364: Death Without Taxes

Buck: Welcome back to the show, everyone, today. My guest on Wealth Formula podcast is is he’s been on before. He’s a friend of the show, Joe Longo. Joe is at three plus decades in practice as an attorney, probate litigation, sports, asset protection, trust and estate planning. He helps me with my estate planning, part of my whole team there, which is a gotten kind of significant, but it’s helpful to have a guy like Joe. You know, again, his clients have ranged from small families to publicly traded international corporations, professional athletes, professional sports franchises, leagues, individuals. Joe’s is a former college football player at Brown. Right. Which I think is.

Joe: Many moons ago.

Buck: Yeah. I think we talked about that before. But anyway, welcome back, Joe.

Joe: Hey, I really thank you for having me back. It’s a pleasure to be here. I’m a big fan of the show.

Buck: Thank you. You know, Joe’s Joe, you’re really I mean, really interesting. We were talking about offline here that, you know, you also are involved a lot in sports and, you know, representing professional athletes and stuff like that. And those guys obviously end up with a lot of money. Right. And, you know, they they end up needing a lot of help. Do you do you feel like these guys are off subject, but do you feel like these guys generally are pretty well set up with guys like you or is are your guys in your mind?

Joe: I get you know, it’s interesting. I would say for the most part, these guys all hire good lawyers and financial people. I mean, I know you read about the bad things them, but actually, for the most part, these guys get good advice. Yeah. And the financial advisors and the insurance people and lawyers are a lot more sophisticated now than they were when I first started.

And it seems that these guys are getting much better advice. But you got to remember their estates now are far greater than when I first started. I mean, you know, the minimum salary in baseball is like 720 grand now. You know, when I first started, it was 100. Okay. So, you know, it’s it’s it’s it’s and that’s on the low end of the spectrum.

Buck: I mean, these guys are like half billion dollars. Yeah.

Joe: There’s certain standard. There’s there’s, there’s billions of dollars in free agent contracts are out there. And with that comes the same tax problems, you know, estate planning issues for their children, you know, that you get with a normal high net worth individuals. So and the good news is, is these guys seem to pay attention and understand that the importance of planning and preserving wealth and, you know, minimizing tax both income tax and estate tax. So, yeah, you know, and they hire professionals, give them advice, do that. So you know, but yeah, no, most of them are pretty well set up.

Buck: It’s great. Well let’s talk a little bit about you know, obviously you you know, you’ve a big bread and butter. Part of your practice is still asset protection and estate planning. And certainly we talked about asset protection before, Doug Lod. Mel, But want to kind of circle back on estate planning and start. It’s always good to get a little review. I think it’s two one. In my experience, just talking to investors in our group, I mean it’s really the one thing that really gets swept under the carpet. People don’t like to think about it. I think there’s a level of denial in a thought that, you know, that that it there you know, it sort of admits to mortality or something like that, that that prevents people from thinking about this. But let’s start with the real basics here. I mean, what what’s the point? Okay. Who needs estate planning and what’s the point?

Joe: You know, it’s it’s it’s really important for all of us to do some planning for it, not for us personally. It’s more for our families. Okay. So and most people care about their spouse and care about their children and want to make sure everything’s taken care of and buttoned up. And I always tell clients, because you’re right, it it’s it’s it’s the last thing on our list we want to take care of on a daily basis.

And you’re right, some people refuse to even acknowledge that, you know, we are going to exit this or some day. So it’s okay. It’s just consulting in a state planning attorney like myself. You know, you really need to do do a good job one time. And we don’t appear every year. I mean, I have some very sophisticated estate plans where there’s maintenance every year.

But for most people, 95% of people I’ve got to get a joint living trust with my wife or you’re not married. An individual living, revocable living trust so that I can transfer my assets to the people named in my trust. A very smooth and easy process. You know, when I when I first started 32 years ago, you could if you died in L.A. County without a will or with a will, which also has to go through probate court. Probate court lasted a couple of months. Now it’s going to be, you know, a year and a half to two years. And that’s on a case with no objections and really smooth sailing. It’s also, I tell clients it’s a black hole of attorneys fees and costs getting through probate. So the only way around that and the only way around that in most states is it is a living trust, which is the codes in most states allow a living trust to sign a contract, and most states have code sections. They acknowledge that contract to allow you to transfer your assets, you know, to your children or grandchildren, whoever you’re leaving your assets to.

Buck: So let’s take one step back here real quick and say, you know, okay, what’s the difference between a will and a living trust? What and why do you need both?

