Estate Attorney David DelFiandra: Having Tough Conversations Now Will Save Millions in The Future

June 1, 2023

Wealth Advisor

Episode Transcript

Welcome to EWA’s Finlyt podcast. EWA is a fee -only RIA based at Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you.

And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time. And this week’s episode of the Finlyt podcast, I’m joined by Dave Delfiandra.

Dave is an estate planning attorney at Leesh Tishman, which is a firm based out of Pittsburgh. And Dave works with a lot of our clients to help get their estate planning needs implemented. He’s really the expert in all facets of estate planning.

So we’re going to talk about a couple of things. The first is some tax -efficient wealth transfer strategies on how to make sure that your wealth transfers as tax -efficient as possible. And the second is why having hard conversations while you’re alive can help instill the values that you use to create your wealth into whoever is getting the money passed on to.

We are about to see the biggest wealth transfer in the history of the United States. $68 trillion is going to go to the next generation as baby boomers are beginning to get older, retire, and eventually pass away.

So stay tuned to hear about all kinds of estate planning strategies and conversations that can be had to make sure that that transfer is efficient as possible. Dave, thanks for joining us today on the podcast.

For those of you that don’t know, Dave is an expert in estate planning. We send a lot of clients to him to get their estate planning complete. So thanks for joining us, Dave. Thanks for having me. I appreciate the opportunity.

Absolutely. Let’s just first start. Very simple question, Dave. What do you do? Why does it matter? So I am a lawyer. And I focus 100% on estate planning and estate administration. So estate planning from a basic sense, you think of a will.

I do those and powers of attorney. and I draft trusts and help my clients with trust administration and those issues. Cool. Do you think that should everybody have an estate plan done? Yes. Every single person?

Yes. And sometimes people think well estate planning it’s for the ultra wealthy and it is but it’s for everyone. We as individuals you know we’re always out trying to you know get a better job, make more money, acquire more wealth.

You know I think most most of us will periodically check online and look and see how our 401k is doing. If we’re so concerned about that during our life then why not be as concerned about where that wealth goes at your death and how it passes to the people that you wanted to pass to or charities that you wanted to pass to.

You know, usually at that stage when you die, you have acquired the most wealth you’ve had in your lifetime. So it’s very important that you focus on that area that most people don’t want to focus on, whether it’s, you know, they feel like they’re thinking about their demise, but it’s truly a way to leave your legacy on to the people that you want it to go to and in a way that you want it to be acquired and accessed in the future.

I could not agree more. We talk a lot with our clients about the importance of having estate planning done. Let’s just fundamentally break down in like basic terms for the listeners. Like when we say estate planning, we mentioned briefly like drafting some documents, trust will, the power of attorney, making sure you know where the wealth goes when you die.

I give like the, like if you were speaking to like a kindergarten class, how would you describe estate planning? So basically if I have, you know, new clients that come in know nothing about estate planning, heard of a will but have no idea what that means.

What I generally will talk to the clients about is try to understand their assets and their net worth. So assets and liabilities and it’s very important on how those assets are owned because it affects how assets transfer at death.

And we’ll talk a little bit later about probate and non -probate. But once I get in, you know, get an understanding of the client’s net worth, then I start talking to them about, you know, the basic estate planning documents.

And those documents, I would say, are three documents that every person should have. One is a will and the will says who you want your assets to pass to at your death. The will is more than that. than that though.

It allows the person to appoint an executor or a personal representative sometimes. And that person that they appoint is in charge of their estate after they are deceased. And when I say in charge, their responsibility is to gather all the assets of the decedent, pay any outstanding debts that the decedent had, and, you know, follow the law as far as certain advertising requirements and ultimately distribute out that inheritance to the beneficiaries.

It also allows the will to create a trust for minor children or, you know, don’t even have to be minors. And you get to choose your own trustee, the person who’s going to handle those assets and manage those assets.

And lastly, but probably Most importantly is it allows the person to name a guardian for minor children. So if both parents were to die and they had minor children, that minor child needs to have a guardian until they reach the age of 18.

You would name that guardian in your will. If you did not have a will, that child still needs a guardian and the court would be involved and ultimately have the authority to name the guardian for the child.

So basically a will, just to make sure I’m hearing that correctly and to reiterate, a will basically dictates what happens to all your stuff when you die. That’s correct. And so we were even talking about this yesterday for your client actually.

If you die without a will and those rules are not set in place, then basically the court’s determine who gets the money, who’s the guardian, all that stuff, which can be a huge messy process. That’s correct.

So if you die without a will, it’s what’s called intestacy. And you’re correct in that the state laws in which you were domiciled determine where your assets go. There’s a common misconception that people think if they die without a will, all their assets go to the state.

That’s not true. The statute in every state will provide that your assets go to your closest living relatives. But that sometimes is not what the decedent may have wanted. For example, here we’re sitting in Pennsylvania and in Pennsylvania, if a client dies survived by a spouse and minor children, the Intestacy Statute provides that the spouse does not get 100% of the assets.

The spouse gets the first 30 ,000 of assets plus 100% of assets. half of the remainder. And the minor children inherit the other half of the estate, which brings more problems because if you’re minors you cannot own property.

So what the court would do is require a sequestered account to be created for the minor children. Their inheritance would go into those accounts and at the age of 18 those children have full access to those assets.

There’s no trust involved because there was not a will that created a trust. So think back to when you were 18 and you know if you had that type of wealth it probably would not have been a good scenario.

Yeah okay so that’s helpful so will and then let’s just piggyback on that a trust. Separate document from a will. We can get really granular in different types of trust which we’ll talk about a few but just high level what is a trust?

