How Doctors Can Give More and Pay Less in Taxes

INTRODUCTION

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is White Coat Investor, episode number 478.

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WCI members can continue to enjoy the benefits and financial resources that they always have, with even more support from KeyBank. To learn more and for terms and conditions, please visit whitecoatinvestor.com/keybank.

Welcome back to the podcast. We've got a great episode planned for you today. We're bringing back a White Coat Investor conference, the Physician Wellness and Financial Literacy Conference speaker, to get even more in-depth on one of the topics he presented on at the conference.

I feel a little bit guilty. I've been underselling this conference for years. It's awesome. It's awesome. I should be begging you to come to the conference. It's a life-changing experience for so many people. You actually get to meet your tribe. You're sitting next to people, one of whom has $300,000 in student loans, one of whom's a decamillionaire. Both of them will talk to you about anything financial that you want to talk about.

That's just not the case for most of us in our lives. We can't talk to our neighbors about it. We can't talk to our family and friends, and even our colleagues. There's this taboo in medicine that keeps us from talking about money. You can do that at the conference. It's so inspiring, not only in the financial content, but the wellness content. We get to do all the fun wellness activities. If you just want to come and have a relaxing time, you can do that and take the content home with you to digest it all at home.

Just the content itself is incredibly valuable. Given your income and the level of wealth, if you manage that income well, you're likely to have the value on just the content is immense.

We actually package up just the content if you want. We call that our Continuing Financial Education course every year. This year, we sell CFE 2026. It's basically the content from the conference. Like all of our online courses, it's totally risk-free to buy. We'll give you a week to see if you really want it. If you don't, we'll give you all your money back, no questions asked, as long as you haven't watched the whole thing. We actually check and make sure you haven't watched more than 20% of it before we give your money back.

But we'll give you all your money back. You can look through it and see what you like and watch one or two and say, “Oh yeah, there's a lot of value here for me. This makes sense.”

But the beautiful thing about that CFE online course, not only can you digest it on your own time, you can listen to a podcast style in your car from your iPhone, but it is dramatically cheaper. Not only do we charge less for it than we do for the conference attendance, because we don't have to feed you a bunch of expensive hotel food while you're there, but you don't have to pay for the Uber, you don't have to pay for the airplane ticket, you don't have to pay for the rooms.

And perhaps most significantly, you don't have to take any time off work. You come to WCICON, you're probably missing a few days of work, and there's some opportunity costs there. It's probably the most expensive part of coming to the conference. You don't have to do that with the CFE course. So you can go to whitecoatinvestor.com/courses and check that out.

But all that to say, I'm bringing on one of our speakers from the conference and from this course, same thing, just to give you kind of a sense of the quality of the presentations, the quality of the content that's being presented at this conference. I mean, we're turning down eight or nine out of 10 of the people applying to speak at the conference, but we're getting the best of the best. And you'll get a sense of that from our interviewee today.

But I think it's going to be a great discussion. We're going to talk about charitable trusts, which is a topic that's become more interesting to me as of late. The last time I wrote something about it was about a decade ago, but I wanted to really dive deep on it today.

I'm going to apologize in advance. We are going to hit the one-on-one level of this topic for sure. But pretty rapidly, we're going to be jumping to 401 or maybe 601 on this topic and really diving into the details of how a charitable trust works and who might want to use one.

Before we do that though, I wanted to cover a couple of things. One's our quote of the day. And we're going to get one from Tony Robbins today who said, “It's not what you get, but who we become and what we contribute that gives meaning to our lives.” And I think that's a great quote because at the end of the day, once you have enough money, life isn't about money. Money becomes irrelevant in your life. And that's where I want you to be. So you can concentrate on what really matters in life.

And for many of you, you do that every day. You concentrate most of the day on what really matters in life. And it's a hard job. It's often a thankless job. If no one said, thank you, thank you for what you do today.

I had a couple of shifts earlier this week, one of which I had to really hustle on. I saw a lot of patients and most of whom were having one of the worst days of their lives. And whether you're just suturing up a laceration or admitting somebody to the hospital or trying to dive through a complicated medical history to figure out what's going on, it's a day they remember and it's significant.

The other thing I wanted to tell you before we get into the interview is that we are having a summer sale. The code is SUMMER20 and that gives you a 20% off everything. And so we're selling stuff at the WCI store. We're selling our online courses, probably most significantly.

Like I mentioned, that CFE2026 course is 20% off right now. That ends tonight. The day this podcast is dropping. It's been going on for the last few days, last week or whatever, but it ends tonight. So if you're listening to this the day it drops and you want to pick up CFE2026 or you want to pick up our No Hype Real Estate Investing course, or you still need a written investing plan, a written financial plan, and you want to take our Fire Year Financial Advisor course, the student resident attending or the version that's good for CME credit, all of that 20% off if you go buy it today.

You go to whitecoatinvestor.com/courses, or if you just want some swag, you just want 20% off a t-shirt or mug or whatever, you can go to whitecoatinvestor.com/store. You can buy our books at the store as well.

It's pretty awesome to be able to offer that. It's obviously this podcast, we're recording it quite a while ago, but it's dropping the first week of July. And we all know that the first week of July is a big day, a big, big week, big time period change. It's basically a new year for doctors, particularly those in the training pipeline.

You move from a second-year medical student to a third-year medical student the first week of July. You move from a third year resident to a fourth year resident, or you leave residency and start fellowship, or you come out of training. The first week of July is a big date for doctors. And now that's usually a great time to revisit your financial plan or to create one. And so, SUMMER20 is the code. Go to whitecoatinvestor.com/courses, or whitecoatinvestor.com/store to pick that stuff up.

Okay. Enough introductory material. Let's get into this interview. Let's get Matt on the line here.

My guest today on the White Coat Investor podcast is family practitioner and WCICON speaker, Matt Moore. Matt, welcome to the podcast.

Dr. Matt Moore:
Thank you so much. It's an honor to be here.

Dr. Jim Dahle:
So just by way of introduction, tell the podcast audience a little bit about yourself, and then I'll explain why we're together doing this podcast, but introduce yourself a little bit your background and how you got interested in finance and so on. And bring them up to speed on who you are.

Dr. Matt Moore:
Sure. I'm a family medicine physician in the Midwest, working for a hospital group, a multi-specialty hospital group. I got interested in personal finance, but I had a grandfather who was an accountant, and he had three very successful son-in-laws who of course were married to wonderful daughters.

And unfortunately, all of them made some pretty stupid decisions with money. And my mom would occasionally mention that fact to me and that encouraged me to try to make sure I was learning about personal finances so I did not make the same mistakes that my uncles did and make it so that more financial security for me and my family.

Dr. Jim Dahle:
Just by way of introduction to the audience of how we ended up having this conversation, Matt spoke this year at WCICON, which is actually a surprisingly competitive place to speak at. I think we probably reject something between 80 and 90% of the talks submitted for the conference, not because we want to reject them, but just because we only have space for so much, even when you include some of the presentations that are only done virtually.

And Matt's presentation was something we hadn't done a lot of at the conference. And in fact, well, I've written about it a fair amount on the blog. We don't get a lot of guest posts about it and we haven't touched on it a lot in the podcast, which is charity. And it was clear that he understood it and that this was going to be an in-depth level talk. And so, we took them for the conference.

And at the conference, I try to drop into every presentation. So that means I don't watch the entire presentation unless it's one of the keynotes. For the most part, I catch 15 minutes here, 20 minutes there. And if I get intercepted between the rooms, I may not ever make it to the next one. I ended up chatting with somebody in the hall about whatever.

But I walked into Matt's talk right when he was talking about charitable trust and realized it's been 12 years since we did anything with charitable trust at White Coat Investor. That was a blog post about 12 years ago. It was probably written even before then. So I realized that he understood this even better than I did. And that very few people really spend a lot of time talking about or thinking about charitable trust.

CHANGES TO CHARITABLE GIVING RULES AND THE BASICS OF CHARITABLE TRUSTS

And so I want to do an episode about charitable trust, but before we get there, we probably ought to just talk briefly about charity in general, how the tax treatment of charity is, how it changed this last year. That big bill that went through Congress, that Big Beautiful Bill that went through Congress last July made a few changes with charity. Why don't we start by just mentioning those and how the charitable tax landscape has changed in the last year?

Dr. Matt Moore:
Sure. I would say first off, I think charity is one of the highest and best uses of your money that you can use it for. It can bring a lot of benefit to a lot of people beyond yourself and bring a lot of non-financial benefits to yourself as well, which probably can make up its own podcast.

But in regards to the financial benefits that they can bring to you, the biggest one is generally the tax deductions that you can get for making charitable contributions. And under the One Big Beautiful Bill Act, there has been some adjustments made to the benefits you can get from those contributions.

Specifically, there are two. The first is there is now a hurdle that you have to get over in order to be able to take a charitable deduction. And that is one half of 1% of your adjusted gross income.

Dr. Jim Dahle:
It seems like such a small number, Matt. It seems so small. It's only 0.5%.

Dr. Matt Moore:
It seems like it, yeah. And it does eat into the benefit a little bit. And for most people, it's not going to make a huge difference. But if you had an adjusted gross income of $500,000, that means the first $2,500 that you donate to charity basically is gratis. You don't get any benefit for that whatsoever. Every dollar after that, you do get to be able to write off on your taxes. But the first $2,500 is basically free. If you are itemizing your deductions, taking the standard deductions is a completely different game.

Dr. Jim Dahle:
The thing I hate about this change is it discourages people from getting started with small donations. Like you mentioned, a physician family making $500,000, it's $2,500. Or if the family is making a million dollars, it's $5,000. So there's no tax benefit at all for the first $5,000. So if you only give $5,000, no tax benefit. If you give $10,000 half your tax benefit is gone. You give $15,000, a third of it's gone.