Joe: Great question. And, you know, and I explain to clients a will a will serve as a a purpose. And it was the originally named a document that most people had because you could probate a will like I said pretty simple and seamlessly and easily. And I think in Florida you can still do in a matter of weeks. Okay but that’s all changed and things got more complex. And so a living trust is actually a document that allows you to do it outside of court. Okay. Which and it’s private. It’s confidential. Like your assets going to transfer whatever you’re doing is not going to end up in a public court setting. Okay. And it’s much less fees and costs to transfer your assets to a living trust in a will. So I think most attorneys are going to recommend the the mothership document, shall we say, should be the living trust.

Buck: Right. But the will you still need a will, correct.

Joe: Well, like in states that are similar to California, like all states, we, we we encourage you to also have a will and we call that a poor of a will. And essentially, in layman’s terms, it just means like if you forgot to put anything in a trust, a poor bill will help poured into the trust. Okay, you can avoid probate. So that’s I mean that’s that’s in you know especially for this audience I mean this audiences, you know a lot of professionals and people have making at least, you know, six figures and above. That’s the bare minimum will. And the.

Joe: Bare minimum. Yes.

Buck: Yeah. Will and trust really probably in all 50 states, right? I mean for the most in.

Joe: All 50 states. Yeah. I think it’s really important to have well and trust the other set of documents that you will hear about, whether it’s online or consulting with professionals, the directives we call like the durable power of attorney, if I become an incapacitated, my wife can conduct business on my behalf until I recover. Right. I get I’m getting a lot of those requests now because people are living longer dementia, some form of dementia like Alzheimer’s, going part of life.

And people need, you know, my father’s doing okay, but he’s being diagnosed with dementia and he has all these bank accounts and I can’t get in-home and he doesn’t you know, if you had a durable power of attorney, you know, he’d be able to handle those accounts and be able to handle business. The health care directives are also important.

You know, hospitals are requiring authorization to talk to you about your loved ones treatment, you know, and those cover, though. So there’s some other things that go on for people with children under the age 18, a guardianship nomination in case something happens to you. There’s other documents that go into a plan that are basic documents that you would need, but you just want to cover yourself everything in the event of disability or death.

Buck: Got it. Let’s kind of, you know, before we move on probate, you describe that probate by definition. When you die, if you don’t have a a living trust, that basically is the process by which the courts determine who gets what and as you were pointing out, this is something that is easily avoidable. But it is. And because it’s extremely expensive and you think about this situation where all of a sudden you die, your family’s mourning, your kids are upset and your, you know, spouse or whatever. And the next thing you know, no one has any, you know, can get access to any of these assets to pay the bills that are still coming in. And that’s where avoiding probate becomes critically important and not not to mention extremely expensive. Right. I mean, that’s that’s the whole concept here is you want to avoid probate fair.

Joe: And I think you hit the nail in the head for your loved ones. I mean, it’s a it’s a difficult process. It’s expensive. And they’re still mourning the loss with a living trust. It’s much easier. Process is much shorter timeline, you know, and and much less expensive. So I think you’re right. It is living trust. You do a once you get it done, you now have the comfort of knowing that your family’s going to avoid probate court. And these are not really expensive things to do either. That’s the other thing.

Joe: So no, yeah, a lot of estate planning attorneys do. I’m on fixed fees now. When I first started, it was a lot of hourly and then some people charge hourly too. But you know, the rates are run anywhere. Fixed fees of 1500 all the way up to 6500. It just depends on the level of complexity and how many documents are involved and how big the family is and again, how big the assets are, because sometimes we have to do advanced estate planning techniques to help you avoid help the estate, avoid estate tax, which is different from income tax.

Buck: So let’s talk about what exactly that is. Is it? I think it’s a good review. And and it’s it it’s actually something maybe in the past few years that maybe, you know, 20% of my audience may have to worry about. But I think it’s going to because of some laws you can talk about probably going to affect maybe even the majority of people who listen to the show and talk about what exactly is the estate tax.

Joe: Yeah. So so upon our death, obviously, we owe one more income tax return. Okay. But we’re also going to buy resources, you know, own 0a706 estate tax return. Okay. And and right now, currently, the estate tax is the highest it’s ever been at approximately 12 million per person. So what does that mean? I can leave $12 million worth of assets to anybody I want, but everything above that’s going to be taxed at 40% on every dollar. Okay. Do you just give me an idea of how much it’s grown? My father passed away in the eighties, and when he died, the estate tax was 600,000. Okay. It’s gone up and down over the years, but we are currently in a climate where it’s the highest it’s ever been. For a married couple. You can double that. So approximately 24, it’s almost 25 million now.