Why does it matter? Why is it important? So a trust Sometimes, you know, people get confused and well, it’s very complicated. There’s many different types of trust, but from a basic standpoint, all a trust is, is, it is a document that is drafted by a lawyer.

And there are certain parties to a trust. The set law or the grantor, sometimes called, is the person who creates the trust. They have to also have a trustee. Sometimes that trustee is the same person as the grantor and set law.

Sometimes it is not usually for tax reasons as to why you can or cannot be your own trustee. But the trustee is the person or institution, because a trust company can also be appointed, that manages the assets inside the trust or provides for their management and distributes assets in accordance with the trust terms.

So the set law or the creator who created this trust may be deceased now. But those terms inside the trust are going to dictate how those assets are distributed. And the last party to the trust is the beneficiaries.

So the trustee holds legal title to the assets, but equitable title always remains in the beneficiaries. So basically, we just talked about three minutes ago. If you don’t have any of that set up, it can be messy.

There’s no rules, courts to set everything. So a trust, let’s just use me, for example, let’s say I have a million dollars, I die. I don’t have any kids, but say I have three kids. And money then, that million dollars, goes into the trust.

The trust is owned is the owner of those assets. Three kids, let’s say they’re all under 18. So they’re the beneficiaries. That’s divided. However you have the trust or it not a third, a third, a third.

Talk a little bit about, so at this point what you mentioned, so we have the trustee could be a person or corporate trustee or both. They’re ultimately making the decisions based on the trust documents to when and how the kids can access the money.

That’s correct. So a standard provision in a trust document for children would be that the trustee is to distribute out income and principal for the child’s health, education, maintenance, and support.

So those are what are known as ascertainable standards and you’ll find them in a lot of trust documents. They are somewhat broad standards. So if one of the children wanted to go and get an MBA at the University of Pittsburgh, that would fall under the education standard and the trustee would be obligated to pay for that education.

But what the trustee would not be obligated to do is if the beneficiary came to the trustee and said, you know, I want to take 30 of my closest friends out to Las Vegas and I want to use the trust money to pay for everything.

Well, that does not fall under that health, education, maintenance, and support standard. So it’s not, you know, going to be distributed for that. But if the trustee… would just say hypothetically the trustee said, okay, that’s fine, then they could do it.

The trustee could do it. Now, the trustee in that example is not following the trust document. So the trustee could have some potential liability, maybe to a remainder beneficiary after the child and the remainder beneficiary could say, hey, I would have had more money in this trust had you not expended this out for non -trust terms.

So then could you write a provision in the HEMS and then plus you said $30 ,000 a year for a Vegas trip with your friends? Yep, you can do anything you want with the trust. So basically a trust avoids probate.

It sounds like it makes us just a lot cleaner and less messy than not having a trust. That’s correct. You have beneficiaries, especially if they’re children or younger children that haven’t reached adulthood yet and you really haven’t seen what type of person they’ve become.

So many people today get caught up in substance abuse and things of that nature and giving that type of beneficiary a large sum of money is not a good idea and could potentially harm or kill them with that type of money.

I may misquote this, but your brain’s not fully developed until you’re like 27 maybe. So it’s like, yeah, you mean you’re, people change a lot from 18 to 27 for sure. You’re beyond that. So totally agree.

Okay, so setting rules, making sure that kids don’t get money when they’re under a, when they’re not at an age to make rational decisions with it. And then let’s talk about other benefits would be asset protection, credit or protection.

So what does that mean? And then also along the lines of like divorce protected. So it stays in the family bloodline. Right, sure. Trusts to do offer creditor protection for the beneficiaries. So in most every state, when someone creates a trust for the benefit of a beneficiary, while those assets are in the trust, those assets are protected from the beneficiaries’ creditors.

So, example, I put, you know, $5 million into a trust for my son. My son has had some bad business dealings and he has a personal judgment against him. That creditor could say to the trustee, hey, I have a judgment against the beneficiary for $300 ,000.

Pay me out of his $5 million trust. Trustee cannot pay that. And the law does not require the trustee to pay that because of the creditor protection. Now, more importantly and probably more likely to happen is a beneficiary who inherits money in a trust gets married, does not have a prenuptial agreement and later gets divorced.

The assets that are inside that trust are not subject to the divorce proceedings. So they are protected against these assets going to someone else outside the bloodline. So that’s pretty generally a conversation we’re having with clients.

That’s pretty important, especially in the high net worth space of parents that have accumulated a lot of assets. They don’t want half of the assets to be split by their children getting divorced. So then let’s think about, so if we have, let’s just say money goes into a trust and the terms are the hems that we talked about.

It stays in the trust then, generally speaking, unless distributed for those terms. So you keep the asset protection, credit protection. But we have seen some stipulations. Actually, I’ve talked to you about this a little bit and why we, I agree, generally going towards the hems.

But if you break the trust up, we’re like, OK, a third of it comes out when the kids 20, they can access a third at 25, a third at age 30, a third at age 35. The first thing like we just talked about is their brains aren’t even fully developed.

So like you could make some pretty bad decisions when you’re 25. Right. Second thing is in that scenario, a third of the assets come out of the trust at 25. Correct. So you lose all of the benefits of the trust.

So if they don’t need it for anything, then. Yeah. So the third of those assets that anything that actually comes out of the trust would then be subject to these credit or claims. Typically, a trust works in a way where the beneficiary is distributed assets that they immediately need and immediately earmarked and dispensed so that the creditor doesn’t have time to reach those assets.

