If you thought our last episode about Estate Planning was beneficial, then you’re really going to find this release chock-full of insight too! Join Zacc and Laura as they dive into the advanced strategies you and your family will want to use for a financially secure future!
In this episode, estate planning guru and attorney at York Howell & Guymon, Eric Whiting discusses the various advanced estate planning strategies you can use to maximize the assets your family keeps after you pass.
Zacc, Laura, and Eric discuss:
[00:00:00] Welcome to The Financial Call. We are financial advisors on a mission to guide you through the financial planning everyone should have, whether you're doing it yourself or working with a financial advisor. These episodes will help you break down complicated financial topics into practical, actionable steps. Our mission is to guide motivated people to become financially successful. Welcome back to The Financial Call. This is Guided Path, season five and episode five. We're making some progress here. So season five is all about estate planning. We've already covered the basics. You know, the estate plan. Everyone should have wills and trust naming beneficiaries. And then we talked about estate taxes in the last episode. We're pretty excited about today's episode. This is all about advanced estate planning strategies. We brought in the expert today with us. Zacc, maybe you want to introduce who we have here with us today. This is Eric Whiting. You might find him in the mountains. Probably would find him in the mountains more often than not, right?
[00:01:00] Skis, mountain bikes is a lot of fun. Eric and I have been out a couple times, but Eric is fantastic with estate planning. I've really enjoyed working with clients with Eric. But not overly complicated. And so that's a hard balance, which is hard to do. Yeah. So I know Eric, we're happy to have you. Happy to be here. Yeah, good to be able to talk through estate planning with you guys. It's not as fun as being in the mountains, but. Try and make it interesting. We'll get it done quick. You can get out there after this and enjoy it. So it's been the best snow season in decades here in Utah. And Eric was telling us how many times did you make it up to the mountains this time? 40 times this year. 40 40 days. That's fantastic. It's unusual, but I prioritized it this year and, and made it happen, so. Nice. Nice. Okay, so today, We've already covered some topics, basic terms, basic trusts. If you feel like you don't know what estate planning is, or if you feel like you're a little bit lost, this is not your episode, you need to go
[00:02:00] back, you need to go back and listen to the first three or four of this season, this one will leave you behind. I think it will leave you behind if you don't go back, because the goal is there are complex issues that folks with a decent amount of wealth need to be aware of and need to handle. And I talk to a lot of clients that have come across a lot of money and they are always amazed at how they think they're retiring, but they basically retire into a full-time job of managing their money and their finances and their estate, and it can be really difficult. So today we have Eric, and we're going to go through quite a few of the more complex strategies that people use. And basically what are they and why do people use them? And I think we dive right in. Let's do it. Anything to add, Eric, before we get going? Nope, that sounds good to me. Okay, so a quick review of topics from previous episodes. We talked about the lifetime exclusion. I always think it's confusing, and maybe Eric, you can help here, but the word exclusion
[00:03:00] versus exemption versus estate tax credit. Like why do all these terms exist when we're basically talking about a certain dollar amount that you can give? Away either during your life or at death without having to pay estate taxes. Can you shed any light on what we're dealing with there? Yeah. I think one of the biggest areas of confusion for people when it comes to gift tax is they all know about the annual exclusion, which is the $17,000 that you can give away every year to an unlimited number of people and. That amount doesn't count against your lifetime exemption, so you can give away 17,000. If you give away 17,001, you're now eating into your lifetime exemption, and everybody has a certain lifetime exemption that they can use. And currently that's about 12.92 million, $13 million rounded up that they can give away. And so if I make that gift of $17,001. I am going to use $1 of my 13 million.
