Tag: Advisor Enablement

In the latest episode of The Practical Planner, Anne Rhodes and Thomas Kopelman sit down with Chris Nason, a partner at McDermott Will & Emery LLP and a Trust and Estate Planning teacher at Stanford University. Chris provides a deep dive into The Tax Cut and Jobs Act of 2017, sharing insights on how advisors can craft effective estate planning and tax strategies before its benefits sunset at the end of 2025.

Don’t miss out on this valuable discussion to help you stay ahead in advising your clients.

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Justin Castelli, Founder of RLS Wealth, joins hosts Anne Rhodes and Thomas Kopelman to talk about how his approach to financial planning has shifted to focus on life planning by placing a focus on his clients’ life goals and values at the center rather than focusing on the numbers first. By helping clients figure out what their authentic life looks like and how to achieve it, he believes it brings more clarity to the estate planning process. Check out this episode to hear how he helps clients figure out what’s most important in their lives and how that helps them plan for what happens when they pass.

For any questions, email us at [email protected].

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Estate planning can be difficult due to tough conversations you may need to have and make. This can be exacerbated by certain cultural and generational expectations and taboos.

Anna N’jie-Konte, CFP®, President and Director of Financial Planning at Re-Envision Wealth, joins this episode to share how financial advisors can help their clients approach these conversations and why having them now can be beneficial for all their family and loved ones.

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Jennifer Rozelle, Owner and Attorney at Indiana Estate & Elder Law and host of the Legal Tea podcast, joins hosts Anne Rhodes and Thomas Kopelman to discuss what advisors need to know when helping their clients figure out what to do with their real estate assets. They touch on common mistakes to avoid, gifting strategies and why it’s often about helping clients have conversations they’ve been avoiding.

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Full transcript below:

Thomas Kopelman: All right. Hello and welcome back to another episode of The Practical Planner podcast. I’m your co-host, Thomas Kopelman here with Anne Rhodes, my other co-host and then join with us is Jenny Rozelle. Jenny is just an awesome attorney in my neck of the woods, Indianapolis, Indiana.

Obviously you’re outside of Indianapolis, but nobody’s going to know the small towns anyways, so we’ll stick with that. And Jenny is also a part of Wealth.com as of, I don’t know, maybe was it like six months ago or so that you were one of the attorneys on the platform?

Jennifer Rozelle: Time is weird. We’ll go with it.

Thomas Kopelman: Yeah. Some time since they’ve been created, you got on the platform. But Jenny, we’re really excited to have you here talk all things real estate, everything from simple titling to complex transferring of assets between family members.

Jennifer Rozelle: Awesome. Well thank you guys for having me. And I have to tell you that I listened to your guys’ podcast, the last guest you had, Tyrone, and I hope that I can mimic his energy level so you guys can grade me towards the end.

Thomas Kopelman: That’s actually funny because Tyrone’s maybe the highest energy person, but you actually do match it. I don’t think there’s very many attorneys that we’re going to bring on that the energy is going to be that high, but that’s actually perfect back to back, now that I think about it.

Jennifer Rozelle: Setting the high bar, right.

Thomas Kopelman: Exactly. So I think real estate is obviously this really complex area, and I think what you wanted to do is really start with some of the more basic side of things and just even just go through documentation, titling, et cetera. So I’d love to hear from you how to get this right and some of the mistakes that you often see happen.

Jennifer Rozelle: Yeah. Where my head instantly goes when I think of real estate and estate planning is all the mess-ups I see, honestly. All the people that will pull deeds and things online and they try to do it themselves and they don’t understand how property ownership may affect someone’s estate plan. And it does. There’s just endless amounts of mistakes that are made all dependent on when you initially draft that deed or in some cases some people just hand write it. And unfortunately those have significant legal consequences, especially when people pass away. And really what transpires with that person’s ownership interest, depending on how they own the property and their interests as well as what type of estate plan that they have. So from a very high level, that’s where my brain instantly went was unfortunately the mistakes that I see and that I clean up all the time.

Thomas Kopelman: Yeah, I think one of the most common things I see from the Wall Street Journal to the regular market watch or whatever those articles are like, “What do we do? Parents passed away. Two of us don’t want the house, other sibling wants the house, they can’t pay for the house. They can’t buy us out of the house, they can’t maintain the mortgage. What do we do?” And so maybe it’s interesting to think through some of these conversations and is this really the parents’ issue? Should they have thought about this better ahead of time and clearly spelled out and helped mediate these conversations? And how do you do that?

Jennifer Rozelle: Yeah. Oh my goodness. Well, first the parents let’s call them Mr. and Mrs. Client, they actually have the ability to spell things out pretty specifically like that, whether it’s through things that are called specific bequests where they may want say their lake home or their cottage in Michigan or whatever to go to very specific people. So very much you can do that, though what I find mostly people will do is just leave it to the kids or the beneficiaries to “figure it out” later. And at that point, it’s really the executor or the trustee’s responsibility to weigh what the beneficiaries want and also take into account how much time do we want to give beneficiaries to line up financing or how much time do we want to give beneficiaries to figure out what they want to do. And so what I always tell beneficiaries in that situation is basically whatever they agree to, I can make happen.

But so often they get into one of my favorite things in the world is analysis paralysis where they get into just throwing out all these different ideas and sometimes don’t take any action and the executor or trustee, they’ve got to keep things moving forward. And so it really can get a little hairy pretty quickly. And so to answer your question, sure, the parents, whoever created the estate plan can put some pretty specific provisions. Most of the time at least I find they don’t. And then the beneficiaries are left deciding what they want to do and how much time they want to waste, I shouldn’t say waste, but how much time they want to spend working things out.

And I’ve seen it work both ways. I’ve seen it where beneficiaries absolutely will come to a consensus and come to an agreement. I’ve also seen beneficiaries start duking it out World War III style, unfortunately. So I’ve seen it all as I’m sure Anna’s seen it all too, but unfortunately at the end of the day, estate planning documents, they can do a lot. They can do pretty little as well, but when you start adding people and personalities into the mix, that’s when things get a little different.

Anne Rhodes: Yeah. I’m happy to jump in here and say a couple of things, horror stories or ways to plan around the horror stories as well, but the first thing I think that’s commonly misunderstood is you during your life or your client during their lives may really be enjoying this property and they think, “Oh, when I pass away, of course my children will all come back to the shore and remember the good old times and everybody will maintain this property and it’ll be great.” But actually this is where an attorney can be so, so helpful to give a reality check to the clients and say, “Do you really think this is going to happen? Is there a structure that we can put in place here so that it improves the chances that this will happen, that your dream for what happens upon your death will happen?”

Because the default, if you just leave a property to two or more beneficiaries is something called a tenancy in common. And that is a form of ownership where yes, there can be a specific percentage owned by the folks on the title, but actually every single one of them is on the hook for a hundred percent of the maintenance costs, the taxes, et cetera. And then each individual beneficiary can actually use a hundred percent of the property too. So it’s not like, oh, if I only own 50% of the property, I can only own half the house. That’s not how it works. So all of a sudden you’re already seeing anticipate, you have, let’s say one child who really loves that property, uses it all the time, but may not have the resources to actually maintain it. And now all of a sudden that causes jealousy with the other sibling where they’re like, “I never come to the home, or I come once a year and you go every weekend. So now all of a sudden I’m supposed to be on the hook for the taxes.”

And so that really creates a headache for the family. And you see beneficiaries really, like siblings, start fighting over whose usage and maintenance, who contributes to the property. So then with some of my higher net worth clients, when they have a dream of passing on the same property to multiple beneficiaries, we used to have a very real conversation with them about potentially forming a trust for that vacation home or whatever. But when you form a trust, which can be very detailed, as Jenny said, you can put anything in there, how they use it. You can really go into great lengths and you set up a trustee who’s going to be then managing that property. You have to also think about an endowment for your trust. And that’s where even the high net worth clients are like, “What is this endowment?”

It’s like, who’s going to pay? How is the trust going to generate money to pay for the income taxes, etc. So with our clients, we basically modeled this out and said, unless you have an endowment of, usually it was like half a million to a million dollars just to start it, then it’s not even worth doing that trust potentially because you still have the same maintenance issues. So those are some of the things that you start thinking about. And the last thing I’ll point out is sometimes you just give real estate to one beneficiary. So you may have a client who owns the home for one of their children, and we’ll talk a bit about intra-family loans as well to help that child get started, down payment, all of that stuff. But maybe that client owns a significant interest in that child’s property and it’s just one child.

So they say, “At my death, I want to just forgive the debt or just pass that property because it’s in my name right now, straight to that child.” So they just own it outright. The issue then becomes one, if there is debt on that property, what do you do? Do you also pass it free of debt or is it subject to the debt? So that comes to Thomas and Jenny saying, how do you service the debt? The second thing becomes, what about other beneficiaries? Because real estate tends to be a really significant chunk of that person’s net worth. Are you treating all the other kids equally? That can become a huge issue of equalizing gifts between kids. That gets tricky as well.