Now, on January, under the current law, the current estate tax sunsets on December 31st of 2025. We’re in on on January 1st of 2026, it gets cut in half. Okay. It goes down to six, approximately 6 million per person. So that’s 12 men for married couple. So let’s say a married couple had, you know, a $22 million estate, okay? Their kids would get the first 12 million tax free. Okay. But the final 10 million would be taxed at 40%. So the kids would have four, four, $4 million on on. That would be the estate tax due within nine months of the second parent. The surviving parents pass. Okay.

Buck: Wait a second. So that that’s I’m a little confused by that, too. So if you have 25 million combined, the timing on that, I was can you can you explain that again? Because I guess if one parent dies and.

Joe: Then the tax is not owed upon the death of the.

Buck: First parent. Okay. Got it. So then there’s an additional part of it that and then and then if you think about like, you know, that first parent or that first person dying, there’s a pretty good chance there’s a pretty big sum of, say, life insurance or something else coming in there to expand that that estate even more.

Joe: Yeah, I get that question a lot. Like, hey, hey Joe, what what actually is valued in your estate? You can assume everything okay. Yeah. And that includes life insurance proceeds. The value of your retirement accounts, all of the the value of your real estate. So that that’s what that’s what you need. Need to get valued upon the death of parents. Okay. Because that’s how the tax is calculated. And the IRS wants 40% on every dollar above the death tax exemption.

Buck: Okay, So let’s talk about what you can do if you’re in this position. What’s the next step of complexity that we’re talking about?

Joe: Yeah, so there’s a couple simple things you can do if you have children. One is let’s try and get some assets out of your estate during your lifetime, okay? Why don’t I just give my children every dollar I own over 12 million, my wife and I over time. Yeah, well, there’s limits. Okay? So the IRS is wise to that.

You’re allowed currently to give away, and it’s an annual exemption tax for your annual exemption of 17,000. Okay. And then there’s also a lifetime exemption that’s equal to the death tax of approximately 12 million per person. So. So you can give away 17,000 a year to anyone you want and use.

Buck: That per child. Or is that total?

Joe: It’s 17,000 per person. So you can give it to your children and grandchildren if you wanted to.

Buck: So you could. Okay. But then you have a maximum. And what was that maximum again?

Joe: The maximum is is equal to the death tax exemption, which is currently approximately 12 million. So let’s just say you gave away 6 million during your lifetime, okay? Your your exemptions, only 6 million upon your death. They could you’ve used 6 million. But then people say, well, why would I give away the 6 million during my lifetime? And I know a lot of your listeners are, are real estate investors, real estate, giving away 6 million of real estate during your lifetime?

Let’s say you gave it to your kids at age 50 and you lived at age 80. Okay, that’s 6 million will appreciate over the next ten three decades. And let’s just say that 6 million turns into 12 million or your kids don’t don’t owe the tax on all that appreciation because it’s outside of your estate. Okay. That’s why people gift during their lifetime.

That’s the lifetime gift exemption on the annual gift exemption of 17,000 a year. You know, I have clients who do it every year, you know, I declined who had ten grandchildren, and she gave it 770 grand a year. So spread between ten grandchildren. And and she just had put them each in growth stocks and just you know, each child would be able to access the account at age 30. That was her choice.

Buck: And again, those for the children or those are those are not taxable at that point.

Joe: Not taxable. Those are gift tax free right estate, tax free gifts. And and the appreciation is also a gift in estate tax free.

Buck: It is. Yeah. No kidding. I didn’t know that. Okay.

Joe: So grows outside of your estate.

Buck: Well, right. But once it’s part of their their estate though, isn’t it?

Joe: Yeah, that’s exactly right. So any of the tax implications that would be part of their asset.

Buck: That’s right. Okay. Yeah. Okay. Got it. You know, and then there’s, I guess, another level of complexity which, you know, I, I’ve as you know, I have I have some of this stuff going on with various sort of irrevocable trusts. Yeah. And talk a little bit about in broad terms what the concept of a trust, an irrevocable trust in the context of estate planning would be.

