A Fifth Circuit court has ruled that the DOL “Fiduciary” rule is illegal, and it may go away as soon as May 7th. What does that mean for you? Also, New Jersey was often mention as one of the worst places to retire. Is that still true?

Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.

For more information, visit Medina Law Group or Private Client Capital Group.

Click below to read the full transcript…

Announcer:  Welcome to “Make It Last,” helping you keep your legal ducks in a row and your nest egg secure with your host, Victor Medina, an estate planning and elder law attorney, and certified financial planner.

Victor J. Medina:  Hey everybody, welcome back to Make It Last. I’m your host, Victor Medina I’m so happy you could join us this Saturday morning. It is 7:30 in the morning after a nasty snowstorm that rocked New Jersey.

I will tell you something. I am tired, and absolutely sick and tired of the winter. I don’t know what the groundhog saw, didn’t see, in like a lion out like a lamb. Whatever it is, I’m done with it. I’m ready for spring full‑stop.

Listen, I’m excited for today’s show because we’re going to be talking about two new pieces of news that had come up. We want to cover that. One of them having to do with the fiduciary rule. We’re going to cover that first, new court case on that.

We’re also going to cover whether or not you should move out of New Jersey when you retire. There’s a lot of talk about taxes, property taxes. Should you stay here, should you leave? What are the rules about that? We’re going to cover that in today’s show.

Before we get to that, I want to relay a quick personal story. World got rocked a little bit this week because my wife had a medical episode. Essentially, it was minor. She’s fine. We had to make sure that she was OK ‑‑ take her to the hospital. We did a lot of other planning in our lives to make sure that this wasn’t going to be a major problem.

What did I have with me when we went to the hospital? I had my advance healthcare directives on a thumb drive in case we need it. I had it accessible online in the Cloud in case I needed to send somebody a link. We had people covering for childcare and the business was covered.

As I had to leave, we still had enough. If I was there day, two, three days in terms of all the systems and processes in here. It highlighted for me what happens when planning works out the way that you mean for it to work out.

If it turns out you’ll stress test this in the moment of crisis, and you don’t have the parts that you need, you’re going to learn very quickly that you should have had it. The crisis moment, the stuff that is causing all of these problems, it’s hard to come back from.

It’s usually very expensive and a lot of time involved in that. Anyway, it was that nice reminder. I’m very thankful, of course, that nothing major happened and my wife is fine. It was really nice to see the way the planning had come together so that even in a minor crisis like this, we had no issues. It’s a good reminder to make sure that we have planning in place.

Just a quick note for you, guys, if you don’t know whether or not your life is ready to be stressed as in this way, whether or not you’d come out successful forward, I think it’s time to revisit that issue. Again, we had a personal reminder. That’s what I do for a living. I’m glad to see it did work out. I’m glad that it was OK.

But if you don’t do this for a living, if you’re not sure, this is definitely something that you’re going to want to retaking a look at to make sure that you have it set up the way that you need to.

I wanted to talk about a new court case that did come out. I’m going to follow along on a news a little bit here. Just referencing the actual court case. There was a US Court, a Fifth Circuit, so it’s a Court of Appeals and it was a two to one vote. Only three of them were on there and there are some kind of technical stuff that comes from this, but here’s what they did. They ruled to vacate the fiduciary rule, put in place by the Department of Labor.

If you’re a long time listener, you know all about the fiduciary rule because I harp on it a lot in the radio show. But if you’re fresh from the show, if you haven’t heard one of those other shows, as a reminder, the fiduciary rule was that law that the Department of Labor put in place regulation that basically made anyone who gave you advice on your retirement account a fiduciary.

Meaning that they have to look out for your best interest above the road which sounds crazy. It sounds like this should have been the case all along, but in fact, it wasn’t. For the longest period of time, all you needed to do was suitability testing which means to say that the suit had to fit you. Didn’t have to look good. Didn’t have to be made of the best materials.

In this case with the fiduciary, what you have to do is have somebody who is looking out for your best interest. Even when it compromises their best interest, they have to look for yours.

The Department of Labor was able to put these rules in place because it governs a risk, which is the retirement laws and retirement investment, retirement savings and investing laws. They put this law in place and it drove the financial services industry crazy.

It drove them crazy because the insurance people couldn’t sell you a bad insurance, the brokerage people couldn’t charge you a whole bunch of fees inside there and really pull the wool over your eyes. All of these folks were challenging the fiduciary rule because it was going to upset their business in a major way. They couldn’t ‑‑ pardon my French ‑‑ screw clients over any longer.

They were fighting tooth and nail with a new administration that came in, which was largely supportive of the industry side of it. They were able to delay the full implementation of this rule, until almost a year and a half after when it was supposed to come.