[00:04:00] So now I have $12,999,000 left. Right? So people are often familiar with the annual ability to gift, but they're not familiar that they can give in excess to that. cause people will come to me all the time and they'll say, I can only give my kid 17,000. Right? No, you can give your kid a million dollars if you want to, and no estate taxes and no estate or gift tax, right? But it's going to eat into that lifetime exemption. Another important thing to remember about the lifetime exemption is that it's a gift tax exemption. And it's an estate tax exemption. They're two different taxes, but they are unified in that you only get 13 million. So you can either give away 13 million or you can die with 13 million or some combination of the two, but that's all that you get. So if you want to give away half of it during your life and die with the rest of it, you can do that. But it's all part of that same exemption. Basically, the government doesn't want you to give away all of your assets before death and avoid all estate taxes. So that's why they combine it, right? You can either give it away or you can leave it behind when you
[00:05:00] die, but we're counting the amount you're giving away so you don't get out of those estate taxes. Yeah, it used to be an estate tax only. Right? And then the IRS. Saw that they, everybody was giving away their money. You give it away on death, right before you're about to, on your deathbed, you give it away. So they implemented the gift tax. Now, while we're talking about this, we probably should bring in the generation skipping transfer tax because it's related, so related to the IRS saying, Hey, we want to make sure that nobody gets away with making a transfer that isn't subject to the estate tax. Well, under a normal circumstance, if, if I. Were to give a gift to my kids, and then my kids own the asset and then they die and they give it to their kids. The IRS gets to hit that with a state tax twice, right on my transfer to my kids, and then on my kids transfer to their kids, my grandkids. Well, if I skip my kids and I go right to my grandkids, I've just skipped the IRS's ability to hit me with an additional estate tax, except that. The IRS has now created the
[00:06:00] generation skipping transfer tax that says if you transfer or make a gift to somebody that's more than a generation below you, then we're going to hit it twice. So you can't make that gift to grandkids and bypass. That second estate tax that we were trying to avoid. So they make it very difficult for you. But the good news is you get the same exemption for generation skipping purposes as you do for gift and estate tax purposes. So you could gift up to 13,000,002 grandchildren without getting hit with this double estate tax. Now the estate tax rate is 40%, as you guys talked about last time. But if you get hit with the generation skipping tax, it's 40% and then another 40% on top of that. So it's really, really punitive if you go beyond that. And because of the exemption someone could give, I mean, we're jumping into generation skipping opportunities here, but let's say someone's, it's A G S T, right? They say a generation skipping trust and someone could put a million dollars in for their grandkids, use up 13, use up a portion of their 13
[00:07:00] million, and then that way it doesn't have to hit on both steps, which is fantastic. It's when you exceed the 13 million across gift and estate and then the generation skipping would be hit twice. Is that what you're saying? Right. So what, what we want to try and do with a good estate plan is make sure that we're allocating both a estate and gift tax exemption and GST exemption to any gifts that we make to trust. So we want that trust to be fully estate and G S T exempt, and that way it can go for generation after generation without getting hit with a state state tax ever again or generation skipping tax. So it becomes a legacy or dynastic trust at that point. Okay, so what we're going to do today is we're going to take several different examples of more complex estate planning. You can hear that I use the word financial planning a lot, right? I keep trying to sneak that in there, but more complex estate planning tools, and the goal is to understand what is it? Who needs this tool and any additional information Eric May have from just using it in practice. And so
[00:08:00] that's the goal. Hopefully this is interesting, but I think for those who are near estate planning limits, they're probably completely dialed into this and needing to understand it. If it feels a little bit crazy to you because you're not close to the 13 million each, we get it, that's fine. But maybe listen anyway and then figure out how to get 13 million and then let's deal with that. Well, and before people tune out because they don't have the 13 million, it's important to know that. The 13 million is a historically high exemption amount, and it was originally, well, not originally, in 2011, the estate tax went to 5 million under Obama's tax bill and then under Trump's tax bill, they doubled it. And so the 13 million we have today is a doubling of the 5 million plus index for inflation. So that's how we get to the 12.92. The way that Trump's bill was passed, he got no support from the other side, which means it was passed under reconciliation. So it has to expire after a 10 year time period. So the current
