , have a whole lot more money, uh, liability.

Thanks. , w what kind of liability risks do I have out there? , if somebody gets injured on my property, if somebody's driving my kid's car, or my child wrecks my car, , or am I going to get sued now? They're just much more at risk is what I'm saying. So there's a couple of other things to think about, and I know we're going to get into it in a minute, but taxes, you know, when you inherit it, you know, that's going to be a big issue.

Uh, maybe I should say, maybe we'll get into it, but what about. Again, when I pass it on to my children, I want to create a legacy for my family. You know, as I get older, I start thinking about that more than I did when I was, when I was Ben's age, you know, but I would love to raise my children and, and, uh, create a legacy.

And, and that takes a lot of work, a lot of responsibility and a lot of planning.

Rob: Absolutely.

But it's one of those things. I think it was at the notorious VIG set at the best.

Charlie: Oh, I love it. When you call me big Poppa,

sorry

Rob: that one also, but when you get all, you know, you get this windfall of money, you got to make sure, or one of the things you would want to make sure you don't got to do anything. You want to make sure that your taxes are covered. And I think , we're going to get into that.

But, Charlie tax consequences of inheritance.

Charlie: Yeah. So, , somebody out there listening and you're thinking, Hey, I'm, I'm possibly gonna going to inherit some money here in the near future, , parents or whatever, then, , you're probably wondering, Hey, am I going to owe taxes on this inheritance?

And the answer as always is it depends. Let's start with a very, very basic, uh, the easiest one. And that's the federal estate taxes. Let me back up even one more level and just define it. What the heck are death taxes. That term gets thrown around a lot. And, um, and I've kind of had to clarify that myself because it's some of the verbiage is like, well, what are you talking about?

You say death taxes, because I know we have inheritance taxes. We have a state taxes. Uh, what are death taxes? Well, death taxes is just a generic term to describe all of those. So we're going to talk today about mainly state, federal, and state. Uh, state taxes. I gotta, I gotta say that it's the federal state and federal, uh, estate taxes, and then there's an inheritance tax.

So we'll talk about those. Now the easiest one to delineate right off the bat is the federal estate tax. Right now, there is an exemption, meaning you're not going to pay any estate taxes. If you pass away and you have $11.7 million. Correct me if I'm going to say, oh yeah, let me double check my numbers.

$11.7 million. As of now that adjust each year to inflation as of now, or if you're married, it's $23 million. So in other words, Rob, you and Janet can leave me $23 million and you won't. Yes. Thank you. And you will not put here me. You will not, you will not pay any tax. Any federal taxes, state taxes. Okay.

Um, now what about Colorado? What about the state of Tennessee? If , if your S your, your son inherits that money in Colorado, he's not going to pay and your, your state is not going to pay a state taxes, because if you have less than 23 million, but is it going to pay, are you going to pay state estate taxes?

And, uh, Colorado let's see, are they on the list? I think they are not on the list for the state or inherited. Okay. So, you know, there are some states, in fact, there are a, I believe 12 states, that still have in a state or inheritance tax. Okay. So there's a little bit confusing. So let me explain again, the difference between estate and inheritance.

If you pass on an estate, Rob, then you're going to take in your house, your cars, your IRA, 401k. And they're going to add all that together. That's the value of your estate. Okay. Now, if you pass on a $10,000 to me, you know, then I'm going to pay. If I'm in one of those states, I'm going to pay an inheritance tax.

If that state, uh, ha has an inheritance tax. So a lot of states recently have gotten rid of those inheritance taxes, but I'm going to stop right there. Cause that's maybe very confusing. And maybe I didn't say that really well, but what do you think?

Rob: I think you got it, you know, you got the Federalist state taxes.

That's what most people are thinking about. And if you, uh, I think it was a flight too. We talked about, uh, the Biden tax plan and what might happen. And we've got that sunset, uh, a state tax exemption that basically is going to expire in 2025. And I believe. It will revert it back

but, uh, right now, if nothing, if, if nothing else happens and, and Congress doesn't act, or the president. It's going to expire and a revert back. So something that all of us who plan on living past 20, 25, want to think about is more estate planning because you know, that 23 million for, for couples ish, uh, will be, um,

Charlie: won't be exempt.

Won't be 23. Yeah. So, you know, there's a couple of things there I'll, I'll, uh, clean up a little bit. If you're again, if you're going to inherit some money, I'm from Kentucky. So Kentucky does have an inheritance tax. So let's say my mom leaves me some money. Well, I'm not going to have to pay inheritance tax because most of these states that have them, they have exclusions.

Like, uh, if you're passing it onto your children, then you're excluded. But if you're passing it onto your. They're going to pay some inheritance tax. Now, most people that if I'm going to leave money to my buddy and I'm from Kentucky, then I'm going to put in my will that just take the inheritance tax out of my money and then pass the rest onto my, my buddy.

That's usually how it would work. So there's a lot of exemptions in a varies wildly by state, but let's do talk about that sunset provision, Rob. Cause that's, that's really important because people go, wow. That, uh, you know, we don't have 23 million now, but it's, uh, the sunset provisions coming in and, you know, we might one day have a decent estate, you know what, meaning a lot of money.

So it's going to go down to a five point, basically 5.8 million per person, which is still a pretty good amount. And I can't remember what year it's reverting back to. I was like half it is half. It is still half you're. Right. It has happened and, and, and by the time 20 and that's adjusted to inflation. So by the time 20, 26 rolls around, it's going to be a little more than that.

Uh, but, but for today's discussion, it's going to revert back to $5.8 million per person, or about 11.6 million per married, couple. , so. If you have, let's do a quick example, let's say you're single and you have, your estate is worth 10 million. And after the sunset provision, uh, uh, 20, 26, you pass away and you leave 10 million you're exempted, uh, amount is 6 million.

So there's 6 million of the 10. I do not have to pay a state taxes on. Now, usually, I don't know what the, I can't remember what it's going to revert to, but usually above that exempted amount, you're going to pay anywhere between 35 and 45% tax rates.

So 10 million amount of 6 million, which is my exclusion leaves me for a million. Let's say it's 35% and I can't do the math that good, but let's say it's about two and a half million dollars. Check me on that. Ben. And, and so you're going to pay two and a half million dollars in estate taxes, which is disturbing to a lot of people because, oh, by the way, I've probably already paid tax on that money once.

So that's a little disturbing. So now we've got a lot of clients. Our average client range is probably in their fifties or early fifties, but we have some people that I think. , down the road, they very well could be in this, in this situation. If things don't change, , one day they might be looking at a state taxes and going, how can we avoid this and how can we prevent this?

That's the other part of that. So again, that's a lot of talking, but, uh, what do you guys have to fill in or add on to? Yeah, just say one thing that I've heard is just that, uh, the trust, you know, being, being used or coming back into favor, once those provisions come back in, um, I've heard that, you know, , a lot of people.

We'll start using trusts more to avoid those estate taxes. Um, and so, especially if you hadn't been considering that before, um, and, and you may be in the category, .

Yeah. Yeah. So let me address the trust because it's it's can be confusing now prior to like back in the Clinton administration and maybe even the early Bush administration, we had the exclusion again. Let's just say is 11.7 million per person. Back in the day, I remember flying with people and talking about this, cause it was, uh, it was low.

It was like a one and a half to 2 million. So even though that was back in the early two thousands or whatever, I still wasn't that much, because if you have an insurance policy, let's say you got a million dollar insurance policy, half a million dollar house, half a million dollar 401k, that's $2 million estate.