There was a baby step in there which happened last June. The baby step they say, it required some disclosures and some other things like that, so that you knew a little bit more about what you’re at finances were doing.

Of course, there was going to be a court case, and there was a court case. Soon one of the court cases in the Fifth Circuit, this industry court of heavyweights challenged it and challenged whether or not it was a rule that could be put in place.

Without getting into the details of how the court case was decided. Understand that the [inaudible 6:24] side won and the US Court of Appeals said no fiduciary rule. It is illegal and you cannot have it in place, which then caused that industry to celebrate. Here’s the joint statement.

I’m going to read it with some dripping irony and sarcasm, but here’s what they said. They said that, “The court has ruled on the side of America’s savers, preserving access to affordable financial advice. All organizations have long supported the development of a best interest standard of care. The Securities and Exchange Commission should now take the lead on a clear consistent and workable standard that does not limit choice for investors.”

Let me parse through the code on that, because what they were saying is if you cause people to have to go to advisors that look out for their best interests, it means that the investment advice is going to be more expensive. That they’re going to have to pay for the advice directly in a way that makes access to that advice not affordable for people with no money. That it would only be for the people who had enough money to pay out of pocket for that.

It said, instead in order to give people the advice, what they said they would be doing is embedding the fees into the cost of the investments, so that people could charge whatever they want as a commission or out of that and I guess get the advice that they needed.

Tell me that sounds crazy to you because the money comes from somewhere. Either you have the money to pay for the financial advice directly or it comes as a commission from the investment that you’re buying.

This isn’t magic money. This isn’t money that all of a sudden is going to show up out of the benevolence of the organization that is selling the investment. It comes from your own money.

The money you could have been getting in investment returns. You’re going to give a portion of that over whether it’s in the form of a commission or some other kind of transactional fee that is hidden inside of there.

The point wasn’t whether or not you were going to be paying for the advice. The point was really whether or not that advice was needed. Whether that payment need to be transparent, whether in fact you had to disclose how that was being paid. Therefore be subject to whatever rules were going to be governing what reasonable advice should cost.

They don’t want that. They totally don’t want that.

Listen, I got to take a quick break but when we come back, I’m going to tell you what the next steps from this are and what you can do to protect yourself, because soon it’s going to be the wild, wild west again. If this doesn’t get put out back in place, what you thought were your protections are gone, the old way of doing business.

We’ll be back with them. Anyway, I’ll come right back from the break. Join us with Make It Last with Victor Medina.

 

Victor:  Welcome back to Make it Last. We’ve been talking about the new court rule that knocks out the fiduciary rule meant to protect consumers. This US Court of Appeals has ruled that that rule is illegal. Can’t happen.

Which means that there are a few things that can happen from here and you’re going to have to watch out for this. You can keep this in your show, because I’m not going to stop talking about it. You’re going to have to watch out what happens, because we can go back to the wild, Wild West before.

This was a limited Court of Appeals ruling, which meant there was only a portion of the judges that were there, so they could take it on with the full court. There could be a petition for a re‑hearing on it by the government, the administration.

You’ve got to remember this rule was put into place during the Obama administration, and we have switched over to the Trump administration. It’s still the government’s rule.

What that means is that it’s up to the government, who has been dealt this blow that their rule is no good, to decide whether or not they are going to appeal it any further. Appeal to the Supreme Court, appeal for a hearing across the entire Court of Appeals.

There are some technical things that they can do, but it’s back in the court of the…wrong analogy. It’s back in the government side to figure out what to do. From that, what most experts believe will happen is that the government will do nothing. They’ll do nothing at all.

They will allow this to die this undignified death through the court process and not challenge it at all. There are some technical rules about exactly when it will be put into place, probably looking more like May 7th. The way the rules are set up, there’s some timing periods.

This idea that the fiduciary rule is gone is something that probably won’t take effect until the beginning of May. If you were somebody who was relying on the fact that the fiduciary rule now protected them, [laughs] even though I have been telling you that it does not.

It only protects in retirement accounts. Doesn’t do any protecting in terms of protection for after accounts. I told you not to rely on it. If you were relying on it, realize that that’s going away. Come May, absent any other new rules, any other changes, we will be back to the wild, Wild West.

The wild, Wild West is advisors telling you crap investments just so they can make an extra buck. They have to pass a minimum bar of suitability, which is, put the mirror underneath, see if you fog it up. Beyond that, they don’t have to be doing whatever is in your best interest.

Which means that the burden of making sure that you get great financial advice is back on you. You have to be looking for somebody that is willing to sign a fiduciary oath. Most of the time, those people end up being independents.