[00:09:00] exemption, it goes back to 5 million at the end of 2025. So it's not for most of you, unless you're going to blast off in the next year, it's really whether or not you have 5 million or more. That you should be paying, especially close attention to this cause that exemption's going to drop. And I don't think that Congress is going to act to stop that from happening. Yeah, and I remember back then I had a client that had about six, 7 million in assets. Correct me if I'm wrong here, Eric, but I feel like there was a moment before I. The Trump era tax bill came through that there was a scare of it going down to 1 million at that time, and that client back then made some pretty drastic moves to get a bunch of money out of her estate thinking that she had to use up the five because it was going to go down to 1 million. Of course it went up to 12 and change and then indexed for inflation. But the reality is it could go down further. Then five, depending on whatever Congress decides to do at some point, obviously that's probably unlikely, but it's a possibility. Right? Well,
[00:10:00] last year we were one vote away, not last year, 2021, fall of 2021, Congress came out with the build back better Bill, and part of this was Biden's signature bill, and part of that was a reduction of the estate tax of three and a half million dollars. That was going to be the Bill Joe Manchin ended up not voting for it. Otherwise it would be three and a half million today. So, and I, I remember back then you were busy. Like you were very busy. Yeah. You, I couldn't get ahold of Eric basically for two or three or four months. Towards the end of the year, it seemed like fall of 2021 was really busy because if you had above that three and a half million dollars, your window of opportunity was shrinking. And so we did a lot of planning that fall. And just a reminder for those listening, that is per person. So if you have a household, you know, that amount doubles for the household. Okay? So we've divided up a few of these strategies into different categories. We're going to first start with the IRS dollar limitation strategies. So these are strategies that you're working within the limits that the IRS has already given you. So first,
[00:11:00] starting with 5 29 plan. So 5 29 plan. Is designed to be a college saving option, but it has some unique coordination with estate taxes and estate gifting. Can you maybe expound a little bit on that for us, Eric? Yeah, we, we mentioned earlier that you can give $17,000. To an unlimited number of people every year, and your spouse can do likewise. So you could give $34,000 to each of your kids without touching your state tax exemption, anything like that. You can also do that to your 5 29, right? You can use your annual exclusion gift to put money into your kids' college savings account. There's a special rule with 5 29 s though that says, not only can you put in 17,000, but we'll, we'll let you. Front load, five years worth of annual exclusion gifts into that 5 29 account. So instead of $17,000 going in, you can put $85,000 in for the kid or double it if you and your spouse are putting it in. So it gives you a really good opportunity to, you know, if you've got additional income in
[00:12:00] that year, you want to offset whatnot. Not income you want to offset, but if, if you have additional funds that you want to gift out to kids, it's a nice way to get out a bunch of it. If you've got somebody starting school, they need a little bit more than the 17 upfront. It's a good way to get that in there. Keep in mind, if you do, if you and your spouse both make a $17,000 gift and it comes from, let's say it comes from one spouse's account or one spouse's asset, your gift's splitting, you're saying, look, my wife and I are going to treat this as coming from both of us. So Dad transfers $34,000 to son. Says this is from mom and I. If you're going to do that and treat it as annual exclusion gifts, you have to report that on your gift tax return. So it's still tax free, but you do need to report it. I had a client that back when it was 12,000, they would put five years worth, so they would drop $60,000 into the 5 29 plan. And these 5 29 plans, they were really big for a 5 29 plan. And most states have a lifetime contribution limit of a little over three. Well, back
[00:13:00] then it was, I haven't looked at it in a long time, but it was over $300,000. You couldn't put more than that. Over the lifetime of the 5 29, but these 5 29 s were in the a hundred, $150,000 range because they'd done it a couple of times over the course of a decade and it really got a lot of money out and in their mind, they knew that they probably weren't going to spend all of that on education. And they were just okay with the concept of not getting all the tax benefits of the 5 29 that you get when you use it for college, because they basically said, it's better than us paying 40% away in estate taxes, even if they have to maybe pay a little 10% penalty or income tax on the growth. Now, the interesting thing about five 20 nines, back then when I was doing it, it was restricted to higher education. But the withdrawal capability is much more wide now for what you can take money out of 5 29 s for without having it penalized and without having to pay taxes on the growth. So I bet that client, I mean that this was the back of the previous employer. So I haven't kept in contact with them back since back in, this is almost a decade ago.