If somebody is a big giver, if they tithe, for instance. That million dollar household gives $100,000 a year. Okay, well, that's not that bad. You still get to deduct $95,000 of it. That's maybe not as big a deal. But if you're just kind of going, “Maybe I should give some money to charity.” And then you find out you get no benefit for the small amount you gave. I think that is discouraging to people to get started, don't you think?

Dr. Matt Moore:
It absolutely is. And there are some ways around that. So if you took the standard deduction, they did write into the law this year that if you're single, you can donate up to $1,000. And if you're married, filing jointly up to $2,000 as an above the line deduction with the standard deduction, and you can actually write that off on your taxes.

In addition, if you are donating significant amounts each year, but you're actually coming over that standard deduction, you can take several years of giving into one year, take the major tax deduction that year, and then take the standard deduction the following years and augment the write off you get from doing that. But that would be more in the standard deduction realm that we've talked about with that.

Dr. Jim Dahle:
Yeah, I think there's some debate as to whether to call that the non-itemized charitable deduction, whether that's above the line or below the line, but it's certainly not Schedule A. It's not an itemized deduction.

Okay, let's talk about the other big change to charitable giving that happened last year.

Dr. Matt Moore:
Well, the other big change is they did cap the benefit that you can receive when you make large charitable deductions if you are making a large amount of money. So if you are in the 37% tax bracket, you can no longer write off 37% of every dollar you donate. They have capped that at 35%.

So it's a very small change that's there and really shouldn't discourage anybody from giving. But at the same time, it's just a bit of an annoyance that you have to calculate that and you're not getting the full benefit despite the fact that you're making a generous contribution.

Dr. Jim Dahle:
Yeah, you add those two together. Again, let's talk about that million dollar family income. Let's say they decided to give $100,000 away to charity. Well, in the past, they would have been able to get $37,000 off their federal taxes. And so that's great, but now they're going to get no more than $35,000 off their taxes minus another $5,000. So they're really getting $30,000 off their taxes for giving $100,000 instead of giving $37,000 off their taxes for getting $100,000. It feels like just kind of a little kick in the teeth to givers though.

Dr. Matt Moore:
Yes, it does.

Dr. Jim Dahle:
You think they did this just to try to raise a little bit of money they could use for other tax deductions in the bill elsewhere and still have it pencil out? You think that was the motivation behind it? Do you think someone was like, let's discourage giving? I mean, what was the thinking behind this in Congress?

Dr. Matt Moore:
I think that was possibly part of it. They did have to make things even out in the end. But I think also part of it was the way to try to write in for the people with the standard deduction so they could get an additional $1,000 or $2,000 off on their taxes when they're taking the standard deduction. But also the fact that the standard deduction was increased so much, it had to be counterbalanced with a little bit of more money coming in from other sources.

Dr. Jim Dahle:
Yeah, that's true. That change does encourage small giving. You can still take the standard deduction. You still get your $800 that you gave away to charity. You can deduct that as well. So I suppose it works on both sides. It just ends up being a little bit more complex than it was before. I think that's probably the main change. And I'm not a big fan of increasing complexity of the tax code or personal finance in general, unfortunately.

Okay, well, let's pivot a little bit. Let's talk about charitable trusts. And many wealthy people have a very hard time understanding charitable trusts. So let's start with the very basics. Let's go to people and their motivation. What are some of the reasons why someone might consider a charitable trust instead of some other solution? Like just donating to charity with some of your money and buying an annuity with some of it?

Dr. Matt Moore:
Absolutely. I say the main reasons. Obviously, you are setting up a charitable trust to be able to give something to charity that's right in the name. So if you're setting up a charitable trust, you have a charitable heart, and you want to try to do some good in this world beyond just what you're doing as a family.

The secondary benefits that you can get from it. So there are ways you can set up trust so that it is paying an income back to you or a beneficiary. There's a way to set up a charitable trust where you can basically defer taxes on a large event like selling a business. And there are ways to set up a charitable trust to pass assets to the next generation, estate and gift tax-free. Those are maybe the three major impetuses beyond the charitable giving to set up these types of trusts.

Dr. Jim Dahle:
And I alluded to this in that first question, but a charitable trust is what's known as a split interest gift. And I think it's really critical that you start out understanding what that is. So can you explain what the split interest gift is?

Dr. Matt Moore:
Yeah. As I mentioned when you're setting up the trust, charity is the heart of that. So you're going to be giving money to charity, but there's that secondary benefit to you, whether that be income or to you or a family member or it can be an inheritance. And so the trust basically has a split interest. It is helping out the charity and it's looking out for the person you put as the beneficiary of that trust.

Dr. Jim Dahle:
Which could be you.

Dr. Matt Moore:
It could be you. Yes. And any decisions made in that trust need to be done basically for the benefit of both. You can't just make willy-nilly, make any decisions in that trust. So it's very important that when it's set up, it's set up in a fashion that accounts for the needs that are going to be happening for you and or the charity going forward.

Dr. Jim Dahle:
All right. As I mentioned in the beginning, the last time I wrote anything about charitable trust was more than a decade ago. I think we published it in 2015. Back then, WCI was just me and one part-time employee. I titled that post CRATS, CRUTS, CLATS, and CLUTS, which are the acronyms for these trusts. They're charitable remainder annuity trust, charitable remainder uni trust, charitable lead annuity trust, and charitable lead uni trust. And I think we probably need to define these terms a little bit before we get too deep into this discussion. The first distinction is between an annuity trust and a uni trust. Can you explain the difference between those two?

Dr. Matt Moore:
Yeah. An annuity trust is basically exactly as it sounds. Just as if you purchased an annuity, the trust is going to pay you a certain amount, the same amount, every single year or quarter, however you set it up, until the end of that trust. So it's the exact same amount every single time.

If you were to set up a uni trust, a uni trust instead pays you a percentage of the assets within that trust. And so, that allows for more variability as the trust hopefully grows in assets, maybe along with the cost of living, then the amount that it would pay out would be matching the increase in the amount of assets. And that allows you to be withdrawing more, whether to you or to the charity, depending on how that's set up.

Dr. Jim Dahle:
Yeah. So, you're taking on a little more risk with the uni trust than an annuity trust typically.

Dr. Matt Moore:
Depends on where you're putting the risk. If it's an annuity trust and things go down, you're getting the money, but what's left over at the end, the risk is going to that party instead.

Dr. Jim Dahle:
Fair point. Okay. The other distinction is between a remainder trust and a lead trust. Can you explain the difference between those two?

Dr. Matt Moore:
Yeah. When you set up the trust, what's left at the end is the remainder. And so if it's a charitable remainder trust, what's left at the end of that trust, the remainder goes to the charity.

Well, we also talked about the income being thrown off by the trust during its life. That income that's being paid out is called the lead. And so, in a charitable remainder trust, the remainder goes to the charity, but that lead, the income that's produced or the set amount of the annuity or the unit trust portion goes to you or a beneficiary.

If you have a charitable lead trust set up, it's the exact opposite. You're basically paying the charity first with the income that's coming off of that lead. And the remainder ends up going to your heirs or beneficiaries.

Dr. Jim Dahle:
Now, one of the first things I often have to disabuse people of when they start learning about charity and the tax benefits with charity is the idea that you come out ahead by giving to charity. And for the most part, when you give to charity, you're not coming out ahead. It really is a gift. You're giving the money away. You give $100,000 to charity and you used to get $37,000 off your taxes. Now you get $30,000 off your taxes, but you're not coming out ahead. You're coming out $70,000 behind. Is that always the case when it comes to charitable trust or is it possible to actually come out ahead?

Dr. Matt Moore:
So if you're just looking at a fairly short timeline, I think that the best you can get out financially back to yourself out of a trust might be 50%. I'm including in that the lack of paying capital gains taxes, assuming you put in appreciated assets.

Over a long period of time, because the assets are growing, well, hopefully growing, depending on the growth of those assets, if you have it over a long enough period of time, it could pay out the amount that you put in there or more, but it depends on how the trust is set up. That being said you have to factor inflation in and there is that risk of the assets, the investments you choose would not be growing and it could actually be decreasing. So, it is technically possible, but very unlikely.

Dr. Jim Dahle:
Okay. And certainly, especially if you include the time value of money, you might actually get more back nominally, but you had your money not being used for something else for 20 years or some opportunity costs.

All right. Can you talk a little bit about how the tax deduction is calculated or how you determine how much that is when you do a charitable trust?

Dr. Matt Moore:
Sure. Depending on the trust you set up, let's start with a remainder trust. When you set up that trust, you basically are setting it up so that you choose the interest rate that the IRS determines at the time you set up that trust. And that is the assumed amount over the life of that trust that the assets are going to grow at.

And so, if you have a charitable remainder trust, if you have a high interest rate environment with that, then the IRS is going to assume that the assets you put in grew faster and that therefore there will be more left at the end to be given to charity.

And then let's say it was a 10-year remainder trust. The amount that's left over to charity at the end of 10 years is calculated using the IRS's rates. And then you get the present value of that amount in today's dollars that you get to write off on your taxes. And if that's a very large amount, you can actually carry that forward over several years to take the full benefit of that amount for a total of up to five years.

Charitable Remainder Trusts: Tax Deferral, Income Planning, and Legacy Goals

Dr. Jim Dahle:
All right. I think we've covered the basics. Now let's go from a 101 class on charitable trust. Let's go now to the 201 or 301 or 401. Let's talk about specific strategies somebody might use a charitable trust for. Maybe we start like you did in your presentation with charitable remainder trusts. And let's talk about them more specifically and when somebody might want to use one and what the considerations would be when doing so.