You know, if the exclusion is 1.5 million, I'm going to pay 45% of 500,000, which is about 200,000 in taxes. So again, I went through all that , really quick, but the point is more people were, were, um, included in that then they thought they were going to be so, um, So back then there were things called bypass trusts.

You know, there was a lot of very sophisticated, uh, state planning using trusts, but let me be clear right now, you cannot go out do just to your standard old, plain Jane living trust and think you're going to have it. Estate taxes. It's gotta be a very sophisticated bypass trust, which are basically irrevocable generation skipping , stuff that estate planning attorneys get into, you know, into a lot more detail.

They haven't done it in a long time because it's not been necessary as necessary that could come back into, into Vogue, so to speak. But I just want to be clear that a regular old trust has no tax benefit whatsoever . , but one of the things people used to do, if they had large estates, especially like, uh, back in the day, these farmers big farmers out in Midwest, let's say they had, they had a huge farms, all this equipment, and let's say the farm and the equipment was worth 10 million bucks.

But the farmer let's just say they're making a hundred thousand a year. Um, they don't consider themselves wealthy, but next thing you know, they pass away. The farm gets put in the estate and oh, by the way, now you got a $15 million estate in the, in the family is like, wait a second. Okay. We're going to owe millions of dollars in estate taxes.

So that was a big deal. People were losing family farms, , and that, again, this is way back in the day. So, uh, but what those people did to protect. I know you're going to cringe when I say this, Rob permanent life insurance. So back in the day, uh, permanent life insurance, , when people say I want whole life or whatever, or universal life, I'd be like, why , and one of the few reasons, uh, uh, answers to that other than just like, I just, what I want is what I prefer.

I understand that. But one of the other, you know, techniques. Uh, we have an estate tax problem, so we need permanently life insurance and they had even the, the, uh, the life insurance trust, the islets. I forget what the, I first honest stands for. But anyway, it's a very specific strategy to allow that permit life insurance to pay those estate taxes.

So that's why people had permanent life insurance. And so, uh, so again , those are just a couple of things that, that may come back in. You're revokable thank you. Irrevocable life insurance trusts. Thank you. It's been a while. Those were all the rage, not just, not just five or 10 years ago, you know, a lot of people had those and they'll probably have them again, if, if these things become an issue.

Yeah.

Rob: Yeah. For sure. Yeah. Let's pivot just a little bit and maybe back up a little bit when you inherit, you know, this month. Well, obviously what a lot of our listeners have and, uh, maybe their parents have, uh, or whoever they're going to inherit the money from our 401ks and IRAs. And I think that's something that we need to touch on a little bit.

It it's important to know that if someone dies and they had an IRA and they were required to take a required minimum distribution out of that IRA, If they've died and they're past the age of 72, where they're doing that, you're going to also have to take in required minimum distribution, an RMD on the year they died.

They haven't already something to keep in mind. If they've had, if they have multiple IRAs, the IRS treats all of those as one pot, if you will. So they might've paid the RMD out of one pot and you wouldn't have to pay it. So something you're wanting to think about, um, when you get, go down that.

Charlie: Yup. Yup.

That's good stuff. Um, because we've seen this happen before and it, you scramble to kind of go, Hey, has the RMD been paid? , again, it's, you're dealing with people who are dealing with a lot of stuff and, uh, it's awful, , it's just awful, but, but it's just one of the many things you've gotta account for.

Otherwise. There's a, there's a huge penalty on not paying RMDs. Yeah. , it's just one of those things, but, um, And, and you're probably getting to this Rob or, or, uh, at least it's on our script anyway. So I'm going to tell you about the importance. You know, what, if I do inherit a 401k, an IRA, what are the laws now?

What are the rules now? And this starts, uh, the secure act of 2019. So if someone had died, um, 2019, , if, if they died prior to that year, then what I'm going to say is very different. But after the security. The stretch. IRA is basically. So, uh, without, without muddying the waters too much, I used to be able to inherit an IRA and then I could take out an RMD for the rest of my life, just a small portion for the rest of my life, so I could stretch it.

You know, that was a big, big deal. That's pretty much gone. Uh, the rule now is, uh, whether it be a Roth or, or a non. IRA or 401k. You've got 10 years, 10 years to draw it all down. So I'll throw in a plug real quick again for Roth conversions. You know, Ben, you and I are working with one of our clients, a father, son duo.

And we're like, Hey, maybe we should do Roth conversions. So that, yeah, at a lower tax rate, , when, because he's retired, he's, uh, he has a lower tax rate. His son's a pilot. So when his son inherits this money, someday, it's going to go right on top of his income. He's got to take it out within 10 years and he's going to be taxed at the marginal highest margin rate, you know, that he's in at that time.

So, so that's, that's an idea. That's a strategy that, that might work. 10 years is the, is the date is a timeframe. Now there's some exceptions as an, every IRS regulation out there. There's some exceptions I'm going to read those because it's important. And these

Rob: are, these are called eligible, designated beneficiary.

Yeah.

Charlie: So it's a 10 year withdrawal rule unless you're a surviving spouse. A minor child of the account owner, a disabled or chronically ill beneficiary, and a beneficiary who has not more than 10 years younger than the original IRA or 401k participant. So, uh, So basically,

Rob: and that's just a throw in, on the disabled and chronically ill.

It's, it's a pretty high bar to reach, I think. Yeah. You have to be, you know, medically qualified for that. It's not just, if you have, you know, chronic tinnitus or something, you gotta have a, you can't do more than two of six activities or something like that. So

Charlie: it's a high we're counting, you know, we're counting on.

Most of the beneficiaries having 10 years, you know, and again, a spouse is completely different. Um, just to throw out another nugget here, a spouse has the option to roll it, make it their own IRA, or roll it into an inherited IRA. And there's some decisions to make there. Unfortunately, again, we've had this experience as well, and we decided to have the spouse use an inherited IRA because that meant she could take out money, you know, without paying penny.

So that's something to think about, you know, if you're under 59 and a half, you know, so, so something to think about there as far as, uh, the options that people have.

Yep. Excellent. There's a lot of misunderstanding around gifting and estate planning. And so again, if some of our people are like, Hey, my parents, uh, they're getting up at night age and maybe they should just start giving us money. Well, just understand that, , a lot of people think, well, there's that 15,000 a year a gifting limit.

And there's a ton of confusion around that. So, so in, in that limit changes a little bit every year, but I think it's 15,000. All that means is if, if someone were to give you Rob $20,000, that person does not have to pay gift taxes and you don't have to pay gift taxes, they just need to file a gift tax return to account for the gift above the $15,000 a year.

Exclusion. In reality, again, this is today's numbers. You could give away $11.7 million and never pay gift tax during your life. So again, I just want to clarify those rules. It doesn't mean that your, your elderly parents are start gifting you money right now. I'm not saying that at all. In fact, the step-up in basis is something you got to take into consideration.

If someone passes away, you're going to inherit a home or, or a capital asset, a non IRA, a non 401k. Then right now there is a step up in basis, which means you're going to inherit that potentially tax. So that's, that's something to think about.

Rob: And they're in, they're thinking about doing away with that.

Am I correct? And you are correct talking about doing away with that step up in cost basis. Yeah. And that

Charlie: requires a little clarification too, because , the media has a field day with some of these, but the, the real, the real, uh, proposal is that it would be excluded for gains in excess of 1 million.