Joe: So there’s two kinds of trusts an irrevocable trust and a revocable trust. The revocable trust is what most people are out there. Walk and wise. It’s revocable. You can change it, modify it, do whatever you want. During your lifetime, it becomes irrevocable. The day you pass an irrevocable trust is used. There’s many, many types of irrevocable trust. But just in as a general concept, I’ll use the irrevocable life insurance trust concept. An irrevocable trust is outside your state, okay? It’s not. It’s not you. It’s it’s own separate entity. You put a life insurance policy in it. Okay? And let’s say the face value on it’s 5 million when you pass, when you pass. And the 5 million inside of that irrevocable trust is there, that’s not part of your estate. Therefore, it’s not subject to the 40% I talked about earlier on this on this call. So it’s a way to get assets outside is simply put, it’s a way to get assets outside of your estate that are are not subject to estate tax.

Buck: And there’s other ways to you know, there’s other ways to not lose control of that per say, vis a vis holding companies in other more complex.

Joe: Yes, exactly right. But you could get more complex structures in place that allow you, you know, to to, you know, change out the property or as long as it’s same value and do some things, hire and fire the trustee allows you to pick your trustee on that. The other reason you can’t serve as a trustee is because it’s your property that you’re gifting in there. So you really need to cut all ties of access to it.

Buck: Uh huh. Now what if what if a and we’ll get getting very complex now, but yeah, know.

Joe: I don’t want to put anyone to sleep.

Buck: Oh no, this, this crowd is nerdy. Believe me, This guy, this girl loves this kind of stuff. Well, okay, so we’re say, where you have a trust. And what if the trust itself start to business? In other words, from day one, there’s ownership from the trust rather than from an individual in that situation. Presumably it’s already out of the estate.

Joe: I get I get that all the time. So Dad owns a successful real estate company and I’ve just for simplicity purposes, let’s just say it’s on one LLC. MM. And then what he does is he, he has two children and he has two irrevocable trusts and he gifts 10% of the company to each child. Dad owns 80%. Still has all control of the company. You know, president of the nothing’s change right. As far as his day to day operations but he’s got his two young children are now partners or two grandchild partner, 10% partner through a trust, through these irrevocable trust. You just talked about. And as the company grows and they 1031 exchange another bill and they keep going along, that 10% grows along with the company and now they’re in those zero of trust. When dad passes, that 20% is not in his estate and it’s not subject to any estate tax.

Buck: Right. And furthermore, presumably, if that trust is, you know, got a bunch of cash sitting in, it could purchase a business.

Joe: Exactly. That’s exactly right. Yeah. You know, like I said, you could keep purchasing businesses, you could keep growing, you could purchase another piece of real estate. You do all kinds of stuff.

Buck: I mean, start businesses that are owned.

Joe: Yes, start businesses. I think there’s a well-written article about he just passed the founder of P.S. Public Storage did that when he started the company, he gave his son and daughter a lot of shares of the company. And upon his passing, which is pretty recent within the last couple of years now, the son and daughter own a sizable chunk of that corporation. They don’t own estate tax.

Buck: Right. But when you get into this. So now what I think is an interesting concept for people to remember is that the law recognizes two entities, sodas, so to speak, in the big scheme of things. And one is the individual, one is the trust right there really is nothing else. You’re either it’s an individual or a trust, right.

In terms of ultimate taxation, because that gets you into, you know, what happens with, you know, taxes when something like that makes money. Right? And then you have non grantor trust versus grantor trust. And I know, again, we’re getting complicated, but I’m telling you, this is there’s a weird audience and they’re going to like this.

Joe: You’re right. You know a lot about this area. So the trust there’s trust tax rates in the IRS code. And you’re right, there’s individual tax rates in the IRS code. Mm hmm. So, yes, the government views, trusts and certain types of trusts of being separate entities from you and and will tax them differently than you.

Buck: Right. But in along that lines, too, if you so let’s talk about let’s talk about the going back to the estate, the gifting as it relates to these trusts. So now these trusts if you’re putting money in these trusts, your subject essentially to this same limit. So again, now instead of giving directly to your kids, you may say, well, I want to give to these kids, but why don’t we do this just to make it efficient? I’ll put it all. I’ll put as much money as I can. I’ll jam it into these trusts while it still, you know. Well, it’s still 12 and a half million and not 6 million.

Joe: Right. I fully expect a run on the last quarter of 2025 if the law doesn’t change. Right, is because then, you know, the law could change. But let’s just say it doesn’t. I do expect the second half in 2025 people with estates over the exemption limit of approximately 25 million will be calling and saying, hey, I know the law is about to go down to 12 million. I’d like to set up these trusts for my kids and gift of a large portion of my estate to my children through these trusts. And you’re right that that I get that I get that call regularly in the second half of the year. But, you know, I tell clients, keep an eye on the law. You know, that’s the current change.