With regard to, you know, if you’re entitled to a third of assets at a certain age. even if that beneficiary keeps those assets in the trust and does not take them, that creditor would still have rights to those one -third of the assets because the beneficiary has the unfettered right to access those assets.

Okay, that’s pretty important in my opinion, yeah. And then while we’re talking about trust, let’s just high -level over you so revocable, irrevocable, revocable means, and Dave cracked me if I misspeak on any of this because you’re the expert, but revocable means while you’re living, money goes in the trust, it can be taken back out.

If it’s irrevocable, there’s some estate tax benefits, but once it’s in there, it is essentially out of your estate and you no longer in the assets. Correct? That’s correct. So with a revocable trust, which is a common document used in estate planning, the revocable trust allows a client to take assets and to their revocable trust name.

That client is both the settler grantor, the trustee, and the beneficiary. And because they retain access to those trust funds, there is no creditor protection for the client. And those assets are going to be subject to federal estate tax if the client has the net worth to which they are subject to federal estate tax.

And they will also be subject to any state debt tax if one exists in the state in which they are domiciled. Okay. And then irrevocable avoids all of that. We’ll get into that in a second when we talk about the gifting.

But I think that’s a pretty good high level of trust. We’ll get into specifics with a slat as well. But as the third document, are you going to mention the powers of attorney? Yeah. So the second and the third document are the financial power of attorney.

And then the other document is the healthcare power of attorney and living will. And unlike a will, where the will comes into effect at your death, the financial power of attorney and the healthcare power of attorney are only in effect while you are alive.

And those go away at your death. What those documents do is allow you to appoint an agent to act on your behalf if you’re unable to make those decisions on your own. So one deals with financial matters and the other deals with making healthcare decisions for the client.

Part of the healthcare power of attorney often is a living will. And that is where you today, while you have capacity, you determine what you would want to have happen to you if you were ever on a life support system and couldn’t make decisions.

Most people say that they would want to be removed from those machines and die a natural death at that point. So the back to the original question 20 minutes ago at Herverlog was should every Everybody having a state plan and your answer would be, I’m just speculating here, everybody should have a will in powers of attorneys.

Correct, correct. And then trust is depending on the complication of the situation. That’s right. Different factors. Okay, that’s helpful. Now let’s talk about, so I think we generally as an advisory firm, first off, our value proposition is to handle as much of their financial planning as possible.

A lot of that includes the state planning, especially in the high net worth space. This is a very important conversation because I think the statistic is 70% of wealth disappears in the second generation and by the third generation, 90% of wealth is gone.

Something along those lines, I could have misspoke on that. But a lot of times you have very, people that are very successful in their careers, they spend their whole life accumulating this wealth and then having these tough of state planning conversations can ensure that those statistics, hopefully if proper state planning is done, do not pan out.

So. We think that we’ve I’ve found I guess is that it’s a hard It’s a tough conversation to have these because it’s very more a bigger thing But what happens when I die and it’s hard for people to To actually take action on it and you may have an initial conversation But then to implement it so our are as an advisory firm Being that this falls under their holistic financial plan We want to do make this as streamlined and as easy as possible for the clients to actually get This implemented like one of our big value props is being a catalyst making sure that we get once the plans in motion We see it through to make sure it’s done.

So all of that being said We have found a super valuable to have a lot of these conversations up front with the clients We know a lot of their personal information and then getting it as close to the finish line to then hand it over to you to draft the document so what has been your experience working with Financial advisor financial advisory firm.

Maybe it’s even a CPA having somebody that can also be very involved in Their planning to help get this stuff to the finish line execute, right? And it’s it’s kind of all over the board I mean EWA does a great great job at it Because they are really involved with their clients and Understand the importance of the estate planning component of everything And they push their client to get that get it done You know clients often don’t you know want to talk to Don’t they don’t want to talk to me, but they know they’re being charged an hourly rate when they’re with me And they procrastinate it’s something you know no one thinks they’re gonna die tomorrow, right?

So And then they’re also busy, you know, they’re busy earning their wealth that they have right they may own a business or You know, this is kind of things that are put off to the back burner There are you know some advisory firms that you know all they want to do is just manage the money and That’s fine, but it’s it’s hard to get those their clients to the table to get this aspect of a state planning done.

You mentioned the statistic that a lot of the wealth that the older generation earns and passes on is dissipated by the younger generations and that is totally true. I think there’s several reasons for that.

Number one, the older generation sometimes does not wanna discuss their wealth with their younger generation. And so, upon their death, the younger generation is just surprised with a boatload of money.

And when you have a boatload of money, maybe you don’t have a boatload of… If you haven’t earned it. Yeah, you don’t have a boatload of desire to go out there and do the same thing that your parent did in earning it.

So it leads to problems of blowing the money on things that maybe they think are good investments, but they’re not. They may have friends or acquaintances around them that think they’re going to hang on and be part of this wealth, and sometimes they are.

So going back to trust, if you have a client that’s uncomfortable talking about their wealth with their kids and how it’s going to affect them in the future, then what they could do is create a trust, and that speaks for them once they’re deceased and determines how those assets are to be distributed out to the beneficiaries.

Yeah, I couldn’t agree more. We are advice on everything you just said is, number one, half the conversations with your kids, because a lot of people don’t. Number two, we do an exercise called the values exercise.

Remake clients, narrow down their five most important values and make sure that they’re living up all of their financial decisions that are aligned with that. So communicating that to the beneficiaries.

Here are my values, how I accumulated this wealth and teaching them those same principles helps as well. And then the other thing is, this is just fascinating to me, as baby boomers now are getting to retirement, $68 trillion.