For a single person in $2.5 million for a couple. Yeah. So that's changes it drastically and oh, by the way, people have been trying to get rid of the step-up in basis for a long time and it never happens. So the likelihood of that happening is very low, , if nothing else, for the reason of, can you imagine people going back 30, 40, 50 years and going, Hey, what's the, what's the cost basis?

I mean, there's no way people are gonna be able to do that. It's just way too common.

Rob: Yeah,

Charlie: Bitcoin. Jesus, what do you got? Yeah, you can leave me some money. See what I think you should gift me some money. Yeah. Well, you did build that house and maybe, maybe I should. I need some gifting.

I can do. I got, I'll put you on my will, but you can have like my old baseball trophies or something. I get you some of my cryptocurrencies as well.

I'm going to inherit something with losses in it. No. Yeah, no, I think this is a great topic though. And, um, it's pretty confusing. So maybe we should, we can do a little recap here of some of the things we've covered, because I know we've kind of jumped around a lot.

Rob: Yeah. Well, here's a little fun fact. Uh, we talked about the penalized, the penalty, the penalty for not taking an RMD.

And you said it was, yeah, it's 50% if you miss. So God forbid something happens. Uh, to someone you love and you inherit that money and they're required to do RMDs on an IRA or 401k then, and you miss it. It's 50% is the penalty that RMD not, not the entire amount, but, but I'll be RMB. They had to, they had to take, you can ask for forgiveness on a fancy IRS form, but, uh, That if you don't ask for forgiveness, that's what you're paying 50%.

Yeah. That's high. That's deep. Yeah, it is.

Charlie: It is. And, and I'll do, I'll take a hack at re you know, kind of rehashing what we've talked about today. Cause I think the most important thing we talked about early on was just chill out, recover for a year. Don't do anything and, and then find someone you can trust to get some good guidance.

And then you've got to, I think you've got to get a plan and I don't care if that you write down on a legal pad. All the things, all the costs, other things that you want to do because that money is going to go away faster than most people think. I believe bar bar napkin is my favorite. Yeah. I use a bar napkin, whatever.

And then, um, neighbor. And if you, yeah, if you think,

okay, if you think that, um, you know, at some point in the near future, you're going to have some inheritance coming your way. Um, think about taxes, estate taxes at the federal level, a state taxes at the state level inheritance taxes, which is just a few states, uh, that it applies to.

So look those up because there's a lot of moving parts at the state level, a lot of moving parts, but most likely if you're. A son or daughter and you're inheriting, then you're probably not going to pay state inheritance tax. Okay. So that's, there's some exclusions. There is what I'm saying. , estate planning, estate tax changes coming our way, 20, 26, no reason to do anything drastic right now.

But a trust bypass trust revokable trust, permanent life insurance may come back into play if you're above these limits and they're still pretty hefty limits of right now, but basically $5.8 million per person. , last thing is we talked about the step up in cost basis. I don't believe that's actually gonna happen.

Take it for whatever it's worth, but if it does, it's only for gains above $2.5 million per married, couple of 1 million. Per into individuals. So, so that's my, uh, attempt at a summary. .

Rob: . It's super important with those 401ks and IRAs or anything or insurance policies that you have beneficiaries named at that. And that they're accurate because what that does is that bypasses probate. And that is key because then you don't have to wait for all that time for the probate courts to do their thing.

And for debtors. You know, the water guy or the lawn guy or the pool guy are all the debtors that come out of the woodwork, uh, during probate to go after that money, they can't do it. It goes directly to that beneficiary. That's why beneficiaries for you, military folks out there, they always make us make sure that that those are correct, because it's so important because it passes directly through you to that, to that person, uh, without having to go through the probate court.

So anyways, yeah.

Charlie: Check your accounts, check your accounts. And if you need any forms filled out for that, just let me know. Ben's the one they can do it@schwab.com. Ben. Oh yeah, that's true. Yeah, no forms, please do yourself. Yeah.

Rob: Perfect. Perfect. Uh, the other thing is you got 10 years and unless you're an eligible, designated beneficiary to take out that money.

IRA RA even a Roth IRA. You gotta take that out within 10 years, even though the ROS have already been taxed. So that's good. And remember, there's a difference between IRAs, 401ks, IRAs and 401ks, even Roth 401ks have required minimum distributions. So, uh, that's all I got. What else you got? Yeah.

Charlie: Bear inheriting money.

Uh, contact us, please. And we'll put spin by Ben Dickinson as a beneficiary. Contact me

Rob: planning doc. Uh, all right. That's all we got. We've arrived at our final destination. Couple of leave you with a couple of quotes. They're kind of related here. They're all just, uh, um, dealing with investing in finances. The first one is from PTC. Money is a terrible master, but an excellent servant. Think on that for a bit.

The second one is from a fellow pilot, Amelia Earhart. The most difficult thing is the decision to act. The rest is merely tenacity. That's

Charlie: it?

Rob: That's all we got. We're at the end of a flight 11. Thanks for joining us here at the pilot money guys podcast. If you like, what you heard hit that subscribe. And we want to hear from you, even if you didn't like what your, we want to know that too.

So just shoot us, uh, shoot me an email@robertatleadingedgeplanning.com and has always remember the world makes way for those who know where they're going. So plan accordingly from

Charlie: all, all of us here at leading edge Godspeed. We out see you next time. See ya.

Thank you for listening to the pilot money guys podcast. It has been our pleasure to share some information with you today. Give us a call to discuss absolutely any investment question. You may have click on the subscribe button below to be notified when new episodes become available. Visit leading edge planning.com to learn more.

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Pilot Money Guys

Can I Get Rich With Options Trading?

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You are on a trip and your fellow pilot says they have a new investment strategy that’s getting amazing returns. You are skeptical at first, but after talking about it for the next five hours on the way to LaGuardia you become convinced you must be missing out.

We hear these stories often; we even experience it ourselves! That’s why we are starting a new podcast segment where we discuss some hot topics circulating the pilot lounges, crew vans, and cockpits. We are calling these episodes the Pilot’s Crew Lounge!

In this episode, we are taking on the hot topic of Options Trading. We’ve had a few pilots come to us with questions about Option Trading after hearing about them on trips. We are here to address these questions and give our thoughts!

Are you missing out by not using options? In this podcast we discuss our Top Five Considerations Before Trading Options.

If you have questions, comments, or topics that you would like us to cover, send them to us at info@leadingedgeplanning.com.

Get your peace of mind back this summer with a comprehensive financial plan! Give us a call at 865-240-2292!

Flight #9: Can I Get Rich Options Trading?


[00:00:30] Rob: [00:00:30] A tip of the cap to you.

Thank you for joining us here at the pilot money guys, podcast. Welcome to the
special edition that we're calling the pilot lounge during these flights or episodes. If you will,
we will talk about the questions we've heard around the system in the pilot lounges. And of
course, I'm your host, Rob Eklund.

[00:00:48] We've got the flight crew today. We've got the godfather certified financial
planner. Charlie Mattingly. Sir.

[00:00:55] Charlie: [00:00:55] Yes, sir. Here, president of for

[00:00:58] Rob: [00:00:58] perfect and [00:01:00] advisor, Mr. Cal bell V Ben Dickinson.
Welcome Ben.

[00:01:04] Ben: [00:01:04] I wish you still have that cowboy cowbell. Oh, the ringtone.