By the nature of the relationship in the company, people who work for the largest organizations are not bound to be looking out for your best interest. They’re bound to be working for their employers. That’s all of the large captive insurance agencies.

That all is the largest broker chances. Those are all institutions, who, by the way, some of them decided that they were not going to change their business practices, in light of the fiduciary rule. That’s going to go back to them, to say, “Hey, we’re going to do things the way they were before.”

Those are places to avoid. The places to go towards and to look at are the ones that are, first of all, independents, and mostly registered investment advisory firms. There are some technical things about the fact that some of those RIAs don’t have to be fiduciaries.

Majority of them are. Especially the ones that aren’t what are known as duly registered with broker dealers. The people that are pure investment advisors, who are independents, those are the people who you want to be working with, because those are by state law, by SEC law, have to be looking out for your best interest when they’re giving you advice.

That’s the way that my organization is set up. In large part because that’s the way I’ve led my entire professional life, is looking out for my clients’ best interests. That’s why I started out as a lawyer looking out for them in that legal capacity.

When we came over to helping them with their finances, absolutely. We would stay exactly on their side of the table looking out for their best interests, and making sure that there was never any conflict in what was the advice that we were giving.

That we could offer any product that was on there. We could offer any form of solution, we had every license available. That meant that because we weren’t paid differently, based on the advice we were giving, that we could give them whatever was in their best interest.

That’s the way we’ve conducted it. That is a hallmark of being a registered investment advisor. It is a hallmark of being a lawyer. I don’t know that there’s a ton of people that are like me with those two designations, but surely, that’s probably the very top of the credentials that you should be looking for.

Lawyer/financial advisor, specifically ones that are independent and not just in some relationship for some money. Like their solicitor relationship referring you out. You want them to be doing the work.

You want to be looking for somebody that’s in fact a fiduciary, and will sign an oath that will sign a pledge to be looking for your best interest. I gave this talk to an organization industry or the people in the public school districts, their business officials.

What came up was the idea that if you can give people this fiduciary oath, most of them are not allowed to sign it, by virtue of the contract that they have with their company. That will be the biggest tale. As a consumer in retirement, you should absolutely be offering this up, and saying, “Will you sign this?”

When they run the other direction, so do you. Take your money and go somewhere else. You deserve to be working with somebody that looks out only for your best interest, in every place in your retirement life, legal, financial, tax.

Everywhere that they go, you want to be working with somebody that’s going to be looking out for your best interest over their own. The only way to do that is to be working with a fiduciary.

It’s clear from this ruling, it’s clear from what’s going to be coming down the road, that the laws are not going to protect you. This fiduciary rule is not going to protect you.

It’s unlikely ever to come back, as long as we have an administration that’s favorable to the insurance industry and to the securities and broker dealer industry.

Victor:  If that is what you’re relying on, don’t because you really can do better and you’ve got to be looking out for yourself.

When we come back, I’m going to cover one more subject before we leave for today. That is, should you move out of New Jersey? Is the taxes too bad? When you get to retirement, should you stay here? Should you go somewhere else? We’ll cover that when we come back on Make It Last.

Victor:  Welcome back to Make It Last. We’ve been covering a lot on the new fiduciary role. I want to change gears a little bit and talk to you about whether or not you should stay in New Jersey when you retire.

I do work for people not only in New Jersey, in Pennsylvania, when we talk about estate planning, income tax planning, but also across the nation. We’ve got clients not in every of the 50 states, but in a lot of them. On one coast, down south, just across, people who are dual citizens. We have to examine this issue pretty regularly.

When people retire, the biggest chunk that is going to take a bite out of their retirement is in income taxes. Generally, a way to make sure that your money lasts as long as you are is to manage the income taxes.

For the longest time, New Jersey was a bad state to retire into. It’s expensive to live here. Property taxes, as you know, are really, really high. A lot of people figured…we’re trying to figure out, should we move out? We have so much life that’s here. Should you move out just in terms of saving the taxes?

I know that when my parents retired, they were Connecticut residents. In terms of their being Connecticut residents, they knew that those tax laws didn’t work out to their favor. They were teachers. They were living on a pension all of which was taxable income. Trying to find a favorable state was really important for them.

They have a residence in New York. We encouraged them to get a residence in Florida and make that their primary residence so they can in fact not pay any income taxes on it. Then, they had to move. Not because of the maintenance forced upon them.

My brother who lives in South Carolina was starting a family and they wanted to be closer to them in South Carolina and to my sister and I up here in the north. We needed to move to South Carolina. We needed to examine whether or not that was going to be an expensive move for them in terms of income taxes or not.

The long and short of it is you have to understand what the tax laws are here in New Jersey to know what you’re running away from when you run somewhere else.