So if you were to add up the wealth of the United States of all individuals, it’s like $120 trillion or something like that, somewhere around there. Over half of that, $68 trillion is going to transfer over the next 20 years to the next generation as baby boomers retire and then eventually pass away.

So all of that being said, all of these conversations, in my opinion, have never been more important and timely to make sure that the wealth doesn’t get lost. And there’s another quote I love, probably going to misquote this again, but it’s like, hard times create hard people, hard people create good things, good things create easy times, easy times create soft people, soft people create hard times.

Basically, it’s like a never ending cycle. And I think that has to do with a lot of this because if you have somebody that’s Let’s just think somebody that has self -made and accumulated $50 million, like they’ve created these character traits to like they’ve gone through a lot of adversity, they’ve gone through a lot of stress to like build from zero to 50 million.

And a lot of times it’s a fine line that we have these conversations with clients between helping and enabling. It’s like, okay, well I went through a lot of hard stuff to accumulate and I wanna give my kids everything.

So that can hurt them because you’re enabling and you’re not helping. So what have you seen, has if you had any, in my opinion, a lot of it’s just having conversations. Was there anything that you’ve seen that’s helped that trust, obviously, or one thing, but anything else that you’ve seen successful navigating that?

I think when you have a client that’s involved in a business that maybe they created and they have one of the younger, or all of the younger generation involved in that business, I think they’re work ethic and values.

easily transfer over to those other beneficiaries that are involved in the business because they see how hard it, how hard the work is. They see the benefits of doing things the right way. And I think that, you know, definitely transfers over to the beneficiaries.

Other than that, I mean, I think it’s just parenting values. And you know, even though you may not want to share, you know, your wealth with your, your children as far as, you know, disclosing that wealth to your children, if you teach them the values that, you know, this stuff is all hard work, you know, and, and, you know, sometimes I have clients that tell their kids they’re not going to inherit anything.

And they do inherit things, but, you know, to keep them on their toes that, you know, don’t sit back and relax and wait for, wait for this money to come to you because it may not be coming to you. So they’ll just tell them you’re not getting anything and then that creates some pressure and work ethic.

That’s right. Yeah, that’s fascinating. No, I never thought that’s a good idea. Anything else? I really think it’s, it’s kind of the, the, the parenting values, you know, it’s, you know, obviously, you know, the, the, the core parents that are, you know, in the same household, you know, even beyond a, you know, a wealth inherent and standpoint, you know, those values transcend to the kids when, when their parents are involved in their lives.

And, you know, whether that’s, you know, going to sporting events or, you know, hey, would you do today? Who’d you go with? Just so that, you know, those kids know that, you know, they’ve got someone watching over them.

Yeah. Now that’s interesting. I think that too, like human nature is especially kids because like, why don’t I have any kids but you know, you know, I’m sure you want to like do everything you can to help them and give them a great life.

So human nature is that when somebody is like struggling, you want to like help them and save them, but the actual like, I don’t want to be, I don’t want to be a kid. I don’t want to say moral thing, that’s probably the wrong word, but like what would benefit them the most is letting them like fall flat on their face and figure it out and go through something hard which then instills you know those character traits.

Yeah, I think that you know just looking back in life, you know the things that you remember and the things that you learn most from were usually tough love situations. Whether it be from your parent, whether it be from a teacher, a coach, you know it gives you some adversity and you learn how to get through that adversity and remember not to do that again in the future.

Yeah, yeah, no I’m going to take I think the actually telling saying that you’re not going to inherit anything creates a lot of, solves a lot of that, so that’s interesting. But let’s get into, we’ll get into in a second one way to help that is through some lifetime gifting that we found, but before we dive into that, let’s just high level review of a eight taxes.

So a common question I get all the time is like, okay, if this gets inherited, if this goes to my kids, we’re just gonna get crushed in estate taxes. Like, well, that’s like not really true because right now the exemption is like super high.

So let’s talk about who pays estate taxes, what is the exemption now? How has that, what has it been historically and then what’s it gonna be in the future? Okay, so the estate tax is a federal tax that applies to all U .S.

citizens on all of their property that they own worldwide. It is a tax that is assessed at death. So when you pass assets on at death, the federal estate tax would be applicable. And then there is also a federal gift tax, which is the same tax, but is only applicable during life.

So if you transfer wealth to someone else during your lifetime, the federal gift tax would apply. And we worry about that tax because that tax is a big tax. It’s 40%. It’s a 40% flat rate on the value of the assets that you transfer.

But there is also a big credit that every one of us has. So each of us has a credit under current law of $12 .92 million per person. So a married couple would be able to have $26 million and still not be subject to the federal estate tax under current law.

So if you have a 50 million, so basically if you’re if your net worth if you’re married is under $26 million, you’re not going to pay any federal estate taxes, state estate taxes we’ll talk about. So then anything above that, so let’s say hypothetical $50 million net worth first $26 is going to go tax free.

And then the difference there of $14 .24 would be hit with 40% taxes. Correct. And that doesn’t matter what the asset is. Correct. All assets. Okay. So you could have you may have $20 million. 26 million of investments, investment account, IRA, 401K, whatever, and then you may have 24 million of real estate, life insurance proceeds, whatever it is, it doesn’t matter, and that’s still going to get clipped at 40%.

That’s correct. Okay. So then let’s talk historically, you probably know this way better than I do. Historically this is high, right? Oh yeah. Yes. Highest it’s ever been. And that’s going to go in 2026.

It’s going to be reduced in 2026. So under the current law, that $12 .92 million credit is going to drop down to $5 million index for inflation. So with inflation where it is today, that credit would be about $6 million per person.