[00:01:07] Rob: [00:01:07] Yeah, but that's

[00:01:09] Ben: [00:01:09] all right. That's

[00:01:09] Rob: [00:01:09] all right.
[00:01:10] Without that certain special occasions, although it is the pilot lounge, so we will
have to get to it.

[00:01:16]Ben: [00:01:16] We might add it in post

[00:01:17] Rob: [00:01:17] production. Do you hear that? If you didn't bend was lazy. Okay.
Exactly. All right. Let's jump into some aviation news. Charlie, we're talking a little history.
What do you got?

[00:01:29] Charlie: [00:01:29] Yeah, so we decided to take the aviation news segment. And
and go historical we were talking before we came on you all about Pardo's push. I said, have
you all heard of Pardo's push? I remember talking about this. We used to do aviation or
excuse me, military history, every Friday night at the squatters, it was cool to go on or some
of our some of our warriors that went before us.

[00:01:48] So Pardo's push is very fascinating. It was I'll just tell the story real quick. Captain

Bob Pardot and wingman captain Earl Amman, I think is how you say that. Eighth tactical fighter wing [00:02:00] out of Thai air force base back in Vietnam, March, 1967, trying to tack a steel mill north Vietnam, just north of Hanoi.

[00:02:08]Both fr Phantoms were hit by anti-aircraft fire. Amman's plane took the worst
damage. His fuel tank had been hit and he quickly lost most of the fuel. So Amman
determined that they did not have enough fuel to make it to the tanker, the KC 1 35 tanker
over Laos. So the options are basically little bailout over hostile territory.

[00:02:28] So Pardot said, Hey, I'm going to push you. I'm going to push you to friendly
territory. So Pardot tried pushing the airplane. Now he's pushing his F for another F four
with his F four 80. So he tried using the drag shoot. Couldn't do that. Basically a mom put his tail hook down and then Pardot put the tail hook on his windscreen.

[00:02:49] And he pushed him that way. So basically then Amman shut down both engines and Pardot began pushing him now, in [00:03:00] reality, he's just minimizing the descent so he can push him far enough into friendly territory. It kinda did the trick basically then. So it gets more interesting.

[00:03:08] First of all, the tail hook would not stay in position for longer than about 15 to 20
seconds. So we had to reposition. Do it again, put the tail, look on his windscreen and push
some more just to reduce that descent, which is pretty incredible. And if you know the
physics of the it's, they call it the rhino or the flying tank, because it is a huge fuselage, huge
body of the airplane.

[00:03:29] And then these tanks, excuse me, the wings that go out are very thin they're not
big for the airplane. So the. So the glide ratio is not good, right? So they're doing some work
there. So he's repositioning every 15, 30 seconds to push the tail hook, to get them to
friendly territory. But Pardot was also struggling with fire and one of his own engines and eventually had to shut it down.

[00:03:50] So in the remaining 10 minutes part, I'll use the last engine to slow the descent of both airplanes. So it was pretty incredible. So they're flying [00:04:00] two airplanes are descending slowly on one engine

[00:04:02] Rob: [00:04:02] in between both of them. Most of the time they have four
between them. Yeah, exactly. So

[00:04:07] Charlie: [00:04:07] Pardot is playing running out of fuel after pushing a Mons plane almost 88 miles.

[00:04:11] Again that's really incredible considering where he would have been, had he not had somebody pushing him, he would have who glided a little bit, but not that much.

So the planes reached a friendly airspace at an altitude of 6,000 feet and left them about two
minutes of flying time where they ejected evaded capture and were picked up by rescue
helicopters.

[00:04:31] So incredible story.

[00:04:32]Rob: [00:04:32] It, we talked about a little bit Charlie, but yeah, it was funny. It was part, it was reprimanded for not saying his own aircraft, but then yeah. Military re-examined and said, oh, actually you deserve the silver star for saving both your butts on.

Absolutely. Yeah.

[00:04:47] As a credible. And they both retired at the prestigious rank of Lieutenant Colonel.
Yeah. That's a big rank. I'm a. That's the team in 20 days. Nice.

[00:04:58] Charlie: [00:04:58] Congratulations,

[00:05:00] [00:04:59] Rob: [00:04:59] man. Thank you. Thank you. July 4th is my retirement date. Oh, nice. So you're going to expect presence from Uben for sure. July

[00:05:09] Charlie: [00:05:09] 4th, you'll be retiring as a Lieutenant, as a reserve, as a
Lieutenant Colonel reservist, correct?

[00:05:16] Yeah.

[00:05:17] Ben: [00:05:17] Robbie better sill better. She'll be on your game. You're still notthere yet. Can tell him those chickens.

[00:05:24] Rob: [00:05:24] Yeah, good point.

[00:05:27] Ben: [00:05:27] Good point. They're watching. I'm watching you like a Hawk.
Anything. I see.

[00:05:33] Rob: [00:05:33] Good call. All right. Thanks Charlotte. That's good. Any other aviation news you guys want to talk about?

[00:05:42] Ben: [00:05:42] Man. There's not much. It's been boring out there. I want some
more elevation. Come on. I'll just lines.

[00:05:47] Rob: [00:05:47] Give it to us. The Southwest boring is good. Boring is good.
Southwest is buying 30 plus max seven aircraft. So it's 7 37, 700. They're buying more of

[00:06:00] those. I think it would have over 60 next year.

[00:06:02] So that's good news, but a little bit other news, we got the electronic vertical
takeoff and landing system, apparently American and Virgin at least are buying some of these IE Vittol electronic, vertical takeoff and landing aircraft that will be coming out at some point. So that'll be interesting to see how that develops.

[00:06:23] So we talked supersonic last week and now we've got V. Wow. Heck yeah. Apple
is crazy world. Crazy world. Yeah. Yeah. All right. Any any

[00:06:32] Charlie: [00:06:32] talk at Southwest about different non Boeing airplanes?

[00:06:37] Rob: [00:06:37] Not that I've heard. Cause

[00:06:39]Charlie: [00:06:39] That was a big, hot topic about a year ago. Yeah. Have you
talked to Gary about that?

[00:06:43] Gary talks about it. Yeah. Because that's, this time last year I was like, holy cow,
you have one type of airplane. We know it. Wasn't this time last year. It was two years ago
when we had the max issues. So yeah, one type of airplane and they're having trouble.

[00:07:00] So that was difficult.

[00:07:02] Rob: [00:07:02] Yeah. Yeah. I don't know.

[00:07:04] I think right now we're they're focused on that, that max seven and what that's
going to do, there is rumors who knows what they're true or not of maybe some eat tops
out of Denver. I don't know. Woo. Nice. That'd be interesting.

[00:07:17] Charlie: [00:07:17] Don't forget about the Dreamliner rumors there at Southwest.

[00:07:20] I'm starting through dream liners coming to Southwest fall 20, 22.

[00:07:26] Rob: [00:07:26] Your words not mine.

[00:07:30] Excellent. All right. That's all we have for aviation news. Quick commercial here,
summers here, planes are full. Things are hopping while you enjoy the sun and fun. Or
overtime flying, whatever. Nice. Let us make sure your retirement plan is on track. Give us a
call or shoot us an email to discuss your financial needs.

[00:07:48] We are fiduciary fee only advisors, and you can reach us at 8 6 5 2 4 0 2 2 9 2 or
good old electronic mail. Do you know what that is? [00:08:00] Even electronic mail.