Based on where the office is, we do a lot of work for people that are both in New Jersey as well as in Pennsylvania. We’re by the river, by the border, so we had to get really familiar with the two laws.

I’m going to compare them a little bit so that you understand. For the longest time, New Jersey did not have very favorable retirement tax laws. But, when they increased to the gas tax to 23 cents and when they eliminated the estate tax as part of those laws, they also did something to the income tax rules which made it a little bit more favorable.

We’ll just deal with married couples, but there’s another threshold for single individuals. They made it that if you make $100,000 or less of retirement income, your New Jersey income tax is zero.

New Jersey already doesn’t tax any Social Security benefits, but most people don’t live on Social Security alone. In fact, they’re living on Social Security, maybe a pension, their retirement accounts ‑‑ their 401Ks and RIAs. There’s a better portion of what their living expenses are that are taxable and can’t be on the Social Security.

In those cases, if you make $100,000 or less, you in fact don’t have to pay an income tax. It’s tricky because if you make $1 over the $100,000, it’s not a marginal tax where you pay tax just on the $1. It, in fact, causes all of the income to be taxed. That’s really important.

If you’re somebody that can manage their income so that it’s below that number, you will be in a better position to avoid those income taxes than if you can’t control it because the pension is going to put you over or some other number is going to put you over. That $100,000 limitation is a hard limit you have to stay under for you to get the benefits of living under the New Jersey rules.

At the same time, you’ve got to think about some sort of inheritance planning on it. Your income tax rules are one thing. New Jersey has now eliminated the estate tax and kept an inheritance tax which does not apply to the majority of people.

If you’re leaving money to a spouse, kids, or grandkids, even though there’s an inheritance tax on the books, there’s no inheritance tax owed on the money that’s left there.

If you go outside of the family tree? Yeah, sure, you’re going to start to pay some inheritance tax. Largely speaking, people who are leaving stuff to just their kids and their grandkids are not going to pay any inheritance tax if they stay in New Jersey.

If they move over the border into Pennsylvania, Pennsylvania does have an inheritance tax of four and a half percent on every dollar that you leave your kids.

Moving to avoid property taxes and to avoid maybe the income tax on the $100,000 limit, implicates this new inheritance tax. That’s one of the things you have to look at. Running away from New Jersey taxes might be running into the lion’s den of another set of taxes especially ones that are inheritance tax for what you’re leaving behind.

There are a lot of moving paving parts. The laws in New Jersey here are not as bad as they were prior to the new rules that were put in place. Now, that we have the exemption for that $100,000 and that the property taxes are so much stabilized for seniors. You can get a senior freeze and stuff like that. It’s not as bad as it was.

There are a lot of moving parts to this. One of the moving parts that you have to keep an eye on is the idea that you can pay higher premiums for homeowners insurance because of hurricanes, floods, things like that.

If your family is still here in New Jersey, and you move away for taxes, you’re going to have some costs that are associated with flying back to see them. The level of healthcare might be better here in the northeast close to New York or Philadelphia rather than being someplace else where it might not be as good.

Again, lots of factors, but the lesson for today is that you shouldn’t be running away. You shouldn’t be running away from New Jersey thinking that it’s the worst state to retire in because it’s not. Some of the rules have changed and changed to your favor. That’s important to take a look at. Just don’t run away. We like you here in New Jersey. It’s the Garden State. We’d like you back.

That’s the quick thing on New Jersey and taxes and the fiduciary rule. I want to thank you all for joining us here. If there is a subject you want us to cover, the best thing you can do is drop us a line at Feedback at makeitlastradio.com.

You know what you can do to help other people? If you like the show, is share this. We have this show, not only available on the radio, but on lots of different formats. It’s available as a podcast which you can get through the Apple podcast app. You can go to the website, Make It Last Radio, and stream all the episodes.

Or, if you’re a Spotify subscriber ‑‑ by the way, there are free subscriptions to Spotify which I think is great because it gives you the entire music library ‑‑ we are there on Spotify as well.

If you like this show, subscribe to it and share it with a friend because what we’re doing in here in terms of giving you information, education on it, is absolutely free. It is one of the best things that you can use to arm yourself. Just even going over what we did today on fiduciary rule, your friends deserve to know that information as much as you do. Best thing you can do is share it with them.

Again, thanks for joining us. We’re here every Saturday and we look forward to coming…We had to delay one guest that we had coming up which I’m really excited about who helps people tell their stories. We had to reschedule them because of this health emergency with my wife that I told you about in the beginning of the show.

We’re going to have that person back on. We’re looking forward to scheduling Steve again. In any event, stick with us. We’re here every Saturday morning. This has been Make It Last where we help you keep your legal ducks in a row and your financial nest egg secure. Catch you next Saturday. Bye‑bye.

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