Thomas Kopelman: Yeah. I think the other issue I see is that even when you pass on an asset like this without a mortgage, there’s all of these quickly growing areas. I think about where my parents live right now. They live in Lake Geneva, Wisconsin, really nice lake, and it’s like there’s all these issues of all these people on lakefront properties that literally can’t even afford the property taxes anymore because just to have a spot on the lake is like $2 million. So parents maybe weren’t that wealthy, they just had this place for 70 years, it gets passed on and you’re sitting at 50, $60,000 a year of property taxes, and that’s just a whole issue in itself to maintain.

Jennifer Rozelle: Yeah, and one thing I thought of while you guys are both talking is I’m sure all three, well, I know I’ve heard it, I’m sure you guys have heard it too, that properties come in different shapes and sizes. And so here in Indiana land, I work with a ton of farmers. I have a ton of farm families, farm clients that I really have to counsel a lot of clients into when they call attorneys, counselors sometimes I really do feel like I’m a counselor because I will hear them say things like, “I want this to stay in the family forever and ever and ever and ever and ever and ever and ever.”

And I hear that a lot with farm families and what I see from my seat is, sure, it may go down the first generation, but when you start talking about generations after that, I consider that I’m not doing them a very good job if I don’t really advocate for some rip cord where beneficiaries are locked into this trust like Anne talked about, or any other mechanism whereby golly, they’re going to keep that property in the family until Lord knows what year. And it’s like that is very unrealistic. If someone came to the table and offered to them bazillions of dollars, you seriously would want them still to keep that and most of the time they will say yes.

And so to each their own right, to each their own. And there’s just so much counseling that goes on through these conversations from the legal end, from the financial end, from the tax, all the different perspectives. I just immediately when you guys were talking, I was thinking about my many, many farm families that, and I’ve heard it before with lake houses and houses down south in Florida, in Arizona, that they want it to stay in the family. And you just have to really weigh, I always say tee it up, talk about the pros, talk about the cons, and as long as my client knows what the pros are, what the cons are, I can say I’ve done a good job if they understand totally what that option’s pros and cons are, and from there, it’s their decision.

Thomas Kopelman: Yeah, I love that you brought this up because I think you would apply this to businesses too. I’m thinking about, I have a few friends who their parents own super, super successful businesses, and it’s like the two boys are anesthesiologists and pharmacists and the daughter’s a PT. Things are not looking good that anybody’s going to be taking over your business, but it’s been passed down from great grandpa to grandpa to dad. And I remember asking one of my buddies about this recently and he’s like, “Yeah, I have no idea. We haven’t really talked about it.” It’s like, “Yeah, your dad’s like 60-something, you guys are very wealthy. You might want to retire. You guys are going to take it over.” A lot of these estate planning things are just conversations that people put off and never want to have versus let’s have the hard conversation. But I know there’s a lot of kids, you don’t want to upset your parents, so you’re like, “Well, mom and dad die, farm’s gone. But right now we’re keeping the farm mom and dad, for sure.”

Jennifer Rozelle: Yeah, wink wink, yeah, keeping it. Yeah.

Anne Rhodes: On that note with the businesses, I have to say, it’s interesting because my father-in-law has one of these businesses that was grandfather to his dad and him now, and he’s looking at his kids, four sons and don’t think I want to settle. Two of them are lawyers, the older ones, the two younger ones, who knows. And so it took him a year and a half to two years to sell off his business in pieces because he came to the realization this was the end of the road for his family owning this business, which I think is very prescient-

Thomas Kopelman: Yeah, I respect that.

Anne Rhodes: And very self-aware. But then I’ve worked with clients and their families where for their businesses, they did keep them in trust and they set up whole structures, voting agreements or voting trusts so that the kid who runs the business keeps voting the stock the way that he feels like it. And his sisters I think just trusted him. They got the economic interest of the business, but they just trusted him to run his business accordingly. So you can do some really interesting estate planning structures for businesses, but you have to be really realistic about what it looks like.

Jennifer Rozelle: Yeah.

Thomas Kopelman: Totally. Okay, so let’s transition into some of the passing this on between family members and the way that I think about it is, and actually I’m working on a client right now who parents own a lake house. Parents are like, “Okay, this is going to you. Your siblings never use it. They don’t really want to”, but dad’s not in great health, mom’s not in bad health. And they’re like, “Well, we’re pretty close, almost 60, is planning to retire somewhat soon. We’d love to have this place”, but well, why would mom and dad, they could gift it to me now and use the exemption, but then now I have to take on and get a new mortgage so that doesn’t feel like a good idea.

The other one is like, well, what if we just wait until they pass away? But then it’s like, what if that’s 15 years? And their big thing is they don’t want to put money into a property that potentially isn’t theirs. Then when they pass away, their siblings fight about it and it doesn’t work out their way. So I think I’m just saying that to bring out, it doesn’t always feel like there’s a really good way to do this.

Jennifer Rozelle: Where my head was instantly going is my practice is split between estate planning and also elder law. And when I start hearing people talking about gifting my elder law brain just about explodes because there’s a lot of considerations there. We keep anchoring back to the same theme I think of there’s a lot of conversations that have to happen and with all sorts of property, whether it’s that someone wants to take a property like that, gift it, possibly use some of the exemption, maybe not, and let it pass through their estate plan, of course you get your potential step up in basis at that point.

From my elder law side of my brain, most of the time gifting doesn’t make a ton of sense because that could bite us in the rear at some point down the road. But that’s just one piece of a much larger puzzle. And so it really comes down to what is the parent’s goal, what are they trying to accomplish and what are the true realistic options when the kids get involved and what they’re able to do? Because last thing you want to do is get this house gifted to one of the kids and then the parents watch the kid not be able to afford it. And so just a lot of conversations have to happen in regards to these sort of things.

Thomas Kopelman: Maybe the best place to step back from this example and just talk and just educate people on what are even our options to think through in this side of things.

Anne Rhodes: Yeah. So I’m happy to jump in here because I had a lot of clients in New York and San Francisco who did a lot of interesting planning with real estate, particularly because it was quickly appreciating and they had some wealth to be able to play around with. And real estate has so many benefits under both the income tax and the estate tax side that it’s worth, I think, unpacking some of this. So the first things first I think is just helping a child when you’re thinking your client is wealthy enough to do a wealth transfer, how do I help my child grow their slice of the pie, the American dream? And so much of that I think for us is tied up in real estate in this country. And so how do I help them with the first down payment or potentially even just buying the property.

And so for my clients, the first thing, if it’s just a small chunk of that, let’s say the down payment, there’s a really cool article that just came out today, and this is April 1st, April Fool’s Day, in the Wall Street Journal but I encourage all of our listeners to read, and it’s about using intra-family loans to do some of this wealth transfer because it doesn’t use your gift tax exemption or your client’s gift tax exemption, so you’re not touching the $13.61 million. You don’t have to necessarily start doing even gift tax returns because what you do is a loan, but the line between a gift and a loan can be very thin when it’s intra-family, when it’s a mom or a dad helping their kids. And so some considerations, what happens is you make a transfer of let’s say $200,000 to your child to help with their down payment, but you structure it, you paper it, and the papering is very, very important.

You paper it like a loan, as though you were the bank for that child. You have to have a promissory note of some sort. That’s the debt instrument. You should have a mortgage. So that’s a deed titling thing that attaches on the deed, and you should have some sort of payment schedule that outlines at this percent interest we’re going to be paying on this schedule. So think is it amortized? Is it interest only with a balloon payment? You can structure that loan in different ways. There are certain ways that are more aggressive than others, and then it starts looking less like a loan and maybe more like a gift, but by and large, as long as you paper it like a loan as though you were the bank, that’s really good. You should talk to an estate planner at that point just to make sure you’re on the right side of the loan versus the bad side and giving a gift.

Then you can actually forgive interest payments or principal payments using your gift tax exclusion every year. So every year, every American is able to give $18,000 to any individual. And so that could be your child, and if you have a spouse now it’s $36,000. You just forget that on the debt. And that’s actually something that can also fast-forward the gifting of wealth transfer, although it’s papered like a loan. So that was a commonly employed technique that my clients did. You can be very creative. I had a client who was so smart, so one thing I didn’t mention is that interest rate. Why is it so good for you to loan versus a bank? The reason for that is because you can gift at a much reduced interest rate compared to what a private bank would give to your kid.

Let’s say right now the average interest is 7.5%. You can actually, you have to gift it at a certain level called the applicable federal rate. It’s just a rate that’s published by the IRS and depending on the length of the loan, it’s a slightly different rate. But let’s say it’s a long-term rate, it could be as low as 4.5% right now. So right there, you’ve given your child a gift of that 3% difference. And so anyways, all of that is to say that’s a really creative technique. Another technique… Oh, sorry.