[00:08:03] Charlie: [00:08:03] You have to go to the post

[00:08:04] Rob: [00:08:04] office for that. Anyways. That's info@leadingedgeplanning.com.
And if you want to reach Ben Dickinson directly, call them at (865) 290-7523.

[00:08:18] Again, that's 8 6 5 2 9 0 7 5 2 3. That's enough of

[00:08:22] Charlie: [00:08:22] that, please call.

[00:08:24] Ben: [00:08:24] I need some more. I need some friends.

[00:08:29] Rob: [00:08:29] I know who I'm calling late Friday. Excellent. Let's jump in. We've
got options. I know we talked a little bit about. The pilot lounge would cover options,
covered calls and how to buy an airplane and the tax implications of these a little bit too
much to cover on one podcast. And we're just going to cover the options and covered calls.

[00:08:45] And we're going to get to the airplane and tax implications next week. Charlie,what do you got?

[00:08:50] Charlie: [00:08:50] Absolutely. We've got some top five considerations before
considering wait a second. That's redundant considerations before I said a lot of things here.

[00:09:00] Top five considerations before. Trading options. So yeah.
[00:09:04] Number one, what is your goal? Are you trying to make money? You're trying to
minimize risk. What are you trying to achieve here? Just like our now famous Bitcoin
discussion, it's like we don't just buy an investment to be buying it. We have to know why
we want it. Secondly, is it something, I think this is this has to be true.
[00:09:22] It has to interest you because you need to spend some time. Studying this stuff,
understanding it. Options can be boring and confusing. So you better enjoy it before you
jump in there. There's other ways to achieve the same results. So that's number two,
number three. Are there more profitable alternatives for you?
[00:09:37] In other words, how do you spend your time? Is there an, is there a better way to
spend your time maybe so profitable and maybe monetarily, maybe in quality of life, that's
number three, number four. Do you have the time. Maybe we just talked to that. I don't
know. Maybe that's a, maybe that's a sub-bullet of number three, nonetheless.
[00:09:54] It is. It does take a lot of time, and you've got to take that into consideration. If
you're taking time away from your normal [00:10:00] job, then there's a cost to that.
Number five. What other options do you have for your free time? Other hobbies, you might
enjoy spending time with your family instead of investing in options.
[00:10:10] But we'll talk about today. Investing in options, pros and cons, nuts and bolts. Yes,
that's true.
[00:10:15] Ben: [00:10:15] It's exciting. It's this has been a hot topic on on tip
[00:10:20] Rob: [00:10:20] tic-tac.
[00:10:22] Ben: [00:10:22] Yeah, absolutely. People are making millions from what I've seen some of these videos. According to these anonymous
[00:10:29] Charlie: [00:10:29] videos
[00:10:30] Rob: [00:10:30] and they've only lost 10 millions, so yeah,
[00:10:32] Ben: [00:10:32] exactly.
[00:10:33]They don't put this on important, it's not really that, that math doesn't really need
to work. Yeah.
[00:10:37] Yeah.
[00:10:39] Rob: [00:10:39] That's funny. We've got Obviously, we're going to explain a little
bit about options. We're not going to get too in the weeds. What are we not going to get
into? Oh my gosh. I wouldn't even some of those fancy
[00:10:48] Charlie: [00:10:48] terms.
[00:10:49] I want that straddles long call butterfly spreads are my favorite. Yeah. Not to be
confused with peanut butter spread.
[00:10:58]Rob: [00:10:58] No. That's different
[00:10:58] Charlie: [00:10:58] long [00:11:00] strangle, married put, but. But call spread. No,
that's not the butt call spread. It's the bull call spread. Sorry, I misread my notes there. I was
pretty close, protective collar rights and unwinds.
[00:11:13] So we're not going to, luckily we're not going to talk about any of those that,
especially the buck calls. Those are not fun to talk about.
[00:11:20] Rob: [00:11:20] Optimism.
[00:11:21] Ben: [00:11:21] Call me all the time, Charlie. We should talk about
[00:11:23] Rob: [00:11:23] this. That's a good point.
[00:11:26] Charlie: [00:11:26] We've got to
[00:11:26] Rob: [00:11:26] keep it professional today. Call you at eight six five two nine zero
seven.
[00:11:33] Yeah. All right. Excellent. We're not going to cover that. We're just going to keep
it high level, if you will, or low level or whatever, we're not gonna get into the details. Okay. I
love that. Yeah. So what is an option? It's a derivative means derived from something else
for our purposes today.
[00:11:48] We're just going to talk about stock options, where the options derive their value
from stock. Typically one option is worth. 100 shares. So that's the first part I [00:12:00]
want you to know. We get a little bit of the history here. Options are very old. They're not
brand new. They've been around quite awhile.
[00:12:05] They were even, yeah. During the stock market crash of 1720, and yes, you heard
me right. 1720, not 1929. Whoa. So back then too, people would go into a contract and
that's all an option is a contract between two parties. And they would enter it in the contract
or one person would write the contract, given the buyer the option to buy or sell the stock if
it hit the exercise or strike price on or before the exercise date.
[00:12:35] So it was just a contract between two people. That's it? That was back then.
Obviously if one person didn't have the shares or couldn't buy the shares, when the exercise
price was hit on the exercise date or before. Then that would be a problem. So in 1973,
Chicago board options exchange came about and they were able to solve some of these
problems.
[00:12:54] And now it's called CBO for you traders out there. , CBO came about helped solve
some of those problems. And if someone [00:13:00] wanted to write an option, Now they
needed to show that they had the shares and this exchange would make sure of this so that
someone would just, wasn't saying, oh, I've got the chairs when they didn't and take off to
London or something.
[00:13:11] And they, or they have money in a margin account. So they say, okay, you've got
money in a margin account. If the stock goes, whatever way we can put more in. And that's
what the margin call is, where you'd have to put more money in. I don't ever want to be a
part of those. I don't think there are any fun for.
[00:13:28]Some of the folks I've talked to who have been a part of those, you have to put
more money in and it can get ugly. But in any case, you get to a point where you're writing
options and they're called naked options or naked calls and naked puts. And all this means is
you don't know the shares.
[00:13:44]With the exchange you're on that margin account where you have that money
away so that they can go in there and trade on your behalf. If the stock goes the wrong way.
Opposite of being naked as being covered, which leads us to cover calls. Charlie, what do
you [00:14:00] got on to cover calls?
[00:14:02] Charlie: [00:14:02] They're not naked, so that's the good part.
[00:14:04] That's good. So options are like we say, can get very complicated as you've
already learned. Very difficult to follow along some of these, but the most basic. When I
was studying and learning about options they said is , you could do covered calls with your
grandmother.
[00:14:21] In other words, it's conservative enough to be able to do that. So that's the one
that people maybe are most familiar with and are able to do if they wanted to not a
recommendation if they want to do that in their 401k they can, in most 401k is like in an, in
a in a brokerage window of some sort.
[00:14:39] Of course in a taxable brokerage account at Schwab or E-Trade or fidelity, you can
do any of these things if you want to, or there's other brokerages out there that facilitate
options specifically. They specialize in that. However, again, we're going to focus on what is
a covered call.
[00:14:53] So let's pretend for a minute that, that I own a stock now. Now most people buy
covered calls [00:15:00] or write covered calls, the lingo there, like Robin said, okay. In a
market where they believe it may be flat, the stock market, the stock may go up in price a
little bit.
[00:15:09] It may go down a little bit, but flat that's when they might do a covered call, but
basically it can add income to your investment. So it's essentially like an income producing
strategy, maybe like a dividend, you could compare it to. So just real quick explanation, let's
say I own a stock ABC stock it's at $20 a share.
[00:15:29] So I own that stock and I say, Hey, I'm going to produce a little extra income. And
I'm going to sell a call option. I'm going to sell that contract. Someone's going to pay me to
do that. So I take that premium that I get paid by selling that a call option. I still own the
stock. Let's pretend then that the stock goes down.
[00:15:48]If the stock goes down, I still own the stock and I've got money for that call option
that I wrote to someone or sold to someone. So that's one scenario. Now let's say that I did
the same thing. I sold the call [00:16:00] option. And the stock goes up well, I've got the
premium from the call option that I sold stock goes up to the exercise price or strike price,
someone else exercises that option I am required to now sell my stock.
[00:16:14] And so it's gone. So in other words, let's say I own that stock at $20, ABC stock at
$20, I wrote a call. I received a premium, it went up to $25. It was called away because I had
to sell. So I made 20 excuse me, $5 on the increase in the stock. And I made a little bit of
premium on the selling of the covered call.
[00:16:35] So that is the strategy in a nutshell. And there's a lot of services out there that
offer that as in, I'll be honest with it, they offer it as some magic solutions and magic potion
to increase your 401k and make your life wonderful.
[00:16:50] Rob: [00:16:50] Yeah. And it's interesting why they might do that.
[00:16:54] You start talking about a lot of, Robin hood and, almost all the brokerages
nowadays are doing zero [00:17:00] commission trades for you. And a lot of people get
confused and they think, oh I'm not getting charged anything. Everything's great. And yes,