Okay. And then what has it been? It’s been as long as like one, right? One million? What’s the… that $12 .92 million credit was $675 ,000 per person. And the tax rate went up to 55%. OK, that’s incredible.

So a couple of things. I think in the high net worth space, and we talk about like there’s a big tax overhaul, I guess, was end of 2021 that was proposed in Congress. And in my opinion, my professional opinion, the two things that really matter that they could attack and would like get a lot of the wealth, we’ll get a lot of tax on the wealth is that number of the estate tax, or I guess maybe not the number of the tax but what the exemption is, because whatever is above that, that’s a lot of people, billionaires, multi -billionaires, like those are huge numbers.

And then so what that 40% number is then the capital gains rate as well, which not the point of this conversation, but most people in that net worth space, a lot of their incomes taxed at long -term capital gains rates.

So those two numbers in my opinion are what could change drastically as, I mean, there’s a number of reasons with taxes, social security, Medicare, money that was printed during COVID, million reasons.

But do you agree that those were kind of the numbers that, I don’t know if I wanna say low hanging fruit, but those could realistically change that would have a huge impact on tax. Oh yeah, oh yeah, yeah.

I mean, where the numbers are today with a $12 .92 million credit, there’s very little people in the country that actually pay the federal state tax. It’s less than one half of 1%, which tells you that there are very few people that have this type of wealth.

Less than, what was that, less than one half? Of 1%. Okay, wow. So what are ways, how can we avoid some of that? Lifetime gifting, trust? Yeah, so couple things. The people, the clients that we have right now that are already in that net worth where they would be.

be subject to the federal state tax. One of the things we try to do is leverage their credit. And we can do that through things like gifting. So a client is allowed to make a gift each year of $17 ,000 to any other person, if it’s what we call a gift of a present interest, then they are able to remove that $17 ,000 out of their estate.

And they don’t have to use any of their $12 .92 million credit, which allows them to save that credit for death. If you’re a married couple, you can double that $17 ,000, so you could give each of you can give your child $17 ,000 a year.

And why that’s helpful is because you’re not using your credit, you’re really saving 40% on each of those transfers. With gifting if you go over the seventeen thousand dollars, so let’s say I want to make a gift of one hundred thousand dollars to my child The first seventeen thousand you wouldn’t use credit But the remainder you would report on a gift tax return.

You would not actually pay tax You would just deduct some of that twelve point nine two million dollar credit So what’s the benefit of gifting the benefit of gifting is that one hundred thousand dollars?

That I gave to my child had I kept that in my name and waited to give it to my child at death That one hundred thousand dollars is going to grow right so you have through the gift you’ve eliminated the 40% tax on the increase in value of that one hundred thousand dollars from the date of gift to the date of your death So the first benefit is just you’re saving on estate taxes all the growth on that gift then avoids that 40% of state tax Then the other big benefit that back to our earlier conversation that we’ve found is that’s a really good way to test out So first you’re getting a huge tax benefit and the second you could start gifting directly into children to your children And you can test out okay I’m gonna see them now.

They are gonna have some wealth while I’m living and make sure that they’re not Making stupid decisions make sure they’re living up to my value. They are Living up to the values I use to create this wealth And it’s a good way to test pilot because you could let’s just say they start making bad decisions Blow all the money you could stop gifting you obviously could make changes to the estate or whatever Have you seen benefits from lifetime gifting on that?

Yeah, and I think some clients have you know given their kids each Now here’s $50 ,000 through a gift each of you I want you in the next year to invest this money in any way that you want And we’re gonna come back and revisit it in a year and see what happened.

Yeah, you know, so you’re really you’re really seeing before you die, this is really what’s gonna happen after you’re dead. So you’re gonna kinda get a handle on what they’re investing in, whether it went right or wrong and why it went right or wrong.

Okay, then let’s talk. So if you are gonna do that, okay, so we have a philosophy where if we have somebody that’s higher net worth and we know that that estate tax is going to come into play now or especially as it gets shrunk down, we’ll say no brainer start lifetime gifting, whether that goes directly or into a trust really depends on the stage of life the kid’s in.

So one example I’m thinking of, client is about net worth of like 10 million, so would be under that exemption now, but as that drops it will come into play in the future. And so there’s a whole conversation we’ll have about whether how much are they spending, what’s the estate actually gonna look like, all these things play into this decision.

But, This situation, the kids are like 10 and 12. You’re not gonna gift the kid $34 ,000 per year as a 10 -year -old, that just doesn’t make any sense. So we’ve used a truck, you can gift it into the trust, gets out of the estate, and one benefit that we’ve seen is buying life insurance inside of that trust while the kids are young.

There’s some tax benefits, but talk about how we can use, how we can use the benefits of gifting into a trust versus just gifting outright into a kid’s name. Yeah, so that’s a very good question. So number one, if they’re minors, obviously you can’t gift to them because they can’t own property in their own name.

So you would wanna use a trust in that standpoint. If they’re not minors, the decision is, are you okay with gifting assets outright to your child? The risks there are that there’s no credit or protection.

They could be in a bad marriage where ultimately some of that gift passes over to soon to be ex -spouse. And if they had any sort of judgment against them, you would not wanna gift them anything outright because it would automatically go to that judgment creditor.

So I would say, by and large, I would favor the gifting into a trust where the children are the beneficiaries of the trust because yet you maintain that asset protection for the children. Okay, so in this, I totally agree.