Thomas Kopelman: I just want to add, I think there’s levels to this. I think there’s the maybe more middle-class family who it might be like, let me help you on the down payment. And if you think about the family that has two parents, three kids, you could give them quite a lot of money or you could even split it between a December and January payment where if you think about that, I mean $36,000 from the two parents per person gets you a long way. But then I think you’re talking about this next level of wealth of like, “Hey, we got to get money out of our name. Well, we couldn’t pay for the whole house without using a lot of our exemption, so let’s set it up in the loan this way.” And even on a $2 million property at 5%, even with that whole family structured in there, you do it right, you could basically forgive principal and interest every single year, but this is something that needs to be documented well.

I want to definitely go into how to do that because I’ve come across a lot of people who they are doing this with no documentation. Parents just gave us a mortgage and we’re just doing it at 3% and they’ll just follow market rates or whatever, or hey, parents do this, this, and this, and they didn’t even know. They just thought they were borrowing money from their parents and they didn’t even know about AFR rates. They didn’t know it would be a gift. If not, they’re just like, “Mom and dad helped us out and we’ll figure out how to pay them back when money comes our way.”

Anne Rhodes: Jenny’s face said it all.

Jennifer Rozelle: We like paper, we need paper, we need paper.

Thomas Kopelman: Well, is this like how the IRS gives you a three-year thing, if it is past three years, statute of limitations is passed. So in all likelihood it’s like what is the chance that you’re in that 0.1% that’s audited probably low, but you don’t want to be the chance that it is and then you’re just clawing back even though I guess it’d probably be you just lose some of that exemption, but still.

Anne Rhodes: Yeah. The issue with the IRS, that three-year rule that you’re talking about is there are ways to start the three-year clock because if you don’t even start the clock, then the IRS is like, “I’m free at any time to come and audit this transaction”, which is an issue. And then the way that you actually do start the clock is by filing a gift tax return, which we can talk about in a later episode. But the idea here is how would the IRS even know that this was happening? If the whole point is you structured it not as a gift, but as a loan, it shouldn’t even be on your gift tax return. It’s not a gift.

So that becomes a very interesting question, which is why when Jenny made that face, I wanted to make the same face because it’s like papering is so important because the first thing the IRS auditor will ask is, “Do you have paperwork to show this, that this is not a gift but a loan? Do you have payments to prove literally checks from your kid showing that they’ve been making these interest payments for X number of years?”

And I will tell you, I once for a client had to go back and try to figure out the paper trail, and I was sent all of these Venmo screenshots from the child for a few thousand dollars every month to mom and dad. And of course some of them are missing because the child forgot that month or it was Christmas and they were spending the money on something else, and that starts to really muddy the water. So you have to commit to this idea of the loan if you’re going to go that route.

Jennifer Rozelle: And you imagine the professional fees and doing this cleanup work. It’s the classic, you do it and you probably save yourself money in the long run versus you don’t do it necessarily the right way and you very well could be paying people like me significantly more money to do this cleanup work and the cleanup work may not indeed actually clean it up. We just cross our fingers and hope it does. And so it’s the classic, you just need to do it right from the get go. And I hate to be so old school about it, but at the end of the day, if there’s one thing I hear from most of my client, I want to say all of them, but is they don’t want Uncle Sam in the mix. They don’t want to pay more taxes. Well, if you don’t want to pay more taxes, then you need to be willing and able and ready to commit to doing things the right way as well. And this is to do things the right way, is documenting your way through this kind of transaction.

Thomas Kopelman: I think this applies to so many things though. I recently met with a prospect who DIY to holding company with three businesses, and I was like, they’re like, “We want to check the structure.” I’m like, “You need to go to an attorney. I could tell you that this is not right. How to fix it. I don’t know about that part”, but the amount of things that I see people try to DIY to save a few thousand dollars that is going to end up causing tens to hundred thousands of dollars in fees, taxes, penalties, et cetera, down the line is crazy what people think that they can do from Google.

Jennifer Rozelle: And a lot of times it’s not even malicious. A lot of the times it’s not like, “Oh, I’m not going to pay a darn lawyer to do that.” They just genuinely think, when I was at the very beginning of this episode when I was talking about people polling deeds and things online and go into the county office to fill out their blank little forms, it’s not like people are maliciously trying to cost themselves more of a hard time. They just don’t know. And unfortunately when you don’t explore your options, that’s just the way sometimes the cookie’s going to crumble. And I dare say if you start talking about real estate at all with the whole topic of this episode, when you start talking about real estate at all, it is never going to hurt you to get an attorney’s advice. Even if it feels so simple, it’s not going to hurt you.

Thomas Kopelman: Totally. Totally. Okay, cool. So we hit on inter-family loans, AFR rates. What are some other ways to maybe be passing on real estate and the good and the bad of those routes?

Anne Rhodes: I’ll mention a couple if I can jump in here. The second way that I’ve seen clients pass real estate specifically is a trust called a QPRT. And it’s a Q-P-R-T. And what that does is try to reduce the amount of gift tax exemption that you’re using on those transfers. And it’s specifically for property where you yourself or your client owns it and is trying to retain some usage right over that property. One of the things that can be confusing for clients when they’re doing these big transfers is in order to have made a successful transfer out of your own estate, so it’s no longer within your taxable estate for your client, is that you can’t keep using the property. You can’t retain the benefits of it. It has to go to your descendants. And so with a QPRT, what happens is you can chunk out the gifts to your descendants, but you want to retain for a certain number of years, perhaps the use over potentially the whole property.

And so what you do is you retain an interest within it, and that is calculated at an interest rate that is set by the government. So it is reflective of the current interest rate that you’re in, that environment, and we’ll talk a little bit about why that matters. But anyway, so you retain an interest in it and what remains after a number of years when that property has been sitting in that trust and that trust terminates, let’s say after five years, that remainder interest then passes to your descendants and you can take a property, chunk it up, do a five-year QPRT, or let’s say a three-year QPRT, five-year, seven-year, ten-year and give out little pieces progressively to your beneficiaries. It was very popular and it is very popular when interest rates are really high. So this was a technique that we didn’t really see for a little while until more recently when interest rates have increased and all of a sudden right now QPRTs have resurged in popularity as a result.

Thomas Kopelman: What’s the discount part of it? I always see people talking about there’s a discount component. I’ve seen posts recently that through using them, you can get pass on real estate at a 45% discount now. I think I just saw a thread about that last week.

Anne Rhodes: So the idea is that that’s the value that you’ve retained. You’ve retained the use for five years, that’s calculated at that interest rate. And so when you calculate the difference between the remainder interest and your retained interest, that’s where you got the discount. Because let’s say you passed property, a property chunk like a value of 100K and the remainder interest was valued at 55% of the total and your retained interest was the 45%, that’s where you’re seeing that discount because you passed full value of 100K, but you didn’t claim a tax exemption usage of 100K.

Thomas Kopelman: Usage mean living in it pretty much, or how does it really enforce? Because if that was my parents and I’m like, “I can bring guests, whoever and whenever I want”, what is there to say I can’t invite my parents to come up for 18 weekends a year?

Anne Rhodes: Right. So exactly. So actually as long as the parents still has that retained value, they can actually use the whole thing. Remember we talked about tenancy in common, how X percent, you may own only X percent, but actually you retain the use over a hundred percent. So that follows this retained use. So you own only X percent because that’s your retained use, but actually the entire property is available to your parents to continue using if they’re the ones doing the QPRT, if that makes sense. So it’s a really nice way to slowly have the parents let go, take the value of the property out of their taxable estate so that when they pass away, it’s completely out of their hands and doesn’t inflate their own taxable estate, but also not use the tax exemption over the whole value of the property. So again, in that example, let’s say it was 100K house, instead of filing a gift tax returns that uses 100K of my tax exemption, instead you’ve just claimed 55% of that, like a 55K gift and you retain 45K.

Thomas Kopelman: Is this more of a strategy for people over the taxable estate? If you were like, hey, we have $2 million net worth, is this even something that you would… My mind goes, you might as well just gift it to somebody if you’re never going to have a worry about estate tax issue.

Anne Rhodes: This is for somebody who for sure is hoping to squeeze every dollar of tax exemption that they can out of that transaction. So they don’t want to just do a one-to-one transfer of their tax exemption to that heir. So they want to, instead of having a $13.61 million exemption, they actually want to inflate it to potentially like $20 million, $25 million.

Thomas Kopelman: Okay, that makes sense. That’s a good strategy. Jenny, what about just gifting in general? Let’s say, I’d love to go through the, okay, if parents are going to give real estate to one child, for example, let’s say they keep it simple, what is the upside and the downside of doing that while still alive versus waiting till after they pass away?