that is true. However, the brokers are still making a lot of money, especially when it comes
to option trading.
[00:17:13] So on a normal equity trade, a broker might make 17 cents portrayed off of
what's called. Payment for order flow. So that's where they get a kickback from the market
maker, the person actually doing the trade there, they get paid to channel the trade to that
person. And you'll never guess who actually pioneered profit for excuse me, payment for
order flow.
[00:17:39]Any guesses there? Bernie made off burning. Whoa. He planned here or helped
pioneer payment for order flow. So the broker gets a kickback. Yeah. You're not paying
anything, but they are getting paid off that bid ask spread is pretty big compared to a regular
[00:18:00] trade when you're talking about option trading and that market maker is able to
offer those guys as much as 58 cents.
[00:18:05] So 17 cents. Compared to 58 cents, those are just rough numbers there, but
they're making a lot of money off of option trading, which is why you'll see some companies
Robinhood, even TD Ameritrade, other companies wanting and pushing option trading
because they are getting a heck of a lot of money.
[00:18:22] I think one of the quarters, Robinhood and TD Ameritrade, there were upwards of
400 million during the quarter. So it's a wow, it's a lot of money out there and it makes sense
why they're pushing it because they get. Again, they get more money off of it. Off of those
zero commission trades there.
[00:18:39] They're getting quite a bit of money. Now, quick note here, fidelity doesn't accept
payment for order flow. And why do you care about that? You're like I don't care except that
if someone's getting paid to channel your trade to a certain market maker, that means you
may not get the most favorable [00:19:00] terms.
[00:19:00]If they're getting. If they're getting paid to send it to, Maydoff, then they're going
to send it to him to get paid. So anyways enough about that what'd you have,
[00:19:10] Ben: [00:19:10] yeah, that's a shame. I was just going to say. Yeah. Like you said,
with these. Different brokers out there that are now pushing options more.
[00:19:17]Options trading has exploded in popularity in the last 10, 15 years. And it keeps
increasing. I think I saw recently it was like 20 million options are traded a day now, and so
talk about a moneymaker, but then also talk about the popularity increase. Like it is a
serious thing and now.
[00:19:35] Again. I actually see it on social media, people talking about this as if it's, instant
way to, to make a bunch of cash. And so yeah, if you want to know these, the ins and outs,
but gut.
[00:19:47] Rob: [00:19:47] Yeah, absolutely. If you want to get into any of option trading,
just try to search for any podcast on opposite trading.
[00:19:53] You'll get a bazillion different ones out there because people are pushing it like
crazy. [00:20:00] Not to say you can't make money. You just better know the risks. And to
that point, some of the things, some of the things we talk about here at leading edge, if
you're going to do it, and you really, like Charlie said, you want to get into it.
[00:20:12] You're really interested in it. You have the time you have the, it's a hobby for you
or whatever, then you're going to want to put no more than at least what we advocate here
is no more than 5% of your portfolio in that you don't want to put too much because you
might lose it for one. If you're going to do it, make sure you define your risk and know your
downside.
[00:20:34] It can take years to get comfortable with it. That's something you're going to have
to make sure you have the time to get. Get good at it. It's not something you're just going to
pick up one day and say, oh, I'm going to, I'm going to be a great option straighter and make
a ton of money tomorrow.
[00:20:46] The one thing I will read here, which is pretty interesting is one of the quotes, the,
one of the quotes from TD Ameritrade that they make you read before you can even start
trading options.
[00:20:55] As opposites are not suitable for all investors. As the special risks inherent to
option [00:21:00] trading may expose investors to potentially rapid and substantial losses.
And it goes on to say a whole bunch of other things. Option trading privilege privileges in
your account are subject to TJ, TD Ameritrade review and approval.
[00:21:13] Not all accounts owners will qualify. So lots of different things out there. Charlie.
What else? What else do you got on options? Yeah.
[00:21:22] Charlie: [00:21:22] Yeah. It's just it's just, I don't know the way you think about
some of these things, a lot of times as investors, we're sold stuff, we're sold strategies.
[00:21:29] We're sold annuity, sometimes nothing wrong with annuities. If they fit your
situation, nothing wrong with options. If they fit your situations, don't get sold something
though. In other words, let's say someone's trying to sell me on call options. Call options are
great, cover calls, fine, income producing the stock gets called away, fine, whatever it can be
beneficial, but as a, as an accumulator right now in my life or any, let's say one of our pilots
still flying, do I really need to [00:22:00] produce some income?
[00:22:01] And my 401k, people are like of course I do. Maybe not because I really want to
keep those investments and I want them to grow. For the long-term, so what is it that I
really need because sometimes executing this fancy complex call strategy sounds really cool,
but is it really what I want?
[00:22:19] And I probably could do better if I, go, just go long on equities, period. And so
that's, I'm not trying to produce income until I'm in retirement. I really want capital
appreciation. So that's one of the things and the other thing is that, we talk about the risk of
options and there are some risks, but most options strategies they're designed to reduce
your risk, buying a put option, it's designed to provide a floor to a stock that you might own.
[00:22:47]To minimize losses, or like I said, covered calls, designed to produce a little bit of
extra income. So most of the time, these things, are risky mitigation strategies that large
insurance companies are using. Large [00:23:00] institutions are using hedge fund managers
are using an individual investor.
[00:23:04] I'm not so sure that we often understand exactly what options are for when we're
investing in them. In other words, most of our most investors will say, I just want to make
more money. Options probably aren't your best bet. Then you don't just go along the stock,
or as many oxygen you can.
[00:23:19] So anyway it's interesting how sometimes things are sold to us when we don't
really know exactly the purpose of the particular investment, we're just attracted to it
because of the complexity.
[00:23:29] Rob: [00:23:29] Yeah, that's a good point and note on that. If you're buying call
options or you're a call option holder, and you're not entitled to the quarterly dividends,
every other person is, that, that has, that just regularly buys that stock regardless of when
they purchase, when you purchase that option.
[00:23:47] So something to keep in mind, sometimes you don't capture those dividends,
which dividends aren't the end all be all, but they are, they do help in certain cases. So
something to keep in mind. Yeah.
[00:23:57] Ben: [00:23:57] Yeah. So I heard something that, . [00:24:00] And again, this is
the pilot lounge topic, cause this is something that we hear.
[00:24:04]That people are talking about and whether it be in the cockpit or in the pilot
lounge, but there's a lot of different people out there actually trying to sell what they call
like the, basically the signals of, Hey here's what options I'm looking at. Here's what options
you should go and buy.
[00:24:20] And then, you pay a subscription fee. They give you a, Hey here's three options a
week that you go and buy and here's the returns I'm making. It's crazy. That's just something
to look out for because I've seen that a lot going around. I've heard a few of our pilots tell us
this and that people are doing it and people are asked telling them about it.
[00:24:38]I would definitely do a lot of more research before you go ahead and subscribed
to something like that, because a lot of scams happen that way. And it seems to be
increasing in popularity. I don't know if you all have seen any of that advertised or anything,
but it's definitely something that you should be .
[00:24:53] Cautious of, if you see
[00:24:55] Rob: [00:24:55] it. Yeah. It's been floating around for sure. One of the pilots I flew
with [00:25:00] not too long ago, he's doing it and, I think he's trying to make sure he's doing
it the right way and protecting himself. But just a side note here, if you're riding or selling a
naked option, You get paid for writing that contract, but your losses can be all the way, you
could lose it all.
[00:25:15] So knowing your risk again, foot stomp in that know your risk, know your
downside as you're getting into this. And if you don't know that, then you probably shouldn't
be doing it.
[00:25:25] Charlie: [00:25:25] Yeah, exactly. And like we talked about before, there's a
couple other alternatives too. Like individual options contracts. So there's a lot of mutual
funds out there that, that take these strategies and wrap them into a mutual fund.
[00:25:39] In fact, there's an ETF. So we'll talk about it in a minute too. But so what I did is I
just Googled, the top 10 mutual funds that, that execute option strategies. So I've got the
top 10 . I put them in our software. And Rob, I was showing you this before we got on the
call here.
[00:25:55] And I was like, we'll look at the risk return profile of these investments in
[00:26:00] the expenses. We're all averaging. They probably average about 1.5. In fact, I
might be able to take a look right now, but it is significant, so here's an example for you on a
portfolio. You typically average a 0.16%.
[00:26:15]It's what our portfolios, average expense ratio. So for every a hundred thousand
dollars, that's $161. So the expense ratio of these option based mutual funds is an average
of almost 1.5%, which is $1,400 annually versus 161. So you've got huge expenses and oh, by
the way, let's take a look, is it worth it to have those expenses?