So like this scenario I was talking about from age 10 to like 25, let’s say, the way we structure the gift into the trust by a life insurance contract inside of the trust paid for 15 years, we can talk about the taxes on that.

And then after that 15 year period, kids now 25, hopefully he’s through college or whatever he’s doing and you can get a feel for, now maybe we start gifting into their name. At this point, the trust is funded, there’s a big death benefit life insurance policy that we know legacy is taken care of.

And now, gifting directly into their names. Some strategies we use is, okay, gift it to them. If they’re working, make sure they max out their 401k and spend the money that you’re gifting. That’s forcing money to go into retirement account.

And then same thing with the Roth IRA. Max out the Roth IRA and then spend the money that you’re gifting. The more gift them, the put it into the Roth IRA. Yeah, great, great scenario. Let’s talk about, so that’s one way, the taxes on a trust.

So it’s pretty tax inefficient. You want to talk a little bit about how trust is taxed? Sure. So a trust is a, an irrevocable trust is a separate tax paying entity. So it would have its own taxpayer identification number called an EIN number.

And a trust has a calendar tax year just like an individual. They file their own separate form, which is a federal form 1041. And when the trust earns income, it’s taxed. If that income stays inside the trust, meaning it’s not distributed out to any beneficiary, that means the income is taxed inside the trust.

The tax rates for trusts are the same as individuals. So the highest income tax rate is 37% for trusts just like individuals, but the brackets are very, very compressed. So for an individual to be in that 37% bracket, they would have to have an excess of $400 ,000 in income.

For a trust, it’s about $13 ,000 in income. So if the trust requires or the trustee decides to keep the income inside the trust, then you’re likely going to be paying higher income tax rates. There is a method to lower that income tax consequence to the trust if the trustee distributes out the income to the beneficiaries.

If they do that, then the tax is paid by the beneficiary on their own 1040 at hopefully a lower rate because the brackets are much wider. So let’s say we would never do this, but hypothetically $1 million in an irrevocable trust.

It’s invested in corporate bonds, which would be the most tax -efficient thing in the world. We’ll talk about, let’s say it kicks off 4%, $40 ,000 a year of income. If it’s at that trust income, if it stays within the trust, anything above whatever the number is, $13 ,000 or somewhere around there to adjust it for inflation this year, it gets clipped at 37% versus if that income gets distributed to the beneficiary, let’s say the beneficiary has a super low income, that could be paid at 10% and 12% ideally.

That’s correct. Okay. Yeah. So taxed very inefficiently, one way around that, so we’d never hold corporate bonds inside of the trust for that reason, but we would want life insurance as a great asset inside of a trust.

because it’s all tax deferred and then other thing would also want to make sure this is getting a little bit more into the investment management versus your space but the growth -oriented stocks things that are not kicking off interest dividends so that you can defer paying the taxes to whenever you sell the asset anything else on taxes inside the trust?

Just you know for the for the ultra wealthy that you know have funded an irrevocable trust being so they put assets into a trust for their children and that parent has no rights to those assets anymore.

If they desire to keep the income inside the trust rather than distribute it out to the beneficiaries for whatever reason you know maybe the beneficiary has a problem and they don’t want the money to go out to the beneficiary.

The there are some sophisticated trusts that would allow that parent to pay the income tax on the trust income. And it’s not considered a gift by the IRS, even though that payment of income tax benefits the children.

What type of, what trust is that? It’s what’s called a defective trust for income tax purposes. So we would include what’s called a grant or trust power in the set law. Even though they don’t have any, you know, rights to the trust, they are allowed to pay the income tax and the IRS says that is not a gift.

So basically it gets taxed to the children, but then the parents just front the tax. Well, it’s taxed to the parent. It’s taxed to the parent. Yeah, so depending on what their income tax rate is, you know, we would have to look at that.

But by paying this tax, remember, if they’re going to be subject to the federal state tax, they’re getting assets out of their state benefiting the children and it’s not a gift. What net worth range do you generally look at that for?

Well, yeah, I mean, it can be for any net worth. But it really helps people that are going to be subject to the federal state tax because they’re moving assets, benefiting the children, not using their credit.

And then is that do you have the option to, does the parent have to be taxed to the parent or do you have the option to? The parent has the option to turn that off at any point. That’s, that’s helpful.

I did not know that. Let’s talk about so the downside. So we talked about a lot of benefits for the trust. A downside of gifting into a irrevocable trust is that you give up control of the assets out of the estate.

We’re avoiding estate taxes, million benefits, but we no longer, we can’t get the technically can but from generally speaking, we can’t bring those assets back. That’s right. One way around that that we’ve found really helpful is through what’s called a slat.

You want to talk about that a little bit? Sure. Yep. So a slat is, and that’s a good one. the acronym stands for Spousal Lifetime Access Trust. And for those that are familiar with estate planning, really it’s the analogous of a credit -shelter trust that you would have in your will or revocable trust, but it’s created during your lifetime.

So if we have a husband and wife, husband creates a slap for the spouse, for wife and children, and potentially issue down the line. The- There are all the beneficiaries? There are all the beneficiaries.

Your spouse is also the trustee. We would limit her interest to income and principal for health, education, maintenance, and support. And then husband, if we have a very wealthy couple here, husband could take up to $12 .92 million to max out his credit.

and transfer assets from his name into the slat for spouse and children. He would do, you know, report that on a gift tax return, he would have zero credit. He no longer has access to those assets, but the spouse does.

So if, you know, assuming their marriage stays strong and they need to access some of those funds, husband needs it for some reason. Spouse could pull assets out as a beneficiary and, you know, get those back over to husband.