Dr. Matt Moore:
Sure. A charitable remainder trust. The goal of a charitable remainder trust obviously is to leave something to charity with that. But at the same time, that lead comes back to you or a loved one that you can set up to help look out for their income.

Usually what people will do is they'll take a highly appreciated asset and donate it into a trust. In doing so, you have made a significant charitable gift, which is wonderful. And because you made a significant charitable gift, you do get a significant tax deduction in the present value of that.

In addition to that, because that is throwing off money every single year, you can take what the asset you put in there, sell that asset. And when you sell it, the charitable remainder trust, anything that happens within that trust is tax deferred. So, if you sell something that's highly appreciated, the capital gains taxes are not owed until any money is distributed. So you basically protected any taxable events in that trust. And then you can redistribute that and purchase other things so that it is more diversified.

And then that's new things that you purchase, the new assets you purchase, can provide you an income through the life of the trust, which could be the rest of your natural life or a designated term. In addition to that, you avoided the capital gains tax that you would have had if you had to sell these assets. And you were able to reduce or completely eliminate your estate taxes by putting the assets into the charitable trust.

Dr. Jim Dahle:
Wow, that's a lot of benefits. Let's talk about a situation. You're going to sell a business you built, you're going to sell White Coat Investor. You're going to sell this medical practice that you built up. And then you look at, wow, if I sell this, and I say you live in California or something. And you're going to end up paying 23.8% plus California state tax, it might be 30% plus of the value if you just sell that business. So instead, you say, “Well, I'm a pretty charitable person. I certainly don't need all the value of this business. Why don't we put it in a charitable trust before the business gets sold?”

And so you put it into a charitable trust, you get a huge one-time charitable deduction. Because you're putting this business in there and whatever the remainder is going to be, whether that's a third or 50% of it, that's charitable deduction you get for that year. I mean, that's a huge charitable deduction.

And then you decide to sell the business once it's in the trust and you don't have to pay that capital gains tax that year. The trust doesn't pay that capital gains tax. And so you've accomplished your goal of getting the business sold. You're out of the business now, and you haven't had to pay any taxes, really. In fact, you got a huge tax break when you're going to sell your business. And it's not like you're not getting to get any benefit personally from selling the business because now you've basically locked in an income for 10 years or the rest of your life or however you wanted to set it up.

I can see why that would be very attractive to somebody with an appreciated business with a charitable bent in their body. What other uses might somebody find for a charitable remainder trust?

Dr. Matt Moore:
Just briefly, you did bring up a very good point is that you decided to sell the business, you put the business into the trust first and then sold it. That's incredibly important because if you were to sign the paperwork to sell the trust before you put it into the trust, the IRS will say that that's not a fair dealing and they will cancel the trust. So you need to make sure you put everything into the trust before ink hits paper of selling something or else it will not work.

Dr. Jim Dahle:
Obviously, you got to get it in there first before you can sell it. It's a fair point. Who else would want a charitable remainder trust besides somebody with this appreciated asset where there's a business or some other type of investment that they're just trying to delay or avoid taxation on? Who else would consider a remainder trust like that?

Dr. Matt Moore:
Another group that would benefit from that is if you have heirs that you would like to help support their income in some way. When money is paid out by the trust, you can set it up so that it doesn't necessarily come back to you, but it can come to your heirs. The more advanced way of thinking about that would be if you set up a testamentary charitable remainder trust. At the moment you die, a charitable remainder trust is created and then you can make that charitable remainder trust the beneficiary of your traditional IRA.

Now, as you've talked about before, the traditional IRA, when you inherit that, you have 10 years to take it out and everything that comes out of there is taxed at ordinary income tax rates.

But if you have this put into a charitable remainder trust, you can have that be paid out over the expected life of the beneficiary that you have set up. So it can go way beyond the 10-year timeline where you're helping support somebody's income. And so you get to sort of sidestep that limitation of a traditional IRA while still giving you on to charitable goals.

Dr. Jim Dahle:
So it could be a form of a spendthrift trust, essentially. You got a kid or maybe you're supporting a parent or a disabled child or whatever. You could lock in an income for them for a decade or for life and yet still basically control where the assets go once that need is taken care of.

I can see why that might be more attractive to somebody than putting some of their money into a spendthrift trust and then just giving the rest of charity at their death. This combination would allow you to be sure you could support them and yet still give to the charity at the end once that needs taken care of. I can see why that would be attractive to somebody.

Dr. Matt Moore:
Another person who may benefit from this would be somebody who wants to make a charitable contribution and they want to get that tax write-off now and set this whole thing up, but they don't really know where they want that charitable contribution to go yet because you can actually set the charitable contributions to be given to your own donor advised fund for which you can later decide what the grant that the money's out to.

Dr. Jim Dahle:
Yeah, you do have to decide who the charity is going to be when you set up the trust though. It's just that the charity could be the death.

Dr. Matt Moore:
Correct.

Dr. Jim Dahle:
That's a pretty slick trick actually. I like that. Okay, with this remainder trust, there's still income coming out to somebody. Whether that's you, whether that's your heir, your disabled child, whatever. That income's coming out. Can you talk a little bit about how that gets taxed?

Dr. Matt Moore:
When the trust is generating income, there is a tiered system as to which it has to distribute that income that comes in. To whomever beneficiary it is giving the money to, it first has to distribute any ordinary income that it creates. And the person who accepts, who is receiving that money, it gets taxed on that income at their tax rates. So if they have an ordinary income, a tax rate of 37%, they would get taxed at that. If it's 10%, they get taxed at that. So it basically folds into their ordinary income for tax purposes.

Once all of the ordinary income is spent, then it has to start paying out any capital gains that it produced, assuming there's still an obligation there to pay money out. And then the person would have to pay their capital gains rate, the beneficiary.

And then if there is still an obligation to pay out money, then it would pay out any tax-free money that may have come from tax-free bonds or the like. And finally, if there is still a requirement to pay out money, then it has to eat into the principal, that money you put in initially, in order to fulfill its obligations. And that would be tax-free as well.

Dr. Jim Dahle:
A pretty good chunk of it, though, is going to be taxed at ordinary income. And who pays that tax? The beneficiary?

Dr. Matt Moore:
Yes, the beneficiary has to pay the tax on that income. It's similar to coming out of a traditional IRA that you would have to pay the ordinary income on any income that comes from the trust.

Dr. Jim Dahle:
But that split is determined by the income generated by the assets in the trust.

Dr. Matt Moore:
Correct.

Dr. Jim Dahle:
So if you only invest the trust in very tax-efficient investments, let's say it's all in VTI, the yield on that is just over 1% right now, and it's basically all qualified dividends, then presumably, the beneficiary wouldn't be paying ordinary income tax rates on that income, correct?

Dr. Matt Moore:
Correct, yeah. It would pay very little ordinary income tax, if any, and then they would just be paying capital gains on what the VTI throws off, and then what needs to be sold in order to fulfill the obligation.

Dr. Jim Dahle:
Yeah, whereas, especially if they're in the 0% long-term capital gains bracket, it could be an awfully tax-efficient way to support them. So that's interesting. Okay, you've got to have a trustee managing these investments in some way. Can that be you? Can you be the trustee for this charitable remaining?

Dr. Matt Moore:
You can be the trustee. This does require some knowledge and efforts and definitely organizational skills to be able to do it. When I sort of explain a charitable remainder trust, I sort of think this as an undergrad-level type of thing. Now, it takes effort, it takes brains, it takes attention to detail, but it is technically possible to do it, or you can choose someone else to do that for you, like a financial institution. If you do that, of course, you do have to pay them for the work that they do.

Dr. Jim Dahle:
Yeah, and in general, it's actually pretty hard to find somebody that will do that for less than 1% AUM. I know of a trust management company that's doing it for more like 0.6%, but you're not going to get this for 20 basis points. I don't think any better.

Dr. Matt Moore:
And if you want that 0.6%, you're probably going to have to make a very significant contribution to the charitable remainder trust.

Dr. Jim Dahle:
Yeah, exactly. The bigger it is, obviously, the lower the AUM fee can be, and they still feel like they're being compensated fairly for managing it. Okay, well, I think we've covered a remainder trust and who might want to use that pretty well. We talked about how it can be a testamentary remainder trust. It can really help with an IRA, getting more than a 10-year stretch out of an IRA, essentially.

Maybe we ought to talk about the downsides. This all sounds like rainbows and unicorns and ice cream so far. Let's talk about the downsides. We talked about the fees. This is not reversible, either. People need to understand.

Dr. Matt Moore:
No, it's an irrevocable trust. When the money goes in, it's in. You don't get it back.

Dr. Jim Dahle:
Yeah, it's irrevocable. What are the other downsides you would think about?

Dr. Matt Moore:
Well, as we mentioned earlier, there's the investment risk. So if, for some reason, you invest in something or the U.S. economy tends to go down significantly, that's going to either decrease the income of the beneficiaries, the amount that eventually goes to charity, or both. So there is that risk associated with that.

This is not necessarily a risk, but obviously, a downside is that when the money is thrown off to beneficiaries, you get taxed on that. And so, it's not a free lunch from that standpoint.

The administrative cost and complexity, it's going to probably take you 20 hours in a year to manage this thing on your own if you're going to be trying to do it yourself. And that's assuming that you've found your groove and you know exactly what you're doing. So there is some benefit to paying someone else to potentially do that.

And then you do have a fiduciary responsibility. We talked about being a split interest. You can't just be making decisions on your own. It has to be for the benefit of the beneficiaries and the charity. And so, making changes to this trust is pretty hard.