Jennifer Rozelle: Yeah, actually that question and your last question go hand in hand because what I was thinking, if you have someone that’s more maybe middle class, average net worth, not high net worth that maybe they do want to consider gifting for whatever reason. I mean, the reason they’re gifting sometimes doesn’t matter to us. They may have just their own motive or reason to gift something to someone else. A strategy maybe that they could potentially explore is maybe gifting as well as retaining what’s called a life estate interest, which basically also gives them the ability to remain in the house. They still have the rights to continue to enjoy it. So it’s maybe a more average net worth ability to do exactly what Anne was just describing. But for whatever reason, they’re wanting to gift the property out of their names, they could do that for whatever reason and maintain a life estate interest.

And the reason that I mentioned right before we started recording, I work with not a ton of people that are super high net worth. And so that’s why I actually asked Anne to speak more into this. And so I come more from a place of those are my people that the people I often help, Thomas, or those people that most of the time transparently, they’re not looking to gift. They’re really not too close, or I shouldn’t even say too close. They’re not close at all to any sort of estate tax threshold. The only time I ever hear people, my kind of clients talking about gifting is when they’re trying to gift out of their names for, say, protecting it from “the nursing home” and things like that. So from my side of the table, I don’t deal with a ton of gifting unless there’s some very specific reason to do it like they’re trying to help their kid get off the ground or something like that.

Thomas Kopelman: Well, I think about just the thought of, okay, what if parents, maybe they have a second little lake house or something, and for them it’s like we don’t really have the ability to go use and enjoy it, and we don’t really want to maintain the property and the cost, et cetera. So it might actually just make sense for us to give this now.

Jennifer Rozelle: A lot of my clients still don’t do that. They will wait until they passed away and they’ll set their estate plan up to absorb something like that. And I do do a lot of estate plans that, like Anne was referring to earlier, that may build in a little trust to house that property. And what I usually encourage them to do is to plop some money into that trust as well to take care of the expenses, the maintenance, the debt, all the things. And still you can tell this must be what’s at top of my mind, still give those beneficiaries a ripcord. And so most of the time my clients aren’t really gifting too much. They’ll put those specific provisions in their estate plan to say, leave the lake house to the kids or leave the farm to the kids, or whatever. And we’ll just strategize different ways to try to accomplish what they’re attempting to accomplish and really set the kids up or the beneficiaries up for success as well. And usually that means plopping some money inside that trust as well.

Thomas Kopelman: Okay, that makes sense. Anne, what about you? Do you think there’s any downsides to gifting while still alive that you guys can think of?

Anne Rhodes: I mean, it’s that you lose the access to the property because the idea of gifting is you can’t… If the whole point is to get that thing out of your taxable estate, you have to be willing to let go of the use. Who gets to decide what happens to the property, including maybe selling it at some point? You have to put that in the hands of others.

Thomas Kopelman: But no step up and cause spacious issues or anything like that.

Anne Rhodes: The one thing I will mention also is I did have clients in this ultra-high net worth space who they’re like real property landlords. They have extensive real estate portfolios, and there the major downside is cash flow loss because the idea is this is how they generated their income. They lived a really nice lifestyle, now they’re starting to gift away the real property. You have to gift away the benefits, the economic benefits, which is not just use, but the income that generates as well. So you have to really use a financial advisor’s help to model out what that income is. What is the income per real property asset, perhaps even like they’re put in an LLC. What’s the income that you were expecting and living off of from that LLC and what does that mean to your cash flows?

The other thing you worry about with real estate, I’ll just point out in case you have a client like this, is that real estate is not very liquid and you don’t want to be forced to fire sale it upon death. And so one thing that ended up impacting a lot of our clients who had extensive real estate portfolio is if they have a taxable estate, if they have huge tax bills, how are you going to generate liquidity to pay for those things? And sometimes it’s actually as a financial advisor worth it to talk to that client about having a life insurance wrapper or life insurance proceeds to generate liquidity so that the beneficiaries are not stuck with an enormous tax bill that they have to generate cash for by selling property at a fire sale.

Thomas Kopelman: This is one of the best permanent life insurance uses. I am not the biggest proponent until you get to that high net worth space. And then there are some good uses just like liquidity in paying estate tax. I think that’s a really good one to add.

Jennifer Rozelle: Can I add two super quick things?

Thomas Kopelman: Yeah.

Jennifer Rozelle: Okay. So one is a fun little nugget. So on my podcast, I recently did a podcast episode on Joe Robby, the founder of Miami Dolphins. And that’s exactly what he had to do, Anne, where when he passed away, his entire estate value pretty much was in the stadium that he built and his team, the Miami Dolphins. And so long story short, they had to sell both of them to pay for all the administrative expenses, including estate taxes. So there’s a fun little nugget. The second thing, which is I guess I’m on the theme of fun little nuggets, I tell clients when we start talking about gifting, I’ve totally made up a word that I need to trademark or something because I call it a gift is untake-a-backable.

Once you gift it, you can’t take it back. It’s untake-a-backable. I know that’s not a word, but it’s a funny word and it usually makes people laugh, but I’ve had clients where they will gift interest or shares of a farm or a business and something has happened and they’re like, “Hey, I want that back now.” And it’s like I’ve seen where the kids are like, “Sorry, dad, not giving it back.” So gifts are untake-a-backable. Just to add on to what Anne mentioned, that you just got to be okay with this, it’s gone.

Thomas Kopelman: I think that’s the perfect way to think about financial planning, estate planning, et cetera, is I think you can really lead with what’s the best way to minimize taxes? Do this, but it might not be the best thing for somebody’s life. And I’m thinking of an example of somebody that I worked with that they were super wealthy for a second. It was like they sold business, it was worth $30 million. They were 40 years old, but 75% of it rolled into a new company. That company went from $10 a share to 70 cents a share. And luckily, they weren’t people who ended up using your evocable trust moving a lot of this stuff out of their name because if they did, I mean this person went from $25 million net worth to three in a year. Maybe that’s going to bounce back. Maybe it’s going to be great or maybe their $3 million net worth and it would’ve been really unfortunate to have half of that into some irrevocable trust because in that year it was the best idea ’cause they were so wealthy at 40 years old.

Anne Rhodes: And you also have to have a real conversation with your clients about what their future to be. I’ve had so many clients who made the money, were like, “I’m ready for my next startup”, or whatever. And then it turns out they just wanted to retire. Five years later, they come to you after doing all this gifting, and then they’re like, “Actually, I don’t want to work anymore.” And then you’re like, “How are you going to generate that income?” And so we always had a saying, which is like, “Do not let the tax tail wag the lifestyle dog”, because you need to live your life and then worry about the taxes. Worrying about taxes is a good thing, but-

Thomas Kopelman: This is so important, I guess, financial advisors and estate planning attorneys to hear this and think it, because right now we have a client we’re working on that’s very, very wealthy. He should be able to sell his business the next few years for, they don’t know, anywhere from $100 to $200 million. He owns 90% of it. He doesn’t want to give it to anybody. He’s like, “I’ve helped my kids. Over the next five to 10 years they’re still a little younger. We can fund life insurance for the couple million I would give everybody, but we’re going to spend every dollar we have left.”

And we keep meeting with some estate plan attorneys and we’re like, “Hey, listen, they care about charity and spending this money.” And they’re like, “Here’s you should do your evocable trust for this, this, and this.” And he’s like, “Can we go interview a different attorney because they’re obviously not listening to me.” And I think sometimes people forget as professionals in our jobs, it’s not to give you the best tax planning strategy, it’s to give you the best strategy that funds your life that ultimately next is tax efficient. It’s that before that, not the flip side. And I think a lot of people get really caught up being there.

Jennifer Rozelle: You need to drop the fictitious mic. There you go.

Thomas Kopelman: Well, cool. Is there anything else that we need to hit on in this topic as it relates to real estate?

Jennifer Rozelle: Do we dare go down the timeshare rabbit hole? I don’t know if we want to or not.

Anne Rhodes: Maybe another day. We will have you back, Jenny, so that we can talk about those timeshares. I think all of us love.

Jennifer Rozelle: Yes. I’m fine with not going down that rabbit hole. I’m totally fine with it.

Thomas Kopelman: Well, perfect. Well, Jenny, we really appreciate you coming on and sharing all the info with us. I think you’ll be a repeat guest for us between my podcast and this podcast. But we really appreciate your time and everybody thank you again for listening. If you want people like Jenny to keep coming back, let us know. Send us your questions. But please leave a review, subscribe, and we’ll see you back for the next episode.

Your client has set up a trust, now what? Hosts Anne Rhodes and Thomas Kopelman dive deep into what assets should go into a trust and what assets should not or, more often, what assets can’t go into a trust.

They cover real estate, businesses, international assets, retirement accounts, brokerage accounts, bank accounts and more. And why the key may be what your state’s threshold for probate is, known as “petition for small estate.” They also tackle beneficiary designations and more, sharing key insights for financial advisors.