[00:14:00] But the point is I bet they're actually really happy now. They have a lot more flexibility and 5 29 s can eventually even be moved from one beneficiary to another. So there's a decent amount of flexibility there. Don't think you're just completely locked in, but that's a way to work within the limits that are already allowed. Question with the 5 29, is that gift to the 5 29 for the beneficiary, does that count as the gift to that grandchild? Let's say you have Tommy, he has a 5 29, you gift 17,000 or 34,000. If you're doing the gift splitting, can you then give Tommy an extra 17,000 or does that contribution to the 5 29 count as his gift? Do you know that that counts as his gift? Okay, got it. Okay, so then you already mentioned this. We probably don't need to go into a ton of detail, but the second opportunity within the IRS dollar limitations is just purposefully using your $13 million. And that happens regularly in, in your line of work, Eric, where you're, you're helping people use it. But I think we just wanted to point that out because so many people, like you said earlier, don't
[00:15:00] realize that they actually can give more than the 17,000 per year. Without paying estate taxes. I run into that all the time. I actually do run into some clients though that know that, but they tell their kids they can't give more than 17,000 just so that there's some ceiling on what they will be funding to their children. That's interesting. So maybe if you're not close to this lifetime exemption, but your family is, maybe listen to this. One thing that I think is important for people to think about too is we often think. About leaving an inheritance to the kids. So let's wait until I die to for them to get anything. But what I've found is that clients who give it away during their lives enjoy it a whole lot more. Like being able to see your kids benefit from the asset is a whole lot more fun than dying. And then the kids receiving it. And so I've had clients come to me and say, man, I, I wish I would've started giving. Sooner because it's been so fun to watch the difference that it makes in people's lives. And so obviously there's really tax efficient ways to use your exclusion, and there's
[00:16:00] tax inefficient ways to do that. And so typically we'll use trust in order to maximize that efficiency. But yeah, making gifts during life can be a really great thing. Okay, so that does take us, that efficiency takes us to the next category, which I feel like we've barely touched the surface of what Eric does. We've made a bullet pointed list, but Eric, of course, if you are seeing something that you're like, well, your list doesn't really cover what we're actually exercising a lot today, let us know and, and you drive here, but let's just go through a few of these. We talked about generation skipping trusts already. This is the idea of setting up a trust in a way that it doesn't get hit with estate taxes twice because it's passing through every generation. But maybe talk to us a little bit about just the standard revocable living trusts to fully utilize the estate tax credit. How do people do it? Why? Give us a little more on that. Yeah. When you're setting up your average revocable living trust, there's a couple of key taxing we want to accomplish with that. I. There's this estate tax idea where we want to avoid the estate tax, but there's also
[00:17:00] capital gains taxes to deal with as well. And so when we're setting up a revocable living trust, the goal is to maximize both of those sides and to make sure that we're not getting hit with capital gains tax. Well, anything that's part of your estate at your passing. Is going to get a step up in basis. Any, any of your capital assets, not including any qualified retirement plans, but your real estate, your brokerage account, those assets are going to get that step up in basis. So basis refers to your initial investment in the asset and when it appreciates in value, you get taxed on the growth when you sell it. So the difference between your basis and what you sell it for. Well, when you blast off, we want to be able to sell those assets to divide 'em amongst your children and not get hit with the capital gains tax. And so we want to set up the estate to maximize that basis, step up. But at the same time, we don't want to get hit with the estate tax. So for clients who are in that range, where they're above the estate tax exemption, the planning gets a little bit more complex because we're trying to. Basis, step up everything, but also
[00:18:00] avoid the 40% estate tax. So basis step ups going to save us 23 and a 5% federally plus another 5% in the state of Utah. So call it 28% or so versus a 40% tax. So obviously the estate tax is more important in terms of avoiding it, but we want to balance both of those things. So when we set up a revocable living trust, what we're. Typically going to do is create a mechanism where all of the assets at first spouse's passing are going to go into a trust that's countable as part of surviving spouse's estate for state tax purposes. And that way, lemme back up a little bit. The old trust model was what they called it an AB trust. So what you would do is you would put a portion of your assets into one bucket of the trust that was equal to your estate tax exemption. And then the rest of it would go into the be part of it and not be part of your estate. It would go to your spouse's estate and in this case, the deceased spouse's estate. Right, is what we're talking about here. So one spouse dies, and I love that you say