Dr. Jim Dahle:
You're going to have to file a trust tax return. Most of us haven't done that. A lot of us have done our own taxes. You don't fire up TurboTax and crank out a trust tax return. People should be aware of that.

Okay, you're going to have to hire somebody to set this thing up too. Generally, you're hiring an attorney and paying them thousands to set this up.

Dr. Matt Moore:
And probably getting a CPA to make sure you're making a good decision in terms of how it's set up. And there's the K-1s, and I think there's a Form 5227 that's there along with that. You mentioned the attorney, and then the investment costs don't go away because you have this. There's still the financial fees along with this as well.

Dr. Jim Dahle:
Yeah. Okay. So, it doesn't make sense to do this with $20,000. The cost, the hassle, the fees are going to eat up any benefit. How much money do you think somebody ought to be putting into a charitable remainder trust before this is “worth it?”

Dr. Matt Moore:
Probably a half a million dollars. If you're going to be doing less than a half a million dollars, you could consider just doing a charitable annuity where the charity just pays you directly and they get to keep the money at the end. It is a lot simpler, but it's less flexible in terms of what you can do with it.

Charitable Lead Trusts and Advanced Estate Planning Strategies

Dr. Jim Dahle:
Half a million. Okay, let's turn the page and let's talk about lead trusts. Charitable lead trust, the classic charity now, family later trust. And let's get into the details of when you might want to use this, what some of the strategies are for using a lead trust.

Dr. Matt Moore:
Yeah, the two main strategies people would use this for is using it as an immediate tax deduction for a large taxable event like selling a business or decide to sell a bunch of Bitcoin that if assuming they had gone up like it had several months ago, but basically a large taxable event.

Dr. Jim Dahle:
Bitcoin you bought in 2011.

Dr. Matt Moore:
Yeah.

Dr. Jim Dahle:
Bitcoin you bought in 2011.

Dr. Matt Moore:
But you're basically trying to take that tax hit and get a deduction and spread the taxable event out over several years to limit it in that one year and maybe absorb it and lower it in tax years.

The other main benefit of certain types of the lead trusts are estate planning. So trying to pass assets on to the next generation and trying to avoid estate taxes.

Dr. Jim Dahle:
Explain how you set that up to avoid estate taxes.

Dr. Matt Moore:
Yeah. In terms of trying to set up to avoid estate taxes, when you set the charitable lead trust up, what happens is you set up a certain amount of money and then you decide you're going to be giving a certain amount to charity every single year. The amount that's left at the end that is calculated right when you set up the trust, the amount that's left at the end, that's a taxable estate tax gift to your beneficiaries.

But if you set up whatever you spin off as income throughout the life of the lead trust, that part goes to charity and you get to discount that amount by the amount you give off to charity based on the present value of how much you give to charity each year. And so you can add that up.

Just as an example, if you have an assumed 2 or 3 percent interest rate by the IRS, if your portfolio overcomes that 2 or 3 percent interest rate, then anything that's made above and beyond that 2 or 3 percent, the IRS basically turns a blind eye to it because it only cares what it looks like when it's set up. And so, if there's money left over at the end of the trust, then all of that money gets distributed to your heirs tax free. This is called the zeroed out charitable lead trust.

Dr. Jim Dahle:
Yeah, that's just the state tax free. That's not income tax free, though, is it?

Dr. Matt Moore:
Yeah, it goes entirely free is my understanding to your heirs.

Dr. Jim Dahle:
Wow, that's pretty awesome. And particularly beneficial if you fund it at a time of low interest rates.

Dr. Matt Moore:
Yes, yeah. The higher the interest, this type of trust really benefits from low interest rates, whereas the charitable remainder trust benefits from high interest rates for that present value deduction you're going to get for what the remainder that goes to charity.

Dr. Jim Dahle:
Yeah, very cool. This would be a great way especially if you're willing to invest it relatively aggressively and for a relatively long period of time. You did it for 20 years. 20 years, if you're arbitrage and essentially the 8% or whatever you made out in this trust versus the 2% that the IRS thinks is going to the charity. 6% on that money amount of money is a good chunk of money you can leave to heirs tax free, which is pretty awesome.

Dr. Matt Moore:
Yeah, I think I did a calculation at one point where I looked if you did a 10 year trust where you put $50 million in there, assuming today's rates, which I think is 4.6%. And assuming that it made 10%. And it was a zeroed out trust.

Over the life of the trust, the charities would have gotten roughly $60 million. And the amount that would have gone a state tax free to your heirs would be around $30 million at the end of that 10 years.

Dr. Jim Dahle:
Yeah, not insignificant. And that's a zeroed out one, you use all kinds of flexibility and how you set these up, you don't have to go for the maximum deduction up front. You could have a smaller amount going to the charity as well. Correct?

Dr. Matt Moore:
Absolutely.

Dr. Jim Dahle:
And then that would pass that, would pass more to your heirs. And you could change it so that $30 million ends up going to the charity and $60 million ends up going to your heirs or whatever it might end up being, you just wouldn't get as big of a charity deduction up front.

Dr. Matt Moore:
Yeah, you wouldn't get a much bigger charity deduction out front. And as long as the amount that goes to your heirs is less than the estate tax limit. So that may also go to your heirs are relatively tax free.

Dr. Jim Dahle:
Yeah. Yeah. So, you're really balancing a lot of things there. You're balancing interest rates, you're balancing how much of an exemption you're going to have left. You're balancing your desire to be charitable versus leave money to your heirs. Um, and then and then you let it cook for a while 10 years, 20 years, the rest of your life, whatever the term you pick.

And then see what comes out the other end, but it could be very advantageous. And you can see why, especially if you kind of ignored the time value of money and opportunity costs you could end up leaving more to your heirs than you actually gave away initially, given all the growth over the years.

Dr. Matt Moore:
Absolutely. This complexity you're talking about I mentioned the charitable remainder trust it's being more like an undergraduate level type of calculation. This tends to be much more like a PhD level, and you're probably going to need some significant help to make sure that you pull this off properly. Yeah. Plus you've got to decide whether it's going to be an annuity trust or a unit trust as well.

Absolutely. Yes.

Dr. Jim Dahle:
Okay. Now inside these trusts, the tax treatment is different as far as buying and selling, isn't it? In a lead trust, you can't perform tax exempt sales in the trust.

Dr. Matt Moore:
Correct. Everything that happens in a charitable remainder trust is tax free, but everything that happens within a charitable lead trust is a taxable event.

Dr. Jim Dahle:
So this doesn't necessarily work to put your business in there and, and try to sell it tax-free. That wouldn't work for a lead trust. That would be something you'd want to use a remainder trust for.

Dr. Matt Moore:
That would work better as a remainder trust. The benefit within a lead trust is if you do have a taxable event within a lead trust… Well, I guess taking a step back there are a couple of different types of charitable lead trust we can create. And by defining on which type you choose, this is beyond a charitable annuity trust, sorry, an annuity or a unit trust. If you choose a grantor or non-grantor trust, those are two further designations that can affect how taxes are treated within those trusts and outside of those trusts.

Dr. Jim Dahle:
Yeah, that is an additional complexity. We're now up to the 601 level, I think, for this discussion of charitable trusts. All right. When would one want to use a grantor charitable lead trust versus a non-grantor charitable lead trust?

Dr. Matt Moore:
A grantor charitable lead trust generally benefits somebody who has a large taxable event in a certain year, as you mentioned, like selling a business. This is a way to try to get a large tax write-off in that year that you sell the business to help soften that impact and maybe even carry that forward a few more years.

So for a grantor, a charitable lead trust, the grantor or the donor is considered to be the owner of that trust. It gets all the taxable deductions from the present value of what you're leaving to charity, but you also have to pay all the future taxes that the trust creates at your taxable rates.

If you're in the 37% tax bracket, then you're going to be paying 37% on every ordinary income dollar that's created by that trust. And in addition to that, that money that's created every single year, remember, is not going to be back to you during that. That's the lead, that's a charitable lead trust. So you're giving that lead to the charity.

Dr. Jim Dahle:
The charity is getting the money, but you're paying the taxes on it. So it's a little bit of the classic phantom income tax there.

Dr. Matt Moore:
Yeah. You got that huge income tax break at the very first year, which you can carry forward for up to five years. But yes, it hurts a little bit to pay to taxes on income that you don't realize that goes towards the charity.

Dr. Jim Dahle:
Especially if you put a huge chunk of your net worth in there. Okay. How about the non-grantor trust? When would you want to do that?

Dr. Matt Moore:
With a non-grantor trust the donor is not considered the owner of that trust. The trust is considered the owner of itself. And so, it actually pays all future taxes that are created when anything taxable happens within that trust. But it gets an unlimited number of tax deductions. So if you have something that you put a million dollars in and it created $500,000 worth of income for some ridiculous reason, which would be wonderful. If it donates to charity, it can write off all $500,000 in that income where you and I could not.

If it does not write off the income though, it has incredibly tight tax brackets much, much tighter than the individual or married types tax brackets. Just an example, I think it's around $15,500 of income. At that point, you're already taxed at 37%.

Dr. Jim Dahle:
Yeah. You got to be careful with the trust tax brackets for sure. They accelerate very quickly. Okay. But this distinction doesn't exist for remainder trust. There's no grant or remainder trust. There's no non-grant or remainder trust. This is just a lead trust thing.

Dr. Matt Moore:
Everything goes to the rain or goes to charity. So you don't have to worry about it.

Dr. Jim Dahle:
Okay. Downsides of a lead trust.

Dr. Matt Moore:
The downsides of lead trust would be obviously it's irrevocable just as the other trust is. There's the investment risks that you have put into it. The complexity, the cost is significantly more. It's not tax exempt as we've mentioned previously.