So it’s losing control, but it’s not losing control. And then depending on their wealth, if, you know, wife has that much money in her name, she could create the same trust for her husband, where husband is the trustee and beneficiary along with the kids, and she would use her whole credit, put it on a gift tax return.

Why is that helpful? Well, it’s helpful for the very wealthy because the IRS has already told us that in January of 2026, when the credit drops down to $6 million, we, the IRS, are not going to come back to the client and say, hey, you use too much credit because you use $12 .92 million.

So they are effectively being able to transfer the difference between, you know, $13 million and $6 million free of the 40% federal estate tax. It’s a huge, huge win. Wait, so two things I want to hit on there.

So the first one, what you just said, you basically can use up that whole exemption, and then when the exemption drops, you’ll get that six back. No, when the exemption drops, you’ll have zero. You’ll have zero.

But the IRS says we’re not going to tax you on the difference of the $12 .92 million versus the six. So gift the 13, round up 13 now, you get the tax benefit versus if you don’t gift all of it now, you can only gift the six.

You’re getting that extra six million. And then what happened? What if you gift… What if you gifted six now if you gifted six now use it all use it all so this really applies I’m really helping you so it’s only you only really get the benefit if you’re gonna I’m going above six gotcha if you’re gonna do anything above six up to the twelve right and if you wanted as a married couple You wanted to give twelve total you wouldn’t want to each gift six Yeah You would want one spouse to give the twelve and the slats a good way to do that now because you don’t lose complete Control over it in the one spouse could okay, so basically then you do that Husband gifts it in wife can dictate pulling money out now.

What happens the downside here is if they get divorced downside is divorce. Yeah, so There are slats that are written where it’s generic Meaning spouse as the beneficiary so if they were divorced in that situation then would no longer be the spouse, right?

But it isn’t irrevocable trust and most people name their actual spouse as the beneficiary so I think either it’s fine for people that have prenuptial agreements and if they don’t, they’re usually comfortable enough in taking that risk that those assets could eventually be separated into divorce.

So prenuptial agreement would help fix that. Prenuptial agreements are great, great tools to really understand what’s going to happen to your wealth in the future. And they’re very, very hard agreements to get signed.

It’s very uncomfortable for parents to talk to their kids about getting a prenuptial agreement because it leads to so many, you know, so many conversations. Yeah, tough conversations. So you have some families that parents say, you’re not, you’re not getting married without a prenuptial agreement.

And they hone into it early on. And, you know, it gets to a point where the kid just knows I’m not getting married without a prenuptial agreement. But there’s a lot of them that, you know, I’ve started drafting and they never get signed.

So yeah, but same thing, like you wouldn’t go into business with somebody without an operating agreement. That’s right. Exact same. Right. And yeah, the statistics don’t lie, you know, over 50 percent of the marriage is ended in divorce.

Yeah. Yeah. Crazy. Okay. So slats are one thing that are super helpful to get the benefits of an irrevocable trust, but still have some sort of flexibility and autonomy. Let’s see if there’s anything else we missed here.

Okay. So let’s just talk through. So young high income earning family, we’ve hit on a lot of this, but just say we were a lot of physicians. So physician couple make in a million a year, let’s say they’re 40 years old with a couple kids.

Basically, they would want wills, powers of attorneys, they may have a revocable trust in place, depending on that worth. Let’s say $500 ,000 net worth, they’re still accumulating revocable trust in place.

That means that some of the assets go into the trust if they were to die. Anything that else that they should be thinking about. Yeah, I think all of those. documents are very important. And with an understanding that anything that is revocable, so if it’s a revocable trust or a will, those can be changed at any point in the future, as long as the client still has capacity.

So when circumstances change and their wealth has increased a lot, maybe they wanna change things up a little bit and well now I want these to stay in trust for a longer period of time and they can always do that.

One thing I would say for the young doctor who gets a big life insurance policy, maybe let’s have that owned by an irrevocable life insurance trust. And the reason for that is depending on what happens with the federal state tax credits, life insurance, when you own the policy, like most of us do, we own our own life insurance policy.

The IRS says that death benefit that you never got to use because it doesn’t pay off till you die, well we’re gonna subject that to the 40% tax. So an easy way around that. is to somehow remove yourself as owner.

And you do that by having an irrevocable trust own the life insurance policy. To the client, it’s really not a bad deal because it’s a life insurance policy. It’s not like they’re transferring a bunch of assets or a house into a trust.

But to gain the benefits of this tax shielding is very important. So to simply, so basically if you have a $5 million or whole life insurance policy, that $5 million doesn’t come into play until you die.

So like there’s a cash value obviously that you could access, it’s much smaller than $5 million. If that $5 million’s in your name, it’s gonna work on that number. Let’s say you have 10 million of assets, let’s say 25 million of assets, so these stay exemptions into play.

25 million of assets, you’re just under that 26 husband wife. And now this $5 million death benefit goes on top of that. And that’s now 30 million is the total estate sum that’s gonna be hit with the 40% tax versus change the ownership to the trust.

And now that whole five millions out of the estate owned by the trust and you’ve avoided estate taxes in this scenario completely. You’re saving a couple million bucks in federal state tax just by having that trust own the life insurance policy.

Yeah, okay, that’s huge. So that’s one thing. And then anything else with, I think we pretty much hit on like, let’s just talk about like ultra high net worth that’s over the exemption. So lifetime gifting, having the conversations, having trust structured correctly, anything else that we’ve missed or that those people generally are not thinking about that they should be thinking about the state planning?

Yeah, I think one of the things, and this applies to even more so, the people that aren’t subject to the federal state tax, but it also applies to the people that are subject to the federal state tax because they do a lot of gifting.