[00:26:37]No, it's not worth it because up until last fall, The intermediate term treasury was outperforming these top 10 together. So I took the top 10 option based mutual funds. I
equally split them, about 8.3%. And their performance was was just about on par with a
government [00:27:00] treasury. Wow. And so not only are you taking more risks, you're
paying more expenses, but I could have been the same thing with immediate term.

[00:27:06] Yeah. So I'll be honest with you. I don't get it. I don't get, because one, an investor doesn't usually a mutual fund like this for a timing strategy. If I'm going to buy a mutual fund like this, I'm going to let those managers execute their strategy. That's the whole point. And that's why you pay more expenses.
[00:27:23] But they've not really done what they said they were going to do. So anyway, I'm just very fascinated at why and what place. Cause that's what we think about Rob and Ben is like as investment advisors. Where, what role does this play in my portfolio? Does it provide diversification? Does it add value? When times are tough, does it help me?

[00:27:44]Let me tell you about in 2020, the options based mutual fund portfolio that I
created returned 3.6, 2%. Intermediate term government treasury 7.5%. Okay. If you'd just
done a 70, 30 portfolio, you probably [00:28:00] would've gotten mid-teens. So what role, a lot of people say you gotta have alternatives in your portfolio.

[00:28:05] Wow. I don't get it. So I'm not sure, you know what I'm missing here. But I don't think I want them in my portfolio.
[00:28:12] Ben: [00:28:12] It's like people it, there's something about the complexity of it
and, Hey, we're doing all these options training. It may sound great. Hey, we're doing all this look, look at all this complex stuff we're doing it sounds maybe good on the surface, but really, yeah, like you look at the numbers, you look at the fees involved, you look at the risk profile, you look at what are their returns been, and you start to realize that just because things are really complex and these portfolio managers are really active. Doesn't necessarily mean that's what's best for you.

[00:28:40] Charlie: [00:28:40] Yeah. And that's a behavioral thing as investors. We just can't believe sometimes that it can really be that simple to own a diversified portfolio.

[00:28:49]Government treasuries provide the best diversification and in difficult times, at
least they've shown to do that in, in, in history anyway. So we, it's just our natural tendency
to look for something [00:29:00] really complex. Somebody has got to have the secret potion out there and listen to these names, equity call a premium, a tactical core fund, enhanced equity, income, strategic program, risk emergent.

[00:29:11]It's that sounds pretty good but it looks when you look, dig a little deeper, it
doesn't look so, so good. So anyway, so sometimes simple wins out in these types of
situations.

[00:29:20] Ben: [00:29:20] It's boring just to own a fund with a bunch of companies in there, but then you look deeper and you realize, these companies that like it and are just a regular portfolio, that's not doing these complex options.

[00:29:31]These are companies and businesses that are doing complex things behind the scenes, trying to make more money for their company and grow. So really it's not boring. It just, it may sound more boring than that. I want that tactical, a whatever you called it. That sounds pretty cool, but really it's just a S a smoke and mirrors from what it seems like,
obviously on the, in those tendencies.

[00:29:52]But is there a place for options?
[00:29:56] Rob: [00:29:56] Yeah. Sure. Sure. I think if you're going to be [00:30:00] trading stocks, individual stocks, and you're scratching that itch again with a very small portion of your portfolio and you're trading stocks, I can see where you're going to head some of those positions. Yeah. To protect yourself from the downside.

[00:30:12] And that's where I see if you're going to be doing that. Then, that's one thing. Or again, if you're really adamant and you're really You really want to get into this, riding those covered calls and doing some of those things with a small portion of your portfolio. I think it could be interesting too.

[00:30:26] And it's got an appeal to it, to some

[00:30:27] Charlie: [00:30:27] people. Yeah., and the way we make decisions is interesting. If

I just had my speculative money out, and I'm ready to go do some different things and just
learn about investing. I'd have no problem doing covered calls.

[00:30:39] I have no problem. With put options buying put options, they create that floor for you, and they're better than doing like a limit order. limit order on a single stock or a put option is better than that because it gives you more flexibility. We won't go into too many details, but think about it this way.

[00:30:53]If the choices of my hobbies and my off time are like to do put call, put options
and cover calls

[00:31:00] versus say, buying a horse. I think you're way way better, better off doing covered calls. Okay. Let me just put that out there because you don't have to feed
them. You don't have to call the vet. You just have to spend some time and if you enjoy it,
great do it. But like you said, Rob, just understand that it's speculative unless you've unless you're doing something little more conservative, again, cover calls, fairly conservative, just to understand which kind of options strategy you're doing.