Subscribe and listen on your favorite podcast platform.

Full transcript below:

Thomas Kopelman: All right. Hello, and welcome back to another episode of the Practical Planner podcast. I’m your co-host, Thomas Kopelman here with Ann Rhodes, chief legal officer of wealth.com. Ann, how are you doing today? Love the new background.

Anne Rhodes: Oh, thank you. Yes, I’m joining you with the greenish background that is actually very wealth.com appropriate to our branding. I’m doing well. How are you, Thomas?

Thomas Kopelman: I am doing well. I think this is the first time recording since I’ve been back from my bachelor party now six weeks away from the wedding, so just in this really busy season. But I’m excited to dive into the topic with you today. I think that funding trust is something that I just equate to the busy boring work. I think everybody gets excited about setting up their trust, especially the irrevocable side. And then you go through the pain point of like, “Well, now let’s get to funding this trust.” I think for certain ones it’s really easy. You just potentially move one thing in or you’re going through the process and you get the deed of your house moved. But the annoying ones with bank accounts, brokerage accounts, beneficiary designation changes, all of that, I just totally tee up to my clients and I say, “This is going to suck, and we’re just going to chunk away at a few a quarter. And the goal is about a year from now, worst case two years from now, everything is funded in the right way.”

But I think a lot of advisors and just people in general have no idea what goes in a trust, what doesn’t, what is supposed to be a beneficiary designation, et cetera. So I’m really excited to dive into this topic with you today.

Anne Rhodes: Yes, I’m excited too. And for those of you have listened before, you should also note that we address this topic in some respects on The Long Game, which is Thomas’s other podcast, woo-hoo.

Thomas Kopelman: Let’s just take two. It’s got to be better, right?

Anne Rhodes: Exactly. But we can’t talk about trust funding enough. So here we go. First things first is, why? Why fund a trust? And I think here it’s important to note that by and large people say to the extent that you can please do fund a trust. It’s a little bit more important in certain states or under certain circumstances than others. And so we’ll address those as well. But there are actually circumstances where you really don’t want to transfer an asset into your trust. So we’ll talk about that as well or can’t exactly. Don’t want to because you can’t. And so anyways, first things first, I’m just going to address the elephant in the room, which is some estate planners really are going to push you to fund your trust, and financial advisors who have learned from those estate planners might do the same thing.

This is particularly important in certain states, so California, Florida, for example, where if any asset is outside of your trust at your death up to a certain level, if you’ve left enough of them outside, will then trigger probate even though you have a trust-based estate plan. So this is in California here where I am, for example. The limit is 166,000 adjusted for inflation. So it might be a little bit higher this year, but the idea is that if you didn’t do your homework during your life and you left a bunch of your accounts real estate, etc, and the total value is above that threshold, then all of a sudden you might be subject to that onerous probate. So really important in certain states just to go ahead during your life chunk away as Thomas says, and just do it.

Thomas Kopelman: I was going to add, I think that’s a really important number. Honestly, that was something that I did not know the exact number for, but I think it’s a good reason as advisors when we’re having these conversations to point people to, “Okay, you’re 22 or 23, you’re just getting started. It is okay to get a will in place for right now.” And I think that sometimes something that I lean on for people is in the beginning it’s okay just to get there and graduate eventually to it, but those basic documents are it’s just easier to get done, easier to get enforced and not have to really worry about the next steps pre even a small amount of assets being built up.

Anne Rhodes: Exactly. And that threshold actually, which is called usually a petition for a small estate, is supposed to make the probate process easier because the idea is your estate is so small, not very complex, that things can just be passed to your beneficiaries much faster, and the judge has kind of a truncated process. But the issue, of course, is that different states have different thresholds. It can be as high as half a million dollars, that’s great. And then it can be as low as 20 or 50k, so you have to be aware of what’s going on in that state. But here in California it’s in 170k thereabouts.

So then the second reason, and we’ve touched on this, Thomas, in our last episodes, is if you own certain assets that make it imperative or more important for your clients to transfer their assets, so this is real estate that’s in a different state than where your client lives. So all of a sudden, let’s say they have a vacation home, so they live in Indiana, and they happen to have a vacation home in Florida. Well, that Florida real estate then opens the potential, and actually it will just happen. If your client passes away, there will be a Florida probate that’s opened in addition to Indiana probate, so it starts complicating things. And then you have businesses and assets like that where for incapacity planning purposes, you really do want to put them in the trust because the trust is a more robust vehicle. And we went through some of those decision points in a past episode.

Thomas Kopelman: I think honestly the easiest way to chunk at this is just type of asset for most people. And I think you obviously alluded to real estate. In your mind, I know if you have real estate in different states, it’s like what are you doing here, nobody wants to go through and probate in two states? But let’s say you just have real estate in one state, states like California, you get it right, probate’s long, it’s painful, do it. But what about some other states? Does it typically make sense for people if you own a house to put it inside of a trust?

Anne Rhodes: That will depend a little bit on state nuances, but by and large it’s always a good idea to put it inside the trust. There are a couple of things. I will just mention it’s annoying as heck when you have your real estate in a trust. So when you go to refinance or take out another loan of some sort on that real estate, your bank, the mortgager, may just require that you take it out of your trust to get the better rate because they have different interest rates depending on if it’s your primary home, if it’s in your own name as opposed to the name of an LLC or a trust. And so to get that better rate, they’re going to ask you to take it out of your trust, do the refinancing, and then a lot of people just forget at that point in time. They just left their real estate in their own names because of some other transaction they were doing and completely forgot to then put the real estate back into the trust for all the other reasons we’ve mentioned including bypassing probate.

So my recommendation whenever you’re putting real estate into a trust and then taking it back out is can you get a two-for-one deed preparation by asking whoever is doing the titling company or whoever is doing the transfer out to proactively also prepare the deed for the transfer back in. And then once your refi has happened and your bank usually says, “Oh, just leave it out for 60 days and then transfer it back in and we won’t care,” after those 60 days have passed, then just go to a notary, sign the thing, you already have the documentation, and just put it back in.

Thomas Kopelman: This is another pointer that you gave me too is if you have a client that potentially has not set up a trust yet and they’re buying a house right now to do the same thing, right? Oh, I wish we would’ve set up our trust. We know we’re about to do that in this year. Let’s get the two different deeds in place. So once we do have the trust funded, we can go get it notarized as well.

Anne Rhodes: Exactly, exactly. And then there are a couple of instances, Thomas, where I’ll just mention in my career where we said, “Please don’t put this property into a trust,” either because legally you can’t as you mentioned before or because it’s just a terrible idea. And so I’ll address those from the get-go. So the first one is retirement accounts, sometimes even life insurance policy. There are certain types of taxable accounts as well where until you pass away, there is no way for anybody but you, yourself, to own that asset in your own name. So this is your 401k. If this was a 401k that you earned while working until you pass away, you have to be the owner of that asset.

Thomas Kopelman: So you said houses are really are good, right? Businesses typically are good. Is there any instances before we really dive into all the rest that you see that that doesn’t make sense?

Anne Rhodes: Yeah, so actually that was going to be my second point, which is there are certain accounts located abroad. We’re a very US focused podcast, but in a past life I did do a lot of cross-border work. And so if that asset, that bank account or real property is located abroad, you may not even legally be able to transfer it into your trust or you can transfer it into your trust, but the local laws, especially income tax laws or transfer taxes might make it impossible or just a terrible idea. So we’ve had certain folks, for example, who tried transferring property located abroad and their CPAs or the accountants from that other country said, “Actually you’re going to be incurring so many taxes that it’s a terrible idea to fund this property into your US trust.”

Thomas Kopelman: What about people who are in US? I have a bunch of clients I work in this situation, I’m going to quiz you on this, we’ll see if this is something you’re familiar with. But what about people who they were citizens abroad, they now have US citizenship, but they’re not for sure going to be staying in the US for a long time. I have a bunch of clients who are like, “Hey, I’m going to work three to five more years in the US and go back abroad. I think the difference of keeping us residency and getting rid of it obviously makes a difference. But I’ve seen some mixed reviews from different estate planners about, “Well, if you’re only going to be here for a few years, is it worth the fees to set up a trust and fund things in the trust for a couple of years? I mean, what are the odds that we pass away?” What do you think of that?

Anne Rhodes: That’s such an interesting question because when you get into as you said, they may have US citizenship or what’s called residency, income tax residency in the US. So this is a green card or enough days spent in the US to trigger income tax residency, depending on what kind of immigration status they have, then they leave, there’s that exit tax that’s imposed. And we can talk about that some other time. But the idea here is, do you bother with a US estate plan, especially a trust-based one? That will depend a little bit I think on the circumstances of that person. If they intend to keep that real estate for the future, either their own use or they just want to pass it on as an investment property to their beneficiaries, it actually makes sense before they leave to talk to an attorney, make sure that they’ve done all their exit planning.