But with the way our tax system works, is that when you make a gift, gift to someone. The dony, the person who gets the gift, gets what’s called a carryover tax basis. If you die with an asset and give it to a beneficiary at your death, it would be subject to the federal state tax if you’re in that area, but they get a stepped up basis to fair market value at date of death.

So how that works is, let’s say a parent bought IBM stock for $100 ,000 years ago, and now it’s worth a million dollars. If they gift that stock to their child, that child takes that $100 ,000 basis, and if they liquidate the stock, they will have a $900 ,000 capital gain.

Versus if the parent died with the stock and Then gave it to the beneficiary the child That child gets a hundred or a million dollar basis and it eliminates the capital gain so I say this only because When you’re gifting it’s fine to gift but make sure you’re choosing the right assets to gift You know, you probably want to gift things that have a higher basis Keep the things with a low basis So that they get the kids get the stepped -up basis Okay.

Yeah, so Is there a way is there any other mechanism whether it’s through a trust? Let’s say you do have that appreciated stock. I mean obviously Charitable contributions dinner advice fund different conversation, but is there anything Any trust mechanism that you could put that into to get the basis stepped up or any other way around that other than just passing Like leaving that as one of the assets that passes when you die.

No, I mean, there’s there’s some You know, there’s there’s let’s say the the very wealthy client has you know elderly mother Who doesn’t have much in assets? He could gift that million dollar stock to mom Mom hasn’t agreed with mom that mom will give it back to him at death So when she dies, she’s not subject to the federal state tax But the way the tax laws work she gets the stepped -up basis interesting.

Yeah, okay now the IRS allows that but She has to live at least a year From when that stock was gifted, but then that would work off of their gift eggs off of their exemption, right? That’s right. So he would use a million of that exemption.

Okay So You know the income tax planning Really because less than one half of one percent is subject to the federal state tax a lot of what we do is Looking at the income tax so the income tax applies to everyone.

Yeah So that’s one big area that we focus on. Another was a couple years ago, the IRS passed, or Congress passed the Secure Act, which really affected qualified plans, which is a big asset of a lot of our clients.

So qualified plans being 401Ks, IRAs, and it eliminated what’s called the stretch. So under the prior law, if I die and I give my million dollar IRA to my two children, my children would be able to take that IRA proceeds over their remaining life expectancy.

Why that’s important is because everything that comes out of there is ordinary income to them. And if they’re able to stretch it out over their life expectancy, it’s less ordinary income and the assets that stay inside that trust is growing tax deferred.

The IRS got rid of that stretch with a secure act, and now the children have to withdraw the full amount within 10 years. It’s kind of, you know, it’s not a tax increase, but it is a tax increase. And that’s gonna be a five million dollar account which over 10 years is, yeah.

Big numbers, and the kids have to get it within 10 years. So some of my clients, what I’ve done for them is, in their will or trust, revocable trust, at death they create what’s called a testamentary crat charitable remainder trust.

And they will then designate their IRA beneficiary to be this testamentary charitable trust under their will. And the charitable trust is required to pay 5% out, at least 5% out each year, to a non -charitable beneficiary.

So they replace the children as the beneficiaries of the qualified plan IRA, they make the trust now the beneficiary, and the children are the income beneficiary for the remainder of their lifetime under the charitable trust.

So it’s really kind of, you know, done the same as the stretch, because they are limited to these distributions for the rest of their life. It doesn’t allow them to take all of the IRA at once or within 10 years.

So let’s say that’s a, okay, let’s use a scenario there. Five million dollar IRA, 5% of that is $250 ,000. So it goes into the charitable trust. That’s a $250 ,000 each year then goes, that’s what’s required to come out, that goes to charity.

No, the 5% goes to the kids. It could be more than 5%, but has to be at the spot. So that every year they have to take that 5% goes to the kids. And where does the charity come into play? When the kids die.

Then it goes to charity. Whatever’s left in that trust goes to charity. Gotcha. And some of that qualified plan is obviously not being subject to tax because of the charitable component. How often are you doing that as a net worth range?

Is it charitable? Is it dependent on charitable goals? When are you having these conversations? I think there has to be some charitable intent involved. But anytime someone is charitable, the qualified plan is a great, great tool to use.

Because charities don’t pay tax and these are all subject to ordinary income tax. Interesting. Well anything else that we missed, I think we hit on everything that I had. Is there anything else we missed that you wanted to make sure we could cover?

No. Just back to the beginning. A state planning is very important. And it’s not for the ultra wealthy, it’s for everyone. It’s for everyone. You know, there’s many more issues other than taxes. You know, we talked and hit on some of them, you know, children beneficiary issues, you know, they’re just got into the wrong situations, whether it be substance abuse or creditors or bad marriages.

You know, that’s a state planning. And that doesn’t matter about the wealth, you know, and any amount that you die with you worked hard for and you should make sure it’s protected when you pass on. So some tax considerations and also just having tough conversations, making sure that the money transitions as smoothly as possible and isn’t wasted.

That’s right. Well, thanks for joining us, Dave. I think that was super, super detailed. I love getting nerdy on any detailed planning topic like this. I hope this is helpful for everybody. But yeah, it was a lot of fun.

Thanks for joining us. Thank you for having me, I appreciate it. Thanks for tuning in to our podcast. Hopefully you found this helpful. Really hope this is as beneficial and impactful to as many people across the nation as possible.

So hit the follow button. Make sure to rate the podcast and please share with any friends or family members that would also find this beneficial. Thank you very much. Thank you.

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