[00:31:25] Rob: [00:31:25] Yeah. Good stuff. Yeah.

[00:31:28]Charlie: [00:31:28] Hey, do we have time to talk about the the last ETF?
[00:31:32] Rob: [00:31:32] I, yeah, absolutely. I think so.

[00:31:34] Charlie: [00:31:34] I think so. Like you said, Ben, the options are used by our
clients, if they buy and, in fact to fixed indexed annuities and that's, that sounds like a dirty word to some of us, but there are some times when fixed index annuities are appropriate, just depends.

[00:31:50]But those types of annuities use option strategies. They use out of the money calls in the money calls and they create. This floor for [00:32:00] investors and they create a cap.

Now all of that is very confusing. We won't go into detail on how those constructed, but
sometimes they're appropriate.

[00:32:07] Sometimes they can serve a purpose and that's why insurance companies use them. So that's one example. There's another example, and this is a relatively new thing in there called buffer ETFs. You can look these up online. They're called innovator ETFs and they came out a few years ago. And basically what they do is they're that fender fixed indexed annuity that I just described where there's a floor created, and then there's a ceiling created.

[00:32:30]. So a couple of years ago, these buffer ETFs came out and they've since multiplied like crazy, they have all kinds of them right now.

[00:32:37]. They don't talk about how exactly how they construct them. But nonetheless, I
could buy one of these buffer ETFs it's in an ETF wrapper, which makes it much more
transparent.

[00:32:46] I know what to expect. I say because there still are some things to think about. I know the expenses they're less than an insurance product. The fact they're about 0.8% is the expense ratio, which is expensive for an ETF. There's no doubt about it, but there's a lot of moving parts going on here.

[00:33:00] [00:33:00] So I will tell you that last year during the COVID downturn this was an alternative to getting out of the market completely. It's not a panacea. If I, when I describe it to you right now, it will sound like a panacea. Okay. So in other words, I can buy an ETF. That's called a buffer ETF S and P 500 is what I'm tracking.

[00:33:19] It protects me for the first 9%. Decline. In other words, the stock, the market goes down S and P goes down 8%. I don't go down at all. So that sounds pretty good. Now, if I go to, if it goes down 20, then I'm going to go down 10 ish. The difference. Okay. So there is not complete protection, but they have other ones that can protect you almost 30% on the downside.

[00:33:39] That sounds great. But the upside is also kept much, much lower. Ah, so see how
these get complicated really quickly. There's the rub. So now is it an alternative? And again, going back to, how does this fit in my port polio last year, we thought, Hey, should we use these or not? And in fact, we tried [00:34:00] to talk to, if a client was having difficulty maintaining their plan in the market, they wanted to go to all cash, which we thought was a bad move.

[00:34:09] Then buffer ETS, we thought were a good solution. Because it provided
somewhat of a predictable outcome. In other words, at the end of this one-year period,
they're all based off of one year, because that's when the options expire, you know what
you're going to be limited to on the downside and the upside.

[00:34:27] So that provided some people, some certainty in a time where uncertainty was rampant. I talked to one person last year and they said, Hey, I think we're headed for the great depression. And I couldn't disagree with him. I had nothing to come back to cause
anything could have happened. That sounds silly.

[00:34:40] Maybe looking back now, but at the time it was pretty scary, a lot of uncertainty.

Now they're not a stock replacement. And maybe they're not a bond replacement, maybe
they're a hybrid, so you gotta think about how you're using them in your portfolio.

[00:34:52] There's pros and cons to everything. I'll go over the couple of negatives real quick.

They're very expensive. Like I said, 0.8% is a very high expense ratio for [00:35:00] ETFs, but you can understand why, because they have options, et cetera, going on inside these ETFs, they're likely to underperform during strong bull markets.

[00:35:09] Now last year, there was such a quick recovery hindsight being what it is.
Probably would have been better off not going into buffer ETFs. However, remember what I
said, it was a stretch, it was an option to go in into cash. We stayed in the market. We've got
some return, not as much as the S and P gives it recovered quickly and strongly stronger
than we ever thought it would.

[00:35:29]So there, there are these ETFs that have these options strategies, quite frankly,
they're going to underperform in the longterm. That's just what you're gonna have to, put up with they're complicated. They have a lot of moving parts. So again, anytime you use an
options, strategies, you need to know what you're doing and know what to expect, because there's nothing worse as an investor investing in something thinking I'm going to have this
result in the exact opposite happens.
[00:35:53] So I think that's one of the big things to consider.

[00:35:57] Rob: [00:35:57] Yeah, absolutely. That is a great [00:36:00] example. Charlie and to piggyback on that, that's one of the reasons why we are so adamant that we're getting your risk analysis, right? Because we want to know when COVID hits, when you know, the 2008 financial crisis hits, we want to know what your risk tolerance is.

[00:36:16] Sometimes you can't know until it happens. And I get that. But if you can, and if
you can simulate it and share flat or whatever you're going to do to see when COVID hits, I'm okay with it going down, 30 to 40%, and I'll, I'm going to be just fine because I'm a long-term investor or I've got my risk.

[00:36:32] I know I've got bonds. , and I'll be able to get through this rebalancing and those
kinds of things. So I don't need to get into to these options that we're talking about right
now, even the ETFs. If you've got your risk analysis nailed, you don't need to get into that.

[00:36:46] If you don't or if you start getting cold feet, that's where an advisor can really
help you out and get you through those hard times. All right. Anything else?
[00:36:58] Charlie: [00:36:58] I think that's about it. Like I said, if you're going to [00:37:00] do horses, the options are better.
[00:37:06] That's it? In a nutshell, I just got my little girl four chickens, because like I said, last time our chickens got eaten by someone besides me or something besides me. I don't like it.

We've got some new chickens. We're going to do some goats. But we're not going to do
horses. As long as I can stiff arm that as long as I have a say in my own family, Which may
not [00:37:26] Rob: [00:37:26] be very long.
[00:37:28] Yeah. Good luck. We're all counting on you. I'll

[00:37:32] Charlie: [00:37:32] talk a bit. Let's talk a big talk. Yeah, my daughter, this
weekend, we got chickens. Soon as we got chicken. So daddy, did you say I could get horses when I'm 12? No. 15. I said 15 and before it was 20 she's already talked me down. She's already anchored me down five years.

[00:37:47] It was 20 before
[00:37:50] Rob: [00:37:50] hires you hire her now. That's awesome. Good stuff. We've
arrived at our final destination. This I [00:38:00] believe is flight nine, episode nine. Thanks for joining this year. Pilot money guys podcast. If you have any questions. You would like us to answer anything on the show.
[00:38:09] Shoot me or Charlie and email Robert leading edge planning.com.
charlie@leadingedgeplanning.com or been@leadingedgeplanning.com. Any of us throw us an email. We'll try to cover it. Leave you with a couple of Charlie Munger quotes. The big
money is not in buying or selling, but in the waiting a second one, here is a lot of people with high IQs, terrible investors, because they've got terrible temperaments.

[00:38:35] That's it, if you like, what you heard, please hit that subscribe button so we can reach more people. And remember, as Emerson said, the world makes way for those who know where they're going. So plan accordingly from all of us here at leading edge. Thanks for
stopping [00:38:52] Charlie: [00:38:52] we're out.

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