It’s on the horizon, you know, but you got to keep an eye on it because, you know, like I said, it’s the highest it’s ever been at this point. And and when we when the federal government decides to get around looking at the estate tax again, they change could to California. Currently in the state I am in it currently does not have a state estate tax some states do but they’re currently I mean I know I know there’s some rumblings about a wealth tax which is different, but but it’s certainly currently no estate tax in a state like California. So we only have to worry about the federal estate tax.

Buck: Right. Okay. So now, if you know, if you’re the other thing that in these trusts, you can also you know, you can also put your life insurance directly in. These are irrevocable trust and stuff like that. There’s lots of ways, again, to, you know, potentially, you know, to potentially help your heirs from having to pay these big taxes. Now, when you have these, you know, these clients or maybe not even your clients, but just, you know, ultra high net worth types, when I’m talking, you know, 100 million beyond, you know, billionaires and stuff like that. Is there any way that they can get around? I mean, because once you gift to a you know, once you give to an irrevocable trust or whatever at that point, I mean, you’re you’re you’re wiped out at 25 million at the most. And what I just can’t see there’s that these guys are paying that kind of estate tax is what are they doing there.

Joe: There’s you know, very sophisticated in advanced share, lead trusts, grantor, annuity trusts, you know, there’s all kinds of sophisticated advanced estate planning that we can bake into an estate of that size. And and then the other thing is that, you know, you know, that’s popular in estate to those sizes is getting large life insurance policies put into an irrevocable life insurance trust and allowing the heirs to use that money to pay the tax. So they’re those types of estates have very sophisticated estate planning. And that’s probably a topic of another show on. I think a good estate planning attorney will walk through these. And certainly I try and make I don’t like clients listening to my recommendations in their eyes, just zoning out because they understand what’s going on. It’s a very complex set of rules, but I try and really go through each step.

Even when we’re doing this advanced estate planning, I really want the client to understand what they’re doing because it bothers me when I sit down with the client and say, Do you understand how to your estate plan works? And maybe a prior lawyer had done it and they said, Don’t really know what’s going on. Yeah, you know, I really want to make sure they understand what’s going on, because you should.

Buck: Oh, let’s just I’m going to ask you one one last question on this topic, because obviously there’s this you know, there’s estate planning, there’s asset protection. If you’re doing of these, you know, techniques where you’ve got things out of your estate because you’ve gifted them and they’re irrevocable trusts. Are you is the implication there that they are asset protected automatically or not?

Joe: It’s a good question. Generally speaking, irrevocable trusts have asset protection features, right? Particularly if you form them in a a a more favorable state with more robust asset protection statutes like Nevada, Wyoming, Nevada, Delaware. Okay. So yeah, generally speaking, you’re correct and you’re a revoke able living trust does mostly do not have asset protection type features. You know.

Buck: Right. Fantastic. Well I hope I didn’t hope I didn’t make this too painful for all my questions here for you.

Joe: No, no. There they’re great. They’re great questions. And I, I, I hope you I hope you and your audience know it’s it’s something we all have to do. You know, at least once. And it’s and most good lawyers make it, you know, painless. And we get through it and we’re done until you want to make a change or until accumulate more wealth or until you have grandchildren, you want to take care of them, You know you’re okay. You’ll be okay. It won’t be that hard.

Buck: That. So let’s talk about how people can get a hold of you. And first of all, before we go, there may be I should ask for estate planning issues is how important is it to be within your state. So I’m you’re based in California.

Joe: Great question. Yeah.

Buck: And this audience is obviously I mean, really all over the country at this point, all over the world. Yes. Yeah.

Joe: Estate planning is state by state, right? There is there is federal estate tax, but the planning is usually state by state. So it’s it’s better to have a licensed lawyer in your state. And certainly if any of your viewers don’t know of one, I can help as I’m a member of a nationwide network of estate planning lawyers so I can help refer them. But I myself sometimes need help in another state. So I’ve had the good fortune of meeting a lot of estate planners in other states. And and it’s very helpful to my practice as well.

Buck: Fantastic. And and how do people get a hold of you, Joe?

Joe: So you can either get my contact information off my website it’s Longo law group dot com or you can email me directly at J. Longo at Longo law group dot com.

Buck: As always, great to have you a fun discussion.

Joe: Thank you very much. I appreciate you having me.

Buck: We’ll be right back.