Specifically with the grantor lead trust. Remember you put that money in and you took that tax deduction based upon the amount that was going to be given to charity over 5, 10, 20 years. Well, if you happen to die before the end of that trust, the trust ends and the last several years of lead don't exist for the charity either. And that means the IRS is going to come back to your estate and say, “Hey, we need that money back from the present value that you took at the very beginning because the later payments are not being made.”

Dr. Jim Dahle:
Yeah. But for the most part, especially on the grantor side, it's really focused on reducing the taxes for the grantor. You're offsetting some sort of major taxable event typically when you do this.

Dr. Matt Moore:
Yeah. And once that trust is over and done with, actually the remainder that comes back to the trustee comes back tax free. It's considered that you've paid taxes on it through what you've done with the charity and the taxes you had to pay on the income. That's one of the other benefits is that when the money comes back, it does come back to you, you're no tax owned on the remainder that comes back to the grantor.

Dr. Jim Dahle:
Okay. Let's talk briefly about a couple of different types of cruts, charitable remainder, uni trusts. There are net income cruts and there are flip cruts, neither of which I think I'd heard about before we got together to record this podcast. So tell us a little bit about those and how they might be useful.

Dr. Matt Moore:
Yeah. Moving back to our charitable remainder trusts, there is something called a net income charitable remainder trust. Basically if you set that up, the trust only pays out income that it creates. So whereas if you have a regular charitable remainder trust and it has obligations to pay to the beneficiaries, it can even start to eat into the corpus, the principle that you put in there originally.

For an income remainder trust, it can only use the income that comes in.

Dr. Jim Dahle:
Because that's how you wrote the trust document.

Dr. Matt Moore:
Correct. Because that's how you specifically set up the trust. You had to set it up as a net income charitable remainder unit trust. And so the benefit there is if you don't want to be taking money out for a little while it can stay in there and grow as long as you invested in something that does not throw off much income like VTI or something like that.

And then later, if you're the trustee, you can say, “Okay, well, we need a little bit more money now. So I'm going to sell some of my VTI.” And that creates an income event. And then more of that can get thrown off for you. You can throttle the income coming off the trust with a net income charitable remainder unit trust.

You can also have it set up that it can be a sort of a makeup trust as well, where if for the first several years, it doesn't pay something off, then you can have it pay extra the first few years to try to make up the, what it never actually paid out to you as an additional option.

Dr. Jim Dahle:
Yeah. Which could be beneficial to somebody that's still working now and in a high tax bracket and won't be in five years. So I can see why that would be beneficial to plan for somebody.

This sort of stuff becomes much easier when you have a clear crystal ball, as far as what's going to happen with you and your family and your economic situation a few years from now, and you can tailor this as best you can. But you could set it up. So it's fairly flexible and changing the investments in there as you go along.

Dr. Matt Moore:
You could also set it up. Let's say that you have a terrible diagnosis, have stage four pancreatic cancer, and you have a child that's 10 years old. You could set up one of these, you could be a flip trust, which basically starts as a net income charitable remainder trust. But then when a specific event happens, you can turn it into a regular crut.

And so when the child is 10 years old, you can have the money just staying in there as a net income charitable remainder trust. And then when they turn 18, you can have it flipped into a regular charitable remainder trust where it starts throwing off income. So it helped pay for their college.

Dr. Jim Dahle:
Very, very cool.

Dr. Matt Moore:
Or you can have that be for the birth of a child or a variety of events can happen where you can flip the net income crut into a charitable remainder unit trust.

Dr. Jim Dahle:
Yeah, that's a good example. Stage four pancreatic cancer, where you typically have months, but not years to live. And it gives you time to do some planning like this. And you're not dying immediately, but you're not going to live a long time. You're pretty sure. That's kind of an ideal example for setting something like that up for the people you're leaving behind.

Dr. Matt Moore:
You can also put in some other contingencies there. There are some qualified contingencies for early termination of the trust. When your child is 10 years old, you don't know exactly what type of person they're going to grow up to be. There's still the peer pressure of high school and concerns of drug use and things like that.

So you could set it up that the crut could be have an early termination if they were say addicted to drugs or gambling. Or when they even have a positive event, like they finished college, you turn off the faucet. So they have to go out and get their own job.

Dr. Jim Dahle:
Now can the designated charity for these trusts, you mentioned earlier, it can be your own donor advised fund. Can it also be your own private foundation?

Dr. Matt Moore:
Private foundations can get a little bit tricky with doing that in terms of self-dealing. So you have to be careful in terms of whether it's a lead trust or a remainder trust about setting that up. It is possible, but there are some, a little bit of a minefield there and I'd recommend getting a professional help.

Dr. Jim Dahle:
Yeah. I think you probably need professional help with about any of these. I don't know that I would view a charitable trust as a DIY project for anybody. You're probably going to need to be talking to an attorney for sure. And probably an accountant, maybe some sort of an investment advisor as well when discussing that.

Dr. Matt Moore:
In addition, if you're going to leave to a private foundation, as opposed to a public charity, it also does limit the amount of write-off you can have on any single year. For a public charity donation, you can write off up to 30% of your adjusted gross income every year on your taxes. But if you're donating to a private foundation that is limited to 20% a year, so that's another factor to take into account.

Dr. Jim Dahle:
Yeah. And does it vary as well by whether you're donating cash or some appreciated asset?

Dr. Matt Moore:
Yes. So if it's cash for a public charity, you can write up to 60% off. The 30 and 20% I was just assuming you're using donating an appreciated asset.

Dr. Jim Dahle:
That's not 60% of what you're donating. It's 60% of your adjusted gross income.

Dr. Matt Moore:
Of your adjusted gross income. Yeah. So if you make $200,000, you can write off up to $120,000 of that income. I just say, if your adjusted gross income was $200,000, then you can write off up to an additional $128,000 if you give cash that 60% of the $200,000. If you're giving an appreciated asset, it's 30% for those are both for public charities. If it's for a private foundation, you can only write off 30% of a cash gift of your adjusted gross income and 20% of any appreciated assets.

Dr. Jim Dahle:
Yeah. And that matters, especially since a lot of times at the time you get rid of the appreciated asset, your practice or business or whatever, your income goes down a lot. And so if you can't use that whole deduction in the year of sale, even though you can carry it out for a few more years, you may not have much income to use it against going forward, depending on what your financial situation is. So you have to be a little bit careful on sizing that and understanding exactly how you're going to use that deduction that you're getting.

Well, our time is now short. What have we not talked about with charitable remainder trust that you think we should mention? With charitable trust in general, not just remainder trust.

Dr. Matt Moore:
The one last thing that I would mention is that if you are putting a business, as you mentioned, if it's an active business that's happening, there can be unrelated business taxable income, and that gets taxed terribly within that trust. So really what goes into the trust needs to be mostly a passive investment in order to be in there and not be taxed at a significant amount.

Just as an example, if you had a piece of real estate that was completely paid off in the mortgage, and you were basically just collecting rent, that's considered passive income. However, if you have a mortgage, that is more considered an active business now. So you'd have to make sure any mortgage is paid off.

If there's work that has to be done to make sure something happens, if you had a business doing vending machines, well, there's work to be done, go to the vending machine and fill them and take the money and manage the inventory. So that's considered unrelated business. And that would be something that's taxable. And that's taxed at a very high rate with for the trust.

Dr. Jim Dahle:
Same issue people run into with leveraged equity real estate inside of IRAs. Same issue there.

Okay. Well, here's your chance. You've got the year of 20,000, 25,000, 30,000, 35,000. I don't know how many people are going to listen to this episode, White Coat Investors out there. What would you like to tell them?

Dr. Matt Moore:
I would encourage everybody to try to make charitable giving a part of their written financial plan and to sit down as a family and decide what's important to you and what causes you want to give to and how much and how often you want to be giving. And then from there, you can work out a plan that benefits the charity, but you can also make sure benefits you.

Dr. Jim Dahle:
All right, Matt, thank you so much for being willing to come on to the White Coat Investor podcast and educate us about charitable trusts and share the knowledge you've accumulated over the years as you've really dove into this subject in detail.

Dr. Matt Moore:
My pleasure.

Dr. Jim Dahle:
All right, I hope you enjoyed that as much as I did. This is something that I have a different mindset on than I had a decade ago. And part of that is just I'm a wealthier person now and you start thinking, “What's the end game for White Coat Investor, for me personally?” Obviously we want White Coat Investor to live forever, but am I ever going to sell this? How am I going to sell it? Would it be beneficial to put it in a trust first? Would it be beneficial to put it in a charitable trust first? All those kinds of questions come up all the time as they should if you have appreciated assets or you face a big tax bill one year, or you just have a good reason to have a split interest gift.

And we went over some of those reasons today. And I know most White Coat Investors are never going to use a charitable trust. But there's a significant number of you out there for whom this would be really beneficial. So I hope that episode was helpful to you to introduce the concept and get you thinking about how you might use a charitable trust.

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All right, that's it for today. Keep your head up, your shoulders back. You've got this. We're here to help you. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER
The White Coat Investor podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

Dr. Jim Dahle:
All right, welcome back to the Milestones Podcast, where we celebrate what you're doing and what you've accomplished and use it to inspire other people to do the same or to reach their goals.
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This podcast is going to drop on June 29, and today and tomorrow, if you book a consult with StudentLoanAdvice.com, we're going to throw in our Continuing Financial Education 25 course that comes with CME. I don't know, it's like 15 or 16 credits, something like that, of CME, and it comes with over 30 hours of awesome content, both about busting burnout as well as maximizing your finances. All you have to do is schedule the meeting. You don't have to accomplish the meeting today and tomorrow. All you have to do is schedule the meeting during June, and you will get that thrown in as well.