And one of the things that they want to consider is actually a holding structure so that if they ever sell the property, it won’t have this basically a transfer or income tax imposed on it. That’s something like 15% of sales proceeds because they happen to now be a foreign person. And so actually a trust might be a really great idea to set up in the US. And not just a revocable trust as a succession planning, like death time planning tool, but actually an irrevocable trust so that their descendants who are based in the US fall in love with US citizens, going to have US babies, just stay here forever so that their descendants have basically this US piggy bank, this US side trust that’s an irrevocable trust ideally set up in a really good tax jurisdiction, the South Dakotas world, and then that becomes their big vehicle in the US to invest their family assets.

So it really depends. If they’re just going to leave and they’re like, “Ugh, this is my temporary home here. I don’t ever plan on coming back,” then in that case it may not make sense to set up a trust. They can just do a will, a US side will.

Thomas Kopelman: Okay. So really it sounds like it’s more on the real estate side of things like brokerage accounts, things like that. It typically doesn’t seem like it would make a lot of sense to be putting inside of a trust.

Anne Rhodes: Yeah, I would say so.

Thomas Kopelman: Okay, cool. So sorry to deviate here, but I thought it was interesting when we were talking about the foreign side of things. So now we start to go into the retirement accounts. So you’re talking about 401ks, IRAs, all of these accounts that are in your individual name, are not good assets to be putting in a trust. It’s not even that they’re not good. It’s not even something that you can do.

Anne Rhodes: Right, exactly. And I think we had a listener question about this actually, so I just wanted to address it. It’s not necessarily that it’s a taxable account, meaning that there are income taxes building up in some of these types of accounts and assets, but it’s just simply that legally you can’t transfer those into the name of the trust. Where I think a lot of confusion comes in is that they can become transferred into the name of a trust once you have passed away. Once it becomes an inherited account or you, yourself, inherit an account from a parent or somebody else, that’s when the question becomes should you put that in a trust or in the individual’s name? And so how do you designate beneficiaries?

That question has actually become even trickier after the Secure Act. So this is Secure Act 1.0, the one that was passed in December, 2019. So at this point it’s about three and a half years old. And what that law did, and we can do a whole episode on this, I like talking about this when I have speaking engagements, but one of the things that it did was remove the ability to draw out those income tax deferrals based on the life of the younger beneficiary through a trust. So now putting that asset in the name of a trust and inheriting that way subjects you potentially to this 10-year rule and things need to come out. And so you have even more pressure when you use a trust on the income tax side. It’s also because trusts that own income generating assets, they pay income taxes at a compressed rate compared to an individual, so you, Thomas.

Because these become irrevocable trusts, right? You’ve passed away, you’re passing also retirement assets to a trust, which is part of your estate plan. So stepping back, let’s say you pass away, you want your retirement accounts to go to a younger beneficiary, like your child or grandchild, and up until they are X years old or maybe for their entire lifetimes, that trust is going to hold the asset for them. So that’s an irrevocable trust formed at your death. That irrevocable trust is the owner of your retirement account and is going to incur income taxes at a very different rate from having just passed that asset onto the beneficiary themselves, so that child or that grandchild. You have this issue of, “Should I just outright name my child as a beneficiary of that retirement account or should I name the trust for my child as the beneficiary?” And that will have different income tax implications to it.

Thomas Kopelman: But, really, I mean the core part that we’re talking about here is if you inherited as a spouse, you have very different rules than any other person other than your spouse. The 10-year period is that big thing that it went away to just stretch it over your lifetime. And now we have this part where most people are inheriting assets in their highest income earning years in their forties or fifties, and they’re required to take it out over 10 years in probably the highest brackets. And so I think that’s the important deciding factor here.

Anne Rhodes: Yes, the categories of beneficiaries matters tremendously. So there’s a reason I didn’t mention the spouse. The spouse is an ideal candidate actually to receive retirement assets. They’re something called an eligible designated beneficiary, so EDB. And so there are also special needs beneficiaries that fall into this category, beneficiaries who have disabilities, things like that. So we are setting those aside, but the idea here is inherited retirement account can be held by a trust, but there you have a whole Pandora’s box of things that you’re opening where you’re considering income tax implications.

Thomas Kopelman: I think the big issue here really is most common we see spouse first, not trust. Second though, you still commonly do see trust if kids are young, right? So if your kids are under 18, especially way younger than that, I feel like most commonly people are going that route. But I think what you’re getting at here is that might not be the best thing if you have adult children.

Anne Rhodes: Exactly. So we can, of course, talk about this in more length, but what the Secure Act basically put an onus on, an incentive on, is to revise your beneficiary designations at the point in time where you feel like your children or the grandchildren are old enough to have that asset in their own names. Before it didn’t matter as much. You could just appoint the trust for that child, and then if that trust was correctly structured, you could actually draw out. So this is the life expectancy. You could draw out the withdrawals, but now that doesn’t exist anymore. So there’s a huge incentive for financial advisors and their clients to review beneficiary designations on retirement accounts more proactively.

In the beginning you might say it’s worthwhile for me to take an income tax hit because I really do worry about this beneficiary’s controlling how they spend that asset. So the control factor outweighs the income tax hit, but eventually when that beneficiary is old enough, let’s say 25, they went to grad school or whatever, at that point in time you might say, “You know what? At this point, let’s switch it so that it’s no longer the trust that’s going to get the retirement account, but the beneficiary in their own name.” At that point, the control factor goes away, and the income tax benefits outweigh the control.

Thomas Kopelman: And this gets complex fast because the size of the account matters too. If you’re passing on to your one adult child the $300,000 IRA, what’s the income problems on that? It’s really just distributing that account to you that’s going to hit you at the income tax threshold because you ideally would probably space it out over 10 years unless you’re going to retire around that time or have a sabbatical or low income year where you can fill up lower brackets.

Anne Rhodes: Right, exactly. And just leave it to the beneficiary and hopefully a CPA working with your beneficiary to figure out how to best withdraw the retirement account benefits. But at least your estate plan should direct the asset to the right places. And, in fact, one quick tip, your estate plan, if it is trust related ideally would also allow for distributions in kind of accounts or assets out to the beneficiary. I think most trusts do this.

Thomas Kopelman: Versus selling the asset?

Anne Rhodes: Exactly. Versus having to withdraw and then give the asset the money to that beneficiary. Instead just pass the entire account straight to the beneficiary. That might be a way to bypass a stale beneficiary designation where the trust is the beneficiary where the trustee just says, “Hey, I’m just going to pass this asset out of the trust whole as it is straight to the beneficiary.”

Thomas Kopelman: This is where the advisors get to add a lot of value. I had a client in a very similar situation. Theirs was weird because the parent was still in their 401k plan active, so they had a five-year stretch period, which is super weird. I’ve actually never seen that, but I guess it happens sometimes. And all we did is they were business owners, husband and wife, both solo 401ks, both max them out. So as we’re withdrawing these assets, filling up brackets, we’re also deferring from basically funneling that income into a solo 401k. Obviously you’re not, it has to be your earned income, but reducing taxes in those years is probably really important.

Anne Rhodes: Right, exactly. And then I did want to address, once you have a trust and you’re starting the process of funding etc. And by the way, speaking of checklists that are account specific and you just work your way through the account, I did want to mention for those of the listeners who have a wealth.com subscription, once your client has a trust or a will, we actually do make available to you a manual. It’s called an owner’s manual, but the trust owner’s manual has a very detailed checklist that takes exactly the approach that Thomas recommends and uses with his clients. So it’s working your way through certain types of accounts quarter by quarter. But anyway, so I just wanted to mention that. But let’s talk about those pay on death or transfer on death designations outside of retirement accounts or foreign assets.

Thomas Kopelman: Can I ask one thing before we go there?

Anne Rhodes: Sure.

Thomas Kopelman: Okay. So we went through business, we went through real estate, we went through retirement accounts. This is the brokerage account side of things. And we still did hit on the brokerage account side of things. What about bank accounts? I think this goes hand-in-hand with what we’re going to talk about next, but I think a lot of times people sit and wonder, “Is it worth it to do with bank accounts because it’s obviously painful?” And for a lot of my clients I’m thinking about they have personal checking, then they have a personal savings there, and then they have five high-yield savings accounts for each different goal, and then maybe they have a couple other ones. It’s like, “That’s a lot going on, and that’s going to be a really painful process.” Is it even worth it or is it just potentially worth it doing your one big emergency fund or something?