[00:19:00] blasts off. So we're going to continue with that. So one spouse blasts off and we're using their 13 million, well obviously the numbers were different back then, but we're talking about old, old estate planning. We're using their 13 million. And we're kind of setting it aside, putting it in a its own little account, own little fence around it called the trust saying, Hey, this was part of my deceased husband's estate and I'm taking the rest and putting it in my estate. And that's the A trust, right? Is the portion that they put in their own? Well, no. So that first part, that's equal to the estate tax exemption. That's the A trust, the B trust is for spouse. Okay. What we're doing nowadays is different than that because what we want to do is actually have the assets all be held by surviving spouse. So rather, in that first example, that first bucket is going to get basis, step up at first spouses passing, and then 15 years go by before second spouse passes. In that time period, that trust may grow. It may double. In that period of time,
[00:20:00] but now we don't have basis to step up on on all that growth because the surviving spouse is no longer the owner of it because she's not the owner. But if surviving spouse owns all of it, at surviving spouse's passing, we get a basis step up on the entire thing. So what we want to do is set up a mechanism where all of the assets go into what we would call the marital trust so that surviving spouse is deemed to own it. For estate tax purposes. And then the entire thing gets base to step up. And we use portability, which is the ability to transfer your exemption to your spouse upon your passing. So if you were to blast off, we transfer your exemption to your spouse. That's portability. Now. Your spouse has doubled the exemption and all the assets. So we get basis, step up and we've maximized. Use of both estate tax exemptions that puts us in the best of both worlds. And portability wasn't available it seems like a decade ago, correct? Right. Which is why if your trust is older than 2012, it's probably backwards. If you haven't revised your trust since then, it's, it's probably time to do that because it's, it's not going to maximum. And the fact that portability became available at that
[00:21:00] time, that was the change that shifted the AB trust to what you're talking about today, right? Exactly. Yep. And is that exemption amount, the amount at the time of death of the first spouse, or are they just holding onto it saying, we're going to use this exemption at whatever amount is available to them when the second spouse passes? Does that make sense? Like we're at 13 million today, let's say it goes down to five, but my spouse passed away today. And then in the future, I pass away 10 years later and it happens to be at five. So I do I have five times two, or do I have 13 and five is what your question is, right? Yeah, exactly. So under current law, you're going to transfer it's, it's what we call the dsu, the deceased spouse's unused exclusion. You're going to report that on your return and say, Hey, here's the amount of unused exclusion my spouse had. I'm now claiming it for me. So it'll stay on that return as the 13 million, the 13 5 million, whatever it is. So that's what the IRS will refer back to when they're looking at how much exemption you have available. So a law change to decrease the exemption after the first spouse's passing does not
[00:22:00] negatively affect the amount that they were able to pour over. It just locks that, that dollar amount in. Yeah, under current law, that's the way that it would work. There has, are they talking about it changing that there's been talk about what they call the clawback, where they would say, okay, if you gave away 13 million, when you had 13 million of available exemption, We're going to pull some of that back and say like, when you die, let's say it's 5 million, but you gave away 13. There was talk that they would come in and say, well, you gave more than what the exemption was at your passing, so we're going to hit you with a state tax on that. Wow. They're not doing that today, but it's in proposals, so, we'll, we'll see where it goes, but. It's a possibility. Okay, so then we're going to move on to another option to leverage dollar limits. So that was one with portability and working through your just normal, standard revocable living trust. And we talked about the trust that everyone should have in a previous episode. Those trusts have language in them. This is why those documents get so lengthy is because they have language in them to handle some of this.