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All right, we've got a great interview today. It's a new topic we've never covered before on the podcast. I think you're really going to enjoy it. Some of you may say, “Oh, I wish I had that milestone,” and many of us do wish we had that milestone. But if you do, it also comes with a downside. Let's get our guest on the line.

INTERVIEW

Our guest today on the Milestones Podcast is Christine. Christine, welcome to the podcast.

Christine:
Thanks for having me. It's a real honor. Thank you for what you do.

Dr. Jim Dahle:
Before we get into your milestone, let's introduce you a little bit to the audience. Tell us what you do for a living, how far you are out of training, and what part of the country you're in.

Christine:
Sure. I'm currently in hematology oncology. I'm on the East Coast, and I finished training in 2022, so about four years ago.

Dr. Jim Dahle:
I think we're doing a milestone here that we've never done on the podcast. This is episode 280-something, and we've never done this milestone, so this is always exciting to us, to do something new.
Basically, the milestone you wanted to celebrate is that you got a windfall and didn't blow it, which is pretty awesome. Let's get into the details. Let's talk about this windfall, as well as the downside. The windfall came from an inheritance and what you've done with it to kind of set yourself up financially.

Christine:
Yeah, sure. In 2021, my mother died of breast cancer, and it was unexpected. Before she died, my sister and I—she was not married—had access to her accounts and had no idea how much she had. But she had saved quite a bit throughout the years. It was like the Millionaire Next Door situation. Including her house, she had about $3.2 million, so my sister and I split that.

Dr. Jim Dahle:
Wow. So you're in training, and while you weren't quite made an instantaneous multimillionaire, you came pretty close.
First of all, obviously, I'm sorry for your terrible loss. To lose your mother at such a young age is a terrible tragedy, as you know from your work when you're dealing with this all the time.

But wow, what a gift. Let's step back for a minute. You said you were totally surprised by her level of wealth. Tell us a little bit about how she managed money during her life and how she ended up being able to be a multimillionaire at a relatively young age. If she's your mother and you're still in training, presumably she was, what, in her 50s when she died? Something like that?

Christine:
She was in her low 60s.

Dr. Jim Dahle:
Low 60s. Okay. Tell us a little bit about how she managed money.

Christine:
Yeah, she's a good example of someone that I learned a lot about money from. She was very frugal throughout her life. She had also saved money and kept money for a long time. She had inherited some assets from her grandparents a long time ago and never touched them throughout her life.

She was working most of the time. She was active duty military until she wasn't, but she got her 20 years through the reserves and whatnot to qualify for retirement benefits, and she just socked money away. She also did side gigs. At one point, after she and my dad split up, she worked on the side so she could do things like go on vacations.
But I don't feel like she scrimped on herself either. She was happy to splurge when it came to the things she loved. She loved being outdoors, she loved to exercise, and she loved good food.

Dr. Jim Dahle:
Yeah. Hard worker, a good saver, and despite a divorce, became a multimillionaire herself.
Okay, so what was your net worth prior to this inheritance? In fellowship, I assume like most people it was negative to zero-ish.

Christine:
So I went back and looked, and before she died I actually had a net worth of over $100,000.

Dr. Jim Dahle:
Okay. How did you pay for medical school?

Christine:
I had a couple of things. I've been a frugal person, and that helped. My dad was active duty in the military. He used part of his GI Bill, not for his education but for me, and that helped with college and also helped with medical school.
My parents had also set aside a UGMA for my sister and me, so I used that for college and medical school. My dad and my sister also gave me some money, so I owed them. Anything I owed after I graduated from medical school was to them. It wasn't to a loan company.

Dr. Jim Dahle:
Interesting. But they chose to loan you the money rather than simply give it to you.

Christine:
Yeah. They loaned me the money at 0% interest.

Dr. Jim Dahle:
How much did you end up owing your family for medical school?

Christine:
Ninety-four thousand dollars.

Dr. Jim Dahle:
Ninety-four thousand. And when you say you were at a net worth of $100,000 at that point in fellowship, that includes the $94,000 you owed?

Christine:
Yes.

Dr. Jim Dahle:
Okay, very well. So you were building some wealth yourself during training. That's not an insignificant amount of wealth for a trainee to already have. You were frugal, interested in this stuff, and saving and investing, it sounds like.

Christine:
Yes, I was. I had spreadsheets from when I was in medical school. I don't have those anymore, but from residency and fellowship I was looking back at the goals I had at the time, savings-wise as well as how much I'd spent on myself. I was pretty pleased with myself back then.

Dr. Jim Dahle:
So this money you inherited landed in prepared hands. You were ready to do something good with this money when it came.

Christine:
Yes, it did. I had also made a written financial plan, I think in 2018 or 2019, thanks to the stuff I had read on The White Coat Investor as well as Dr. Leif Dahleen's old blog site, Physician on FIRE.
It was helpful because, like you said, the money landed in prepared hands. I was just like, “Okay, that's great. I know what to do with it.”

Dr. Jim Dahle:
Very cool. So tell us what you did with it. You get, whatever, $1.6 million dumped on you as a fellow. Presumably some of that had to go to taxes. I suspect some of it was in tax-deferred accounts. But tell us what you did with it.

Christine:
Well, my sister and I got some of that from selling the house, and with the house we got a step-up in basis, so there wasn't a whole lot of taxes, really.
I beefed up my emergency fund. I did buy, in early 2022, a used car with cash, and that was one of the sweetest things I've ever done.

Dr. Jim Dahle:
You inherit $1.6 million as a fellow, and you still bought a used car.

Christine:
Yes, I still bought a used car.

Dr. Jim Dahle:
What was the car?

Christine:
It was a Toyota Prius. I had wanted it for years.

Dr. Jim Dahle:
Awesome. All right, keep going. Tell us what you did with the rest of it.

Christine:
So I got that. I did loosen the purse strings a bit. Mostly it was because my sister, at one point, when I told her how little I would spend, she just looked at me and said, “What do you do on the weekends?”
And I was like, “Oh, okay. I guess I should be doing a little more, like enjoying myself.”

Dr. Jim Dahle:
Tell her, “I go to the hospital and see patients.”

Christine:
I would just study. I didn't really do too much. So that was a time where I thought, “Yeah, I now have some money. I can live a little.”

Dr. Jim Dahle:
It did increase your spending a little bit.

Christine:
A little bit, yeah. The used car made up for a lot of that increased spending that year, but yeah, I increased it. What I felt like was, “Ooh, I'm living large.”

My sister and I gave money to a woman who had been my mom's healthcare power of attorney, and she really did some good work because we weren't living in the state, so we wanted to be kind to her. I paid off my sister for her loans. I put a big chunk toward my dad's loans. Then I invested the rest. Some of it was cash that I put in my emergency fund. Some of it went to a taxable brokerage account. The other funds are now in an inherited Roth IRA and an inherited traditional IRA that I've just let grow.

Dr. Jim Dahle:
You're stretching it out as long as you can.

Christine:
I have 10 years because of the rules, and I won't touch the Roth IRA. But the traditional IRA, I debate whether I want to pull it out at the end or do half in year nine and half in year 10 because there's…

Dr. Jim Dahle:
It's complicated, isn't it?

Christine:
It is, and there's a decent amount, and I'm going to owe some taxes. But that's a good thing. That's a good problem to have.

Dr. Jim Dahle:
Yeah. Clearly you're financially literate. You're a saver, and I suspect you're probably saving some of your earnings now as well.
Give us a sense. You're four years out of training now. You inherited a bunch of money, and now you're working and earning and saving. Of course, your money is growing. Markets have been pretty nice to us. Maybe not in 2022, but since then they've been pretty nice. Give us a sense of what your net worth is now.

Christine:
$3.9 million.

Dr. Jim Dahle:
Three-point-nine million dollars, four years out of training. I mean, you can do whatever you want with your life, right? You can practice full time. You can practice part time. You can practice not at all. You can change careers. You can do whatever you want. Welcome to my existential crisis. Fortunately, I didn't become financially independent until, I don't know, 12 or 13 years out of training, not one year or four years out of training. So that existential crisis didn't start so early for me as it has for you. How has this changed how you live your life?

Christine:
Yeah, that's a great question. I reached that financial independence number, which was, I think, $3 million back in 2025. Around then I was feeling some burnout from what I was doing. I was working full time, but I just felt like there were some things I wanted to do differently.
I didn't really want to do call anymore because that was wearing on my sleep. So I made the effort to change things to become what I am now, which is per diem.

My last full day was at the end of May of this year, and I decided to take a couple of weeks off just because that was an option. I'll go back to working two days a week, but I won't do call, starting at the end of June.

Dr. Jim Dahle:
So you're going to work part time, essentially. You worked full time for four years.

Christine:
Yes, four years. I know that was a year under what you said for trying to be experienced, but…

Dr. Jim Dahle:
You read the blog carefully. I do worry about people going part time right out of training. I think solidifying your clinical skills is important. You got four years of doing that, and now you're going to part-time work.
It's interesting. When I survey doctors, I ask them, “If I wrote you a check for more money than you're ever going to spend, $10 million, $20 million, whatever, what do you do tomorrow?” About a third of them tell me they're not going to work tomorrow. They're done. But most of them, about 55%, say, “I would work part time in some way.”

You and I fall into that category. When we have enough money to do whatever we want, we still practice medicine part time I like part-time work so much that I have two part-time jobs. I think part time is great. But tell us why you decided you wanted to be part time at this point in your career.

