$2m in Cash, or Cash-cash?

CASE STUDY: Do you mean cash or cash-cash?

THE SET UP:

Self-employed, custom home builder needs help with some inherited annuities. What started as a project to help an individual deal with some annuities, turned into a deep review of best practices across seven topics.  In the end, there are two distinct observations:  

• The individual achieved a fantastic retirement setup; great cash flow and a net worth of about $7 million.

• He missed some opportunities that should NOT have been overlooked given his existing advisory relationships.

Let’s dive into this profile and discover what was overlooked and what the best practices pathway looks like.  

CLIENT PROFILE:

Client and spouse are in their 60s and within 1-2 years of retirement.  Will only take on one or two final building projects in 2024-2025. Spouse also worked. Steady six-figure household earnings across their careers. Two adult kids, one grandchild. Debt-free. Total net worth is about $7 million.

1. Seven Rental Properties:

Client owns seven single-family rental properties worth $2.5 million, acquired across the last 20 years. The rental properties are owned outright with no debt. Monthly rental income of $13,500.  

Best Practices: This is outstanding. Discuss the client’s long-term view of the properties, how to manage the cash flow, and make sure everyone understands the long-term plan and the tax consequences (hint: the properties will step up at death).  

2. Brokerage Account:

Client holds $1 million in an old-school, commission-based brokerage account consisting of an assortment of individual stocks. The client describes the broker relationship as “not highly communicative.” Client describes the account as “volatile.”  All the positions have long-term unrealized gains.

Best Practices: Move the account to a low-cost, commission-free firm like Charles Schwab.  I’m comfortable keeping certain stocks, but if there are positions that are excessively volatile, review what to keep and what the tax consequences are to reduce risk. Explore charitable strategies for the low-cost basis stock versus realizing gains.

3. Cash or cash-cash?:

$2 million in cash spread across multiple banks in town earning about 0.01%.  

Best Practices: With cash equivalent yields bouncing between 4.0% and 5.5% in the last few years, this is a missed opportunity to cash flow about $100k per year risk-free. Consolidate the cash from the banks to a single taxable brokerage account at Charles Schwab and build a mix of Money Market Funds, CDs, and short-term treasury bonds.  Alongside this high cash balance, discuss long-term investment objectives, the client’s desire for another rental property versus equity/bond/income investment options.

Pro Tip: In my view, Cash is money market funds, CDs, and short-term treasury bonds.  Cash-cash is (low yielding) bank deposits and physical cash. Linking your online bank and your brokerage accounts will help you minimize cash-cash balances so you can earn better yields on your cash.  

4. The Inherited Annuities:

$500k inherited fixed annuities (non-qualified) with low yields.  

Best Practices: I am generally not a fan of annuities.  They are high-commission products delivered by salespeople – they are rarely a “financial solution.”  For this example, I will only review the beneficiary’s perspective.

On the death benefit, to cash out the annuity is penalty-free, but a taxable event. The current annuities are low-yielding, well below today’s cash equivalent.  To improve the yield there are two options, the client can 1035 exchange (tax-free) into higher-yielding fixed annuities with 3, 5, and 7-year contracts paying 5.5% – 6.0% (At the time, October 2023).  The other option is to swap into a variable annuity which simply means investing the funds into a mix of traditional equity and bond funds (that I would manage).  In either instance, the annuity can then be drawn down over a 5-year period to spread out the tax hit.  Always check with a professional about annuities – they are complicated and there may be multiple options available to the beneficiary.    

In this instance, I can 1035 exchange the annuities to Charles Schwab’s no-load annuity service desk and handle all the details, navigate the best choices amongst a few options (fixed or variable), and do so with no commissions and competitive options.  

Pro Tip:   Be careful when dealing with the original annuity provider, the insurance company is not obligated to look out for your best interest…they are in sales mode. The 800# customer service is not great and they are not required to offer the most competitive yields; they are incentivized to roll you into a new contract and keep you with their label.  If you call the broker that sold the original annuity, they will probably offer a new contract and get paid another full commission.

5. Retirement Accounts:
None.  

Best practices: While this client has achieved a great outcome, they have been investing in real estate almost exclusively.  It is absolutely a missed opportunity to not contribute to a SEP IRA or SOLO401k for a single member-employee-owned business– let alone how you can also include your spouse.  Contributing to a SEP IRA or SOLO401k for a steady six-figure earning business owner reduces taxes while boosting retirement savings that can grow tax deferred.  

6. Seeking new CPA relationship:
Current CPA is a local mid-sized firm.  The client regards them as high-fee / low-service.  

Best Practices: I introduced the client to an independent CPA whose specialty includes contractors.  The best practices portion of this step is that I ATTENDED the meeting with the client and the CPA.  The meeting turned into a “master class” financial planning discussion of what actions the clients should consider for 2023 and 2024, plus a review of gifting/estate strategies for his adult children, grandchild, and much more.  

7.  The Family Trust:
The family trust is out of date and needs to be reviewed and updated.  The original estate attorney retired.

Best practices: I shared the names of a couple of trust/estate attorneys for the client to contact on their own.  I have a good roster of attorneys in town and understand their focus, fees, and if they are compatible with the client profile.  It is a time saver for everyone – I don’t charge a separate fee or receive any incentives from any of the professionals that I refer.  

Summary:

Western Level Advisors LLC is focused on providing comprehensive, independent, fiduciary advice that generates value across the client’s household. This profile demonstrates only the interview and on boarding process… the primary service of Western Level Advisors LLC is managing the client’s investment accounts and helping them compound their wealth.  It is this level of depth that can distinguish independent RIAs from non-fiduciary advisors (aka banks and brokers).

What did I miss in this client profile? Thoughts and questions are welcome. Please email me directly at hello@westernlevel.com.