[00:23:00] Depending on what your estate planner determined was necessary based on your situation. Obviously most of the focus is around who does what and who has what rights and powers and who gets what, but it will have a little bit of this in there as well. Now, if you really are running up against the limits, that's when oftentimes we see a second trust, or we're going to talk a little bit about a limited liability corporation. So people use LLCs within a family to leverage their limits. Talk to us a little bit about that. Yeah, so the Family Limited partnership was the vehicle that people used for a really long time. Now we're using family LLCs cause LLCs offer better liability protection. But the idea is, is the same if we want to make transfers to kids. If, if I, for example, was to come to you and say, Hey, I'm going to give you a million dollars. In cash. A million dollars is worth a million dollars. Right. That sounds fantastic. Instead, if I came to you and said, Hey, I want to give you an interest in an LLC that has a million dollars in it,
[00:24:00] but you can't liquidate it, you can't sell it, you can't, I, I put these different restrictions on that llc, and you're not even in charge of it, by the way, at all. Right? Right. So you're not in charge all of these things. Is that worth a million dollars to you? Probably not. Yeah. The answer's no. So the IRS actually currently allows you to take discounts for things like lack of marketability, lack of control, minority interest discounts, so it can reduce the transfer tax burden when you're giving a gift to a child if it's put into a, an llc. So family LLCs have become really popular for this reason. Instead of it costing me a million dollars to give you that million dollars. It might cost me 600,000 because we take a 40% discount for those things. It feels like I've seen this in privately held businesses, especially family businesses more often than not, where the business has outgrown the family to a certain degree, and the founder maybe is the matriarch, patriarch of the family, and they're saying, I'd love to give away. Assets to my kids, but I don't just want to take cash, like you said, and give it away.
[00:25:00] They may give away $5 million worth of the business at a value. And it, it seems like I'm hearing crazy numbers of more like 1 million, 2 million, like extreme discounts. And maybe that's just aggressive estate planning and valuations being done, but, but anyway, they're able to put that into a trust or into ownership. Of the kids that then is through an L L C, so they're layering it, right? They've got the llc and then maybe the trust owns their portion of the l c, so they can still maintain all that control. Am I seeing it right Eric, or are there other things maybe to add in to add some clarity there? Yeah, so the LLC is one of the tools that can be utilized. So if, if we have that family business and the kids are directly involved, We can gift them using our exemptions we talked about earlier, using some of that 13 million. We can just gift them interest in the LLC at a discount, which is great. So we maximize our $13 million that we have, but probably more likely what we want to do is gift that LLC interest to a trust for our children. The trust is going to put us into a position where one, all of the assets
[00:26:00] are asset protected from for that beneficiary. So if anybody's coming after that beneficiary, The assets that are in their trust are not going to be available to creditors. So we get a, a big asset protection benefit, but from a tax standpoint, those assets are going to be out of the kids' estate. If I give my kid an interest in the llc, they now own it and it's subject to the state tax. When they die, if I put it into a trust for their benefit, it won't be. So they get a huge benefit by having it be held into a trust. So usually we're going to, we're going to combine the LLC tools with. Irrevocable trust. Got it. It feels like this next category has picked up steam. When we talked about you being really busy, was that the end of 21? End of 21, and this was intentionally defective, grantor trusts. Is it the same as a spousal lifetime access trust? Is this all the same thing slat, and these are the terms that I'm hearing or are their main differences? Maybe help people first understand what is an intentionally defective grant or trust. And then
[00:27:00] why was that such a big deal and maybe why is it being discussed today? Yeah, so those are the same thing generally. I mean, there's a million different flavor of of trust, and you guys covered last time, the revocable trust. And every trust has three parties. The person who creates it and puts the money in, the person who manages it, that's the trustee, and the person who benefits, that's the beneficiary. And then you can decide whether or not you want your trust to be revocable, which means you can change it whenever you want to, or irrevocable, meaning you can't change it. So an intentionally defective grantor trust, or a spousal lifetime access trust, a slatt. We'll just call it the slap from here on out here to keep this easy. A slat is a trust that the Grand Tour sets up for the benefit of spouse and kids, and the spouse and kids are the only beneficiaries, not including the Grand Taurs. The grand tours not going to be a beneficiary, but the spouse and kids are, which means that you can create a trust that the assets you give to it are going to be out of your estate for estate tax purposes, but your spouse still has full access to it. For any of their needs during their