Anne Rhodes: So I would say at the minimum, take a look at what the threshold is for your state for those small estate probates. Because some of our clients like here in California, we’re pretty resistant about putting all of their assets into their trust because you have to reopen accounts in the name of the trust. Your banker is going to ask for a certificate of trust or to look at a copy of your trust. Then new cards are going to be issued to you. All of your automatic deposits and other things like payment terms are going to need to be rejiggered and reconnected. It’s really annoying. So what we usually said is, ideally you transfer everything into your trust, but if there is some working account like your principal checking account and it’s under that small estate probate threshold, that’s okay to keep in your own name, but just be very careful because then if that’s what you’re keeping outside of your trust, then make sure that you’ve your homework on all the other accounts.

Thomas Kopelman: The other one, something that I’ve heard from estate plan attorneys is always have your own individual account with some money into it. So if this does happen or whatever and probates there, you still have access to some amount of money.

Anne Rhodes: Right. And I will say one small advantage, but this is something I learned last year when Silicon Valley Bank and First Republic were struggling is that there is an insured amount from the FDIC, and it’s per account X dollars. I think it’s like 50k if I’m not mistaken.

Thomas Kopelman: It’s 250k.

Anne Rhodes: 250k, thank you, Thomas. But the interesting thing is if you put it in the name of a trust, every single one of your beneficiary counts towards that so you can actually multiply the insurance. So that’s just a side bonus.

Thomas Kopelman: And there’s honestly now a lot of banks that multiply this. They have five million minimum and stuff like that. Definitely important to look at. I think people didn’t think that was an issue. And then last year that happened, but then last year everybody did get their money back, and they got bailed out. So we have this weird thing of does it matter? Does it not matter? Well, who knows, but you might as well just be smart.

Anne Rhodes: Right. So something interesting there, but those transfer on death or pay on death beneficiary designations that you had, review those. If you’re a financial advisor and your client finally has a trust and are starting to fund them, don’t forget to review those designations because they may have become stale. Now the client has a trust. I always think of those designations, so, for example, you have a joint account with your spouse, and there’s right of survivorship on that or you’re single, elderly and you have pay on death to five children because that way it bypasses probate, it goes straight to those kids once you pass away. Those designations may have become stale once you have a trust for two reasons, and I just wanted to address them. The first thing is that your trust is actually a more robust vehicle for determining how things are passed at your death.

So the first thing is that it provides for the payment of your taxes, your last expenses. This would be funeral expenses, attorney’s fees, whatever else. And also your last debts, so you made charitable pledges or just whatever debts you have. If all of your accounts passed by one of these designations automatically to your beneficiaries, your executor or your trustee would then have to go back to your beneficiaries and try to get assets from them in order to pay for those things. So that creates an awkward situation for your beneficiaries. It’s like, “Who’s going to volunteer?” Or, “In what proportions are you going to regurgitate the assets that you just got?” And do you focus only on the liquid assets or the illiquid ones too? It just becomes really awkward.

Thomas Kopelman: Yeah, so it feels like though that it’s like a step one, right? That’s better than nothing if you have a trust set up. I think sometimes people are like, “Do we keep those designations? Do we just end up funding it into the trust?” And it feels like from you, it’s take that extra step because now that it’s funded, you might as well utilize it because it’s going to lead to less issues and better results at the end of the day.

Anne Rhodes: Exactly, exactly. And less issues. It also includes things like not having to always take a look at the account levels to be like, “Ooh, am I giving enough to my daughter versus my son?” And things like that. It’s like if your trust just says 50% to my son, 50% to my daughter, just let your trust take care of gathering all the assets, a hundred percent of the estate and then dividing smoothly, fifty-fifty as opposed to each account trying to balance it out.

Thomas Kopelman: It feels like if you’re going through the pain, and obviously it is a pain to get a trust set up and get it funded, if you went through the pain, you paid the cost, you just have that last little part to get to the finish line to get everything in the right places. Don’t get lazy on it, get it done. And as advisors, it is honestly part of our job. I think sometimes advisors are always looking for more things to talk about. This is a really easy thing to talk about. It might be super boring in a meeting to watch them do some of these things, but we can help make sure that it gets done, and I think everybody will be happy because of it.

Anne Rhodes: Exactly. So that’s the episode I think on trust funding and some of those designation issues that you might see once your client has a trust and is starting to revisit those beneficiary designations. And we always encourage listeners to send us their questions because I’m sure that you’re touching on these issues.

Thomas Kopelman: Totally glad to finally get a question. We have more coming, but if anybody else has them, send them our way. But everybody thank you for listening. Please rate and subscribe, and we’ll see you back in the next episode.

Hosts Anne Rhodes and Thomas Kopelman discuss how advisors can help their clients manage and reduce fees related to estate plans. The conversation highlights that, often, the biggest assistance and advisor can provide is to prepare their clients ahead of meeting an estate planner while also helping set expectations. While this can help streamline their time with an estate planner, they stress that quality is always paramount.

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Full transcript below:

Anne Rhodes: Hello everybody and welcome to another episode of The Practical Planner. Today I am the one who is opening, and so we have a very sort of hopefully an easy listen for you. I know the last episode with irrevocable trusts and businesses and all these trust acronyms was probably really dense and long. And so for this episode we thought we would give you some practical pointers about what you can do as a financial advisor to help control the bill when you are working with a client who is working with an estate planner. And so Thomas, today I’m going to start by asking you sort of as you help your clients navigate estate planning, either for just succession planning, like they’re at death basic foundational estate plan, but also some of these more complex wealth transfer strategies and you have to coordinate with an army of advisors. What do you do? What are you seeing out there and what are some of your strategies?

Thomas Kopelman: I think you worded that really well without saying lower fees directly, because I think sometimes a lot of the advisors I talk to, everything is about fee compression and lowering fees and everything. But at the end of the day, you still want to work with a professional who’s going to get the job done and get the job done well, like finding an estate plan attorney that’s going to cost 1000 versus nine is really cool until that’s a terrible estate plan and issues come about. So I think first and foremost level setting that quality is important and you want to pay for quality, but there still are ways for us as advisors to help reduce the fees that our clients are going to pay to the estate plan attorney, at least in my experience. And I think this really starts with first meeting I have with my clients is all about getting organized.

I need to understand their balance sheet, I need to understand their family, I need to understand their wants. And then from there I really focus on educating them on the benefits of each different type of thing. So I think if you start with the bare minimum of just getting a will in place or getting a revocable trust in place, I think it’s just educating them on the differences between the two. Why one potentially could be better for the other. So when they walk into that first client conversation with the estate planning attorney, they’re not like, I’ve never heard of the word revocable trust. Because I’m pretty much a flat fee advisor, but a lot of the estate planning attorneys are hourly. So the more questions you have, the less you know, the more that’s going to cost and I think that makes sense to everybody. I think there’s only so much you can do on that side of things.

You’re still going to pay to move the business there, to do a deed transfer of your house. I think there’s a lot more that we can do on the irrevocable side of things, because if you walk into the attorney’s office and you’ve never heard of any of the different types of trusts, it is overwhelming. And so for us with our clients, we really start to walk through some of the strategies that could be impactful to them and why. And we do that twice actually. We still have a beginning one, here’s the strategies, here’s the potential impact, here’s what this can do for you in the long term. Take some time to think about this, understand it, and then we’ll sit down for the next meeting and answer questions about it for them. And so then when I call the estate planning attorney, I’m thinking about a recent case I’ve been doing this on.

I said, “Here’s the client, here’s what they want. Here’s some of the strategies we’re considering that we want to go through with you and help decide what are the best ones to do.” Because for example, I had a client who I knew the estate planning attorney wanted to bring up irrevocable trust for the parents to set up, but that was never going to happen. The parents were never going to agree to it. They’ve already talked about it. We already had them facilitate that conversation. And they said, “Absolutely, that’s not something that we really want to do.” And so he just wanted to set up things for himself even though he had really wealthy parents. So instead of sitting through an entire hour long meeting of the advisor showing all the estate planning strategies the parents could use to benefit him, we didn’t necessarily have to go through that time and do it.

So to me, I think it’s really all centered around a lot of time gathering the information. So I think you can attest to this. The first meeting, if somebody didn’t have an advisor sat down with you, it’d be all about, let me get to know you. Let me get to know your family. Let me know your business. Let me get to know your balance sheet, and then let’s start educating, and that’s probably the first three meetings. And so what we can do is we can condense down those first three meetings to potentially only one. And I think for some people like, well, you saved two hours. Well, we also saved hours of them gathering it and organizing it to give to them, which can maybe that reduces 20 to 30% of the cost.

Anne Rhodes: That’s one of the pain points that I remember when I onboarded new clients. And let’s be clear, my biggest referral sources were financial advisors. So the better I worked and coordinated with a financial advisor, the more likely they enjoyed working with me and saw me in action with their clients, and would then refer business back to us. So with the financial advisors that I got a lot of referrals from, it was like, we synced up, we hit a really good pace, but there’s always that information gathering that a lawyer needs to do.