Christine:
Another good question. I still like medicine, especially what I do. Toward the end, I felt like I had really honed my craft, or I was still in that phase where I feel like I'm becoming an expert, as much as you can be. There's so much in medicine, and you'll never know everything.
But I found myself thinking, “I'd like to do this, but I'd also like to do it on the terms that I want to.”
That meant practicing less. Instead of four days a week, maybe two or three days a week. And not doing call, because that was something that didn't appeal to me. Even if it was infrequent, I didn't like having that hanging over my head or getting woken up.

Dr. Jim Dahle:
Yeah, I agree. I especially chose never to be on call. Emergency medicine has some late hours, as it is, and it's not always fun to wake other people up in the middle of the night, but it beats being woken up. Okay, tell us a little bit about investing. You're still young. You're four years out of training. You've got a long time to make this money last. Give us a sense of how you've chosen to invest it.

Christine:
Yeah. In my written investment plan, I included things like my asset allocation, and that's changed throughout the years.
I had a higher allocation to stocks than bonds in the past, but I've changed that. Right now I have about 65% in stocks, with various allocations between U.S. and international.

I have 10% in real estate through Vanguard REITs because I've thought about crowdfunding, but I don't know. I feel like I'm kind of low maintenance when it comes to real estate, so I like that approach. Then I have 25% in bonds, and I also have a cash reserve just for sequence of returns risk. I felt like that would be a nice thing to have.

Dr. Jim Dahle:
Do you feel like you'd be taking more risk if you hadn't gotten this inheritance?

Christine:
Yeah, probably. That's probably true.

Dr. Jim Dahle:
What advice do you have, having been through this experience of receiving an inheritance? What advice do you have for people leaving inheritances? What did your mom do right? What do you wish she'd done differently?

Christine:
Well, I'll give her kudos for all the things she did to make it easy. I was the executor, so number one, she had a will. Right at the end, she was able to get a transfer-on-death deed for the house, which was amazing in terms of bypassing probate. That was great.
She just did all the things, and as a result, she inspired some people who knew her to try to get their affairs in order. That's important for someone who's going to leave an inheritance.

There were some minor things. She had, I feel like, a 403(b) that she hadn't rolled over, and it took some digging on my part to track that down. Growing up in a military family, you move around. She'd be a teacher here, then three years later a teacher somewhere else. She had this retirement plan from over a decade ago. She hadn't worked there in over 10 years, but I had to find it. We eventually did.
I guess that's something to keep in mind for people. Where is all of your money located? If you can consolidate those accounts, that's great.
I guess the advice I'd give for someone who's in my position is that there's a lot that can go on when you receive an inheritance like that, not only from the emotional side but also from the financial side. Having your financial ducks in a row can really help so that you're not feeling like you're going to blow the money because you don't have a plan for it.

I remember Josh Katzowitz's article from April 19 of this year where he referenced a BuzzFeed article about people who received an inheritance and, within a couple of years, it was gone. That just made me feel sad because that thought never crossed my mind when I got this money. I already had a plan in place.

Dr. Jim Dahle:
I've often said you really only have to get rich once. You only have to get lucky once. You only have to have one business idea take off. You only have to get one inheritance. If you know what to do with it, if it hits prepared hands, that's enough. A lot of us will have some fortunate thing happen to us during our lives. That fortunate thing might simply be that we were able to become a doctor and have a good income. Whatever it might be, as long as you know how to manage money, you don't have to have multiple experiences like this. I think you've demonstrated that very well. Any last advice you have for someone who might inherit money and is trying to decide how much to save for the future versus how much to spend now?

Christine:
I guess I'd say one thing is don't count your chickens before they hatch. I think it's a good idea to almost pretend as if you don't have this money because you never know what can happen. Certainly, in my experience, my sister and I had no idea this was going to be the case.
I also feel like if you know something is going to happen, maybe you're not going to prepare as well ahead of time. Lots of things can happen, so keep going on that good savings pathway and the financial path you're already on. If something like this happens, it's a bonus. You can roll it into whatever you want, and maybe you can do something different or cut back on your work, like I did.

Dr. Jim Dahle:
Awesome. Well, Christine, I'm sorry for the reason behind your inheritance, but I want to congratulate you on what you've done with it. You should be very proud of what you've accomplished.

You basically have financial freedom from nearly the beginning of your career, which is a pretty awesome gift. I wish you a wonderful life taking advantage of it.

Christine:
Thank you very much. I appreciate it.
I feel like my mom would be proud, too, but she'd also want me to spend a little bit.

Dr. Jim Dahle:
Okay, that was a fun interview. I've been spending a lot of time thinking about, reading about, and talking about this topic lately because we expect our kids to inherit a significant amount of money, and we want them to be prepared for it.
It was really good to see somebody who was prepared to inherit money. This windfall hit prepared hands, and she did an awesome job with it. Now she's got the financial freedom we're all seeking. Money has ceased to be a factor in how she lives her life. While that usually provokes some sort of existential crisis in most of us, it's a pretty awesome gift to give somebody, and something we should be grateful for. We should also feel a little responsibility not only to enjoy a life well lived, but maybe to pay a little of it forward to other people.
This was a great opportunity to hear from somebody who inherited a significant amount of money on top of her already considerable financial success, given where she was in life. It's a good example of what we should do when we receive our own windfalls.

FINANCIAL BOOT CAMP: ANNUITIES

Let's talk for a minute about annuities.
An annuity is probably most easily thought of as some sort of insurance or pension product available from an insurance company. That's the best way to think about an annuity.

A lot of times they get confused with retirement accounts. A lot of times they get confused with investments. But in reality, they're a separate kind of product that has some similar characteristics to both retirement accounts and investments.
The simplest type of annuity to think of as an example is what's called a single premium immediate annuity, or SPIA.
What this is, is someone taking a lump sum of money, giving it to an insurance company in exchange for a promise, a contract, that the insurance company will pay them a certain amount every month for the rest of their life, whether that's two years or 50 years.
That is classically what an annuity is.

Its legal structure, however, can be used to create all kinds of other products. The problem is that because it can be changed into all kinds of other things, it gets changed into all kinds of other things. They're made complex, expensive, difficult to analyze, and easy to sell.
There's a whole industry of annuity agents who want to sell you annuities with all kinds of bells and whistles. They want to swap you into new annuities where they'll earn another commission over and over again.

You've got to be a little careful about the annuity industry. If you're thinking about buying an annuity, you should probably get advice from somebody who is not being paid to sell you one. Annuities can make a lot of sense in certain situations and certainly have some useful features, but they're oversold, just like many insurance products. Whole life insurance is oversold, and annuities can be the same way.
Okay, so annuities are taxable, but they're taxed in a different way. Lots of financial products are taxed differently from one another. Life insurance is taxed differently from retirement accounts, and retirement accounts are taxed differently from taxable investments. Annuities have their own unique tax treatment as well.

Basically, if you put money into an annuity outside of a retirement account, you don't get an upfront tax break like you would with a 401(k) or a traditional IRA. However, as the money grows inside the annuity, it grows in a tax-protected way, similar to how money grows inside a Roth IRA or a 401(k).

When you eventually take money out of the annuity, the earnings are taxable. It's interesting how they're taxed, though, because it depends on whether you've annuitized the annuity. What I mean by annuitized is that you've turned the lump sum into an income stream. You've essentially said, “I don't want my $100,000 back. I want $600 a month instead.”

If you've annuitized the annuity, each payment is only partially taxable. Part of each payment is considered your basis, or principal, and part is considered earnings. That's called the exclusion ratio. A portion of every payment is excluded from taxes because it's simply returning your original investment.

If you have not annuitized the annuity, however, it receives LIFO treatment, or last in, first out. The earnings come out first.
So if you simply withdraw money from your annuity, the first dollars you receive are considered earnings. Those earnings are taxed at ordinary income tax rates, not long-term capital gains rates, not qualified dividend rates, and certainly not tax free like money coming out of a Roth IRA.

If you buy an annuity inside a retirement account, it's taxed just like the retirement account itself. If it's inside a traditional tax-deferred retirement account, every dollar that comes out is taxable at ordinary income tax rates. If it's inside a Roth IRA, every dollar comes out tax free. A lot of people ask, “Are annuities a good investment?” Well, they're not really an investment at all.

They're a wrapper with some insurance features, so it's probably best not to think of them as an investment. Instead, ask yourself what you need and whether an annuity accomplishes that goal better than anything else. I can think of four situations where an annuity may actually be the best solution. The first is the single premium immediate annuity, or SPIA, which I mentioned earlier. This is for someone who wants to buy a pension from an insurance company. Maybe they have Social Security and maybe they have a small pension from an employer, but they want additional guaranteed income to put a floor under their retirement spending. They're willing to give the insurance company a lump sum of money in exchange for guaranteed monthly payments for the rest of their life.

Unfortunately, you generally can't buy inflation-indexed SPIAs anymore. Sometimes they'll have an inflation adjustment, but it's not truly indexed to inflation the way Social Security is. If you're interested in purchasing this type of annuity, the best annuity you can buy is often simply delaying Social Security until age 70 because it's generally priced better than commercially available annuities and is indexed to inflation. It doesn't make much sense to buy a SPIA if you haven't already delayed Social Security until age 70, but some people choose to add a SPIA on top of that, and that's a perfectly reasonable use. Another reasonable use for an annuity is a deferred income annuity, or DIA.
Think of this as longevity insurance. You give the insurance company a lump sum today in exchange for very large payments beginning 10, 20, or even 30 years from now, assuming you're still alive.

Because the insurance company doesn't have to start paying you immediately, those future payments can be much larger than those from an immediate annuity. Instead of receiving perhaps 5% or 6% annually, you might receive 30% or even 35% of the original investment each year once payments begin, simply because the money had decades to grow and the insurance company didn't have to make payments during that time. Buying longevity insurance is another reasonable use for an annuity. The third reasonable use is what's called a MYGA, or Multi-Year Guaranteed Annuity.

Think of this as the insurance industry's version of a certificate of deposit. You lock your money up for a certain period of time and receive a guaranteed interest rate. The interest is ultimately taxable at ordinary income tax rates, but you don't pay taxes on it until you withdraw the money. Even after the initial term expires, if you exchange it into another annuity, you can continue deferring those taxes. Some people find MYGAs attractive, especially during periods when their interest rates are higher than those available on CDs or Treasury securities. Finally, there are situations where a low-cost variable annuity can make sense. A variable annuity simply places an investment, often something resembling a stock mutual fund, inside the annuity wrapper. This can be beneficial for highly tax-inefficient investments, such as REIT mutual funds. The tax-deferred growth over many years may outweigh the disadvantage of eventually paying ordinary income taxes on the gains.

Sometimes people also exchange the cash value of a whole life or other permanent life insurance policy into a variable annuity after surrendering the policy. If they're underwater on the life insurance policy, this strategy may allow the investment to grow back to their basis before they eventually surrender the annuity, helping reduce the tax consequences of an otherwise poor financial decision.
There are also many unreasonable uses for annuities. Most variable annuities should be avoided like the plague. I'm also not a big fan of fixed indexed annuities, especially because they're often marketed as though they're similar to index funds. They're not. In reality, their returns tend to resemble those of fixed annuities far more than those of stock index funds. The more complicated the annuity, the less I like it. I want a straightforward annuity that you can understand and easily compare across multiple insurance companies.

If only one company offers a particular product with unique features, it's difficult to know whether it's fairly priced because you lose the benefit of meaningful competition. The bottom line is that there are reasonable uses for annuities, primarily as a way to provide guaranteed retirement income and protect against longevity risk. But just like whole life insurance, annuities are products that are frequently sold inappropriately to unsuspecting investors.

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All right, we've come to the end of our podcast. We'd love to have you on it. We want not only to have the audience listening, but also participating.

You can sign up at WhiteCoatInvestor.com/Milestones. Until the next episode, keep your head up and your shoulders back. We'll see you next time.

DISCLAIMER
The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

Let's talk about how to choose a financial advisor.

The truth is, the vast majority of doctors, I estimate something like 80%, but Bill Bernstein would tell you 99% of doctors need a good financial advisor. When I say good financial advisor, I'm talking about somebody who gives good advice at a fair price. That's what you're looking for: good advice at a fair price.

The vast majority of people who call themselves financial advisors really aren't what I consider true financial advisors. They are product salespeople, and they might be selling insurance products, they might be selling mutual funds, or they might be selling some other type of investment. That's not a financial advisor. That is a salesperson masquerading as a financial advisor. The reason they're able to do that is because there is no legal meaning of the term financial advisor.

In general, when you're looking for a financial advisor, you're looking for two services. One is financial planning. The other is investment management. They're often bundled together, but they do not have to be. Either way, if that's what you're looking for, you don't want to be paying somebody to sell you products because you're not looking to buy products. You're looking for a plan. You're looking for somebody to manage your assets. You're not just looking for someone to sell you something.

The first thing to look into is how they get paid. You can just ask them that, or you can look it up on their required disclosure documents. The best financial advisors tend to put their fees right on their website, and you can look it up very easily, know exactly what you're going to pay, and how you're going to pay them. You're looking for fee-only advice. Fee-only means you pay them like you pay your attorney, like you pay your doctor, like you pay your accountant. They do a service, and you pay them a fee.

Now imagine you're going to see your doctor, and they didn't actually get paid for giving you advice. They only got paid a commission, a percentage of whatever medication they prescribed for you. So they prescribed you Zoloft, and that costs, you know, 30 bucks a month. Well, then they get paid $5 a month, indefinitely while you're on the Zoloft. The problem with that sort of model, as you can imagine, is the conflicts of interest. Maybe if they put you on Celexa, they'd get a $10 a month commission instead of a $5 a month commission on Zoloft. Now you can see the problem with getting that biased advice that comes from not being fee-only.

They might be completely commission-based. That's how a lot of insurance agents work. They just get paid a commission when they sell you a policy. Or they might be what's called fee-based, which means they get paid fees and commissions. Just recognize that fee-only is not the same thing as fee-based.

You also want an advisor that is a fiduciary. Fiduciary is a word that basically means Hippocratic. It's somebody who is going to do the right thing for you, even if it's not necessarily the right thing for their pocketbook. Basically, they're putting your needs first.

You want an advisor that intends to act as a fiduciary, is legally required to act as a fiduciary, and actually does act as a fiduciary because the vast majority of advisors are going to tell you they're going to be your fiduciary. You want somebody where you see ongoing evidence that they are actually doing so.

You also want them to believe in a reasonable investing philosophy. There are all kinds of people out there that invest in all kinds of different ways. The academic literature is pretty clear about the best way to invest, at least as far as investing in publicly traded stocks and bonds. The way to do that is to keep your costs low, be broadly diversified, and don't be jumping in and out of the market all the time.

What does that mean? That usually means investing in low-cost, broadly diversified index funds. If that is not a huge chunk of the portfolio that this advisor is going to put your money into, you probably need to move on to a different advisor.

People who are picking stocks, chasing performance, or trying to time the market are probably best avoided when you're looking for someone to help you with your investment management.

You can also ask for help figuring out what services you actually need, and then ask if they provide those services. That can be very helpful. You don't necessarily just want somebody to manage investments for you. You might want advice on planning your taxes, making projections for retirement, analyzing your insurance, doing estate planning, or helping you with your cash flow, which might be the most important aspect of what a good financial planner can help you with.

Understand what services an advisor offers, and see if that actually aligns with the services you need. If you have no idea what services you need, that makes it very difficult. But if you can at least write down a handful of what you really need done, that will help you find the person who can offer those services.

Ask them what their typical client relationship looks like, how often they're going to be meeting with you, what happens between the meetings, and find out who exactly you're going to be working with. If it's not the owner of the firm, maybe you ought to talk to the planner you'll be working with before committing to hiring them.

Some advisory companies tend to specialize, whether it's in business owners, tech workers, or physicians, in the case of a lot of the financial advisory companies we work with. The truth is, 95% of it is the same for everybody, but it's nice to have someone who has a few clients like you so they understand the issues that are unique to you.

You wouldn't believe how many accountants out there don't seem to know anything about the Backdoor Roth IRA process, which seems so common among the White Coat Investor community, but actually isn't very common once you get away from physicians and other high-income earners. So you want someone who has clients that are somewhat like you.

You may also want to ask them how they approach taxes. Do they coordinate with a CPA or other type of accountant or enrolled agent? If you're going to have a taxable account that they'll be managing, ask about things like tax-loss harvesting, Roth conversion strategies, and how they plan to withdraw from the portfolio. Make sure they're doing that in a way that is tax savvy.

It can help to ask them to walk you through a sample financial plan. If they're a financial planner and they make financial plans for other people all the time, they should be able to bring up an anonymized plan and help you see what you would be getting. You want to actually see the deliverable. What does this written financial plan they're helping you create actually look like when they're done with it?

Talk to them about how they measure success for their clients. If they start talking about beating the market and things like that, that's kind of a turnoff. You want somebody who's actually talking about your goals and is focused on helping you achieve those goals while taking the least amount of risk possible.

Ask them what they do in a bad market. Will they be contacting you more often? How are they going to communicate with you when stocks are dropping like crazy? This is going to happen. There's a bear market, on average, every three years. What should you expect as far as support from them when the next bear market hits?

Ask them about what changes, if anything, they will make during the bear market so you understand their approach and so you can see what their temperament and discipline are like.

Ask them about their conflicts of interest. Ask if there's any revenue-sharing agreements, proprietary products, or insurance commissions. If they say they have no conflicts whatsoever, they either don't understand the question or aren't being honest. Even a fee-only, hourly financial planner has some financial conflicts of interest. They're incentivized to take longer to do your work than it might otherwise take because they get paid by the hour. Everybody who's getting paid has some sort of conflict of interest and ought to be comfortable discussing it with you very openly.

You can ask about their credentials. The most common credential for a financial planner is Certified Financial Planner, or CFP. There are a few other high-level designations, like CFA, ChFC, or CPA, but the vast majority of letters after the name of a financial advisor represent the equivalent of weekend courses.

Just because they have 20 letters after their name doesn't mean all that much unless some of those letters represent a significant commitment to the profession. While credentials matter, their behavior actually matters more. It's entirely possible for somebody with fewer credentials to actually be a better financial advisor. But I'd like to see some of the basics done, showing that they're going to be committed to the profession long enough to be providing you advice and service for many years.

You can ask questions like, “What would make this a bad fit for me?” Not every client is right for every advisor, and there ought to be some clients that your advisor is just not the right fit for. They should be able to talk to you about that.

You should also talk about the end. Any financial advisory relationship does not last forever, and you should know how it's going to break up from the beginning. Are there any contracts, lockups, or exit fees? Who holds custody of the assets?

You want flexibility, control, and the ability to move on to another advisor if this isn't working out very well. You don't want somebody who makes it hard to leave. You want somebody who feels complimented when you go to them and say, “I think I know enough now to do this myself.” They should feel like that's a compliment and help you take over on your own rather than fighting you every step of the way to keep you as a client so you keep paying them fees.

Choosing a financial advisor can be tricky. Getting referrals from people you trust, such as going to the White Coat Investor's Financial Advisor Recommended List, is a great place to start your due diligence process.

The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.