And so to the extent that the financial advisor has already done all of that once, why do it again? And this I have to mention by the way, that attorneys tend to operate in a pretty antiquated way. It’s just the business. I think the profession, they’re very reluctant because of different liability reasons and insurance and whatnot to adopt technology quickly. And so this is where, to be honest, I sent a PDF and very recently we made it fillable, which has even better than just a static PDF. But imagine if your clients have to sit through and fill out a static PDF, do they print it? Do they have Adobe Pro to be able to fill? You as a financial advisor, just the fact gathering stage could just really be helping your client.

Thomas Kopelman: I was going to hit on that a little bit deeper though too. Almost every advisor I know has financial planning software. So the tools we have to gather the info, my software has them link every account they possibly have. And then I have a vault that has taxes, company benefits, insurances, investment statements. So everything is gathered in a really easy way, where it’s not like I give the attorney that login, but all of that is downloadable and be able to share it with them as long as clients give the approval, which of course they do. Every client wants you to handle vacation for them or like them.

Anne Rhodes: So because you might be more technologically forward than the attorneys you’re partnering with, your tech stack, put it to work to reduce the bill for your client on the legal side of things. And of course there’s technology out here, like wealth.com that can help you further reduce some of those costs.

Thomas Kopelman: But I think that’s a good talking point to add too. All of our clients are entering things into wealth.com, so when they book a meeting with the attorney, the attorney can go through the software with them and that also saves a whole bunch of time.

Anne Rhodes: Absolutely. Something interesting that you said too is about setting client expectations and making sure that the first time that they hear about something is not necessarily from the person who’s billing them by the hour, but if you just happen to know and have the comfort level to be able to speak to it, you can take that first crack for sure. So here’s what I would say. I think that with the most successful financial advisors that I worked with, client management was also a thing, because let’s put it this way, sometimes you have clients who just really like to ask questions, detailed questions. They really need to know what’s in the boilerplate of their documents and they need a lot of hand holding and they’re just constantly emailing. I’m sure everybody can think of a client that’s a little bit like that.

And that experience can be just as frustrating for the client who’s getting the $20,000 bill from the attorney at the end of the project, as with the attorney, because they don’t want to charge $20,000 to do a basic estate plan. That’s not what it’s supposed to cost. And so then they have to reduce their own billing, go back to the billing department, get approval from the head of whatever their group is, their practice area, and it’s just a bad experience for everybody.

And so in that case, sometimes it’s helpful for you as a financial advisor to tell a client, “Listen, maybe I can interface with that attorney and take that burden off of you, because I know how you run your life. Let me take that on and make sure that you feel like you’re set up,” but without spinning the wheels of all the parties involved. So I’ll tell you that that has happened a couple of times where when you have the financial advisor stepping and mediating that, it is really helpful as an attorney as well. The flip side of that to be careful about is the attorney-client privilege, and how all of a sudden you are almost stepping into the shoes of the client to impart their wishes.

So just making sure that when you’re doing something like that, you’re being the liaison, keep the client copied if you can, make sure that you have things in writing from the client. Because sometimes you don’t want to copy the client, because what starts their wheel spinning, but at least that you have a trail for like, they instructed you this way and now you’re going to go in and instruct somebody else. There were some clients we never even talked to because of the family office, and things just came straight through from advisors in their inner circle. And so there are some things to think about there too about the dynamic.

Thomas Kopelman: That makes a lot of sense. And I think if you’re an advisor with a pretty good practice and you have some good attorneys that you refer to, most of the time they want to work with your clients. And so they’ll have conversations with you and educate you without charging you. I’ve luckily had that experience. I have a bunch of great attorneys I talked to, they help answer questions. They’ve never once billed me for it. If they did, obviously that would be part of it. I think another way is there are flat fee attorneys. I’ve found some really good flat fee attorneys. It’s not like whatever we do is $5,000, what we do is 10. But they give you at the start, “Hey, I got to know them. Here’s what we’re thinking we’ll do. It’s going to cost $15,000 or whatever.” And so sometimes I think people just really like to know the cost going into things.

I think it’s just kind of, “Hey, we charge $600 an hour. How many hours are you going to be?” “Well, really hard to say.” “Well, could you give me an estimate?” “We really have no idea because it could depend on this, this, and this, and then this happens. You’re like, okay, well that’s really scary. So I’m going to say no.” Even if 15,000 ends up being more than what it was, I think a lot of times people just like to know the number. Call it a day, it’s planned for and that there isn’t just a large unexpected expense.

So some of my clients have really liked that structure and working with those type of attorneys, same with financial advisors. Some are okay with AUM, some only want flat fee advisors. They know exactly how they’re charged when they’re charged, et cetera. So I think that’s something good to know.

Anne Rhodes: And I will say two things on that. The first is I think that you’re owed a quote, like an estimate. And sure the lawyer can couch it and be like, “Well, I still am going to bill by the hour or whatever.” But you should be able to just put a number on it to just give you a sense for how efficient that lawyer is. Because that lawyer could be like a solo practitioner where every hour they work on your account as their billing rate, versus some attorneys start building some efficiency into their practice. They have paralegals, they have their own tech, how efficient they are. The billable hour can’t substitute for that metric. And so I actually think as a bill of rights for the client, you’re owed an initial estimate, plus anybody just wants to be able to budget. You guys as financial advisors, that underpins the very basics of what you’re doing as a planner.

And so that’s just another line item that goes into the budget. And lastly, I will also say don’t assume, and I’m sure you know this, but don’t assume that the wealthier your client is, the less sensitive they are to a legal bill. I think I was always surprised by this, but there were some clients who had so much money and they argued over every single billing block that I had on my invoice, versus a client who didn’t necessarily like a mass affluent and who just was so pleased with the service, just never argued a bill, so you just never know.

Thomas Kopelman: That doesn’t surprise me at all. Again, I’ve worked with a household, they’re like a hundred million net worth and the nicest place they shop at is Target. They don’t want to buy clothes anywhere nicer. And then you work with people who make $250,000 in… They’re buying Gucci everything. So that does not surprise me. I think the only last thing I’ll note is obviously a way to reduce fees for me and my clients is that I do pay for wealth.com and then that my clients, the ones that fit, do it through there. And then another one is a lot of times what I think is great planning for parents is your kids should have power of attorneys and medical power of attorneys set up, and I can just invite their kids to do that through wealth.com without it being a cost that would prohibit them from doing it.

Anne Rhodes: Well, thank you for that plug in, Thomas. Actually, it’s interesting that you should mention that, because I remember having clients where the parents have done tens of thousands of dollars of planning to be able to reduce their own taxable estates and get things out. And then you ask, well, your kid is in their 20s and they’re not married, they don’t have kids. So if they pass away, something happens to them, all the assets that you just transferred to them come right back up to you, because of default intestacy laws. So you as a financial advisor sometimes can just bring that up and kind of see how if the client is open to actually taking on the bill for their kids to do their own estate planning, but with certain tools now it can be like you just need a basic plan for the kid. It does not need to have your dynasty trust in it or whatever else. They just need to pass assets to their siblings or somebody else, but not the parents.

Thomas Kopelman: Well, I think this was another really helpful episode. I know this was a big question that I had when I was starting to engage in we’re the estate planning attorneys. I was very price conscious for my clients of like, you just started with me. You’re paying all these financial planning fees, now we’re going to have you pay estate planning fees. How do we at least make it the best situation you can? And I think this episode did a really good job of helping people understand that.

So again Anne, thanks for joining me. I love doing this podcast with you, and I’ve been getting really good feedback from people about how great it is. So hopefully we continue to just get more and more people listening and all the listeners that do enjoy this, the best way you can help us is share this on social media, like it, subscribe, and that would be really helpful. And then submit your questions or things you want to talk about to us. All right everybody, see you next time.

The previous episode covered why you may want your revocable trust should own your business. So, in this episode hosts Anne Rhodes, Chief Legal Officer at wealth.com, and Thomas Kopelman, Head of Community at wealth.com and co-founder of AllStreet Wealth, talk about why you may want your irrevocable trust own your business. They discuss the main considerations — Control, Asset Protection and Tax Planning — as well as key legal terms to know, plus examples of when someone may want to consider their business being in their irrevocable trust.

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Helping new clients with their estate plan can be an early win. It’s not uncommon for new clients to not even have an estate plan in place. If they do, there may be opportunities for updating and optimizing.

In this episode host Anne Rhodes, Chief Legal Officer at wealth.com, asks her co-host Thomas Koppelman, Co-founder of AllStreetWealth and wealth.com’s Head of Community, how he approaches new clients and where financial planning intersects with estate planning, including:

• Finding simple opportunities like just creating a will or updating old plans to include new children.
• Understand the “why” of what they did previously to see if there’s new, better ways to achieve their goals.
• How to dig deeper for more robust estate planning optimizations and opportunities.

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