[00:28:00] life. So what you would do is you would use some of your lifetime exemption to put money into that trust. So maybe you put a million dollars worth of assets into that trust. You make a million dollar gift, you now have 12 million of exemption left. That million dollars is now out of your estate, and all growth on that million dollars is now out of your estate. Maybe you put 13 million into it. Use all of your exemption. All of those assets are now out of your estate for estate tax purposes. But you haven't put them beyond the reach of your family. So clients get a little bit uncomfortable going, wow, this is an irrevocable trust. I'm making a gift. I'm no longer going to have access to these assets. Well, you won't have direct access, but your spouse will have access, and as long as your spouse still likes you, that can work out really well. And so the spousal lifetime access trust has become a really, really important tool. For estate planning, for clients who are over the estate tax exemption, it's one of the primary tools that we use. It gives them the ability to get the future appreciation out, but still have access to those assets and
[00:29:00] just works really, really well for that purpose. The intentionally defective part of it is important to talk about because what we're doing with that trust is we're bifurcating the tax aspects of it. So, There's the estate tax, which is one part of the code, and there's the income tax, which is a completely separate part of the code, and your trust can be different from an income tax standpoint and an estate tax standpoint depending on how it's set up. So for example, when we create that slat, we are going to put assets into it that are going to be out of the estate for estate tax purposes, but they're still going to be taxable to the grand tour for income tax purposes. So I put $5 million into that trust and I put it into a brokerage account that's producing dividends. Those dividends are going to show up on my tax return. I'm going to pay the tax on those. That's intentional, right? Because we want to reduce the size of my estate. We want it to go down over time. So if I'm paying the taxes, my trust is now growing tax free.
[00:30:00] And so it, in addition to the trust being able to get all of those assets out of the estate for estate tax purposes and all the appreciation out, now it's all growing tax free. So then it really multiplies that effect and the trust can grow really fast. And you pay the tax on it. And the tax rates associated with trusts are so much worse than the tax rates associated with individuals. Right. So this is actually, is that also part of the reason is to get it to flow through to them? And have a much better tax rate, or am I missing something there? I'm just curious to know how that would work. No, that that is part of it. You know, ultimately the rates are the same, but you get there much faster under a trust schedule. So trust reached the maximum bracket at like $15,000 of income, whereas an individual reaches it if they're married at, 400 and something thousand dollars a year. So they get there a lot faster. It's not as ideal to have the trust be taxed on it necessarily, but within these trusts you have the option to. Toggle that. So if you decided at some point you wanted to stop paying the taxes, there are powers that you can relinquish that would
[00:31:00] make the trust taxable to itself. So then does that make it so it's no longer defective? Essentially, yeah, that would be correcting that defect, I guess you could say. Yeah. I mean, you joke, maybe you didn't joke, but you talked about if your spouse likes you, but obviously not all marriages work perfectly here. What should they expect? If you've given all your assets into a trust that you don't have direct access to, you're paying all the taxes and your marriage isn't necessarily going great. I mean, what are those risks? Yeah, so there's a a few different safeguards that will build into one of these slats. So for example, there's really two reasons where you would want to be a beneficiary of that trust, right? You're not going to be initially, but there's two reasons when you might want to be. One is if your spouse doesn't like you, and two is if your spouse dies and you need access to the funds. So what we're usually going to do is create kind of a hybrid trust where the trust says, I'm not an initial beneficiary. But I can be made a beneficiary. By a trust protector at some point in the
[00:32:00] future if that's ever needed. So if I go through a divorce, if my spouse dies, the trust protector can add me in as a beneficiary of that trust. And as long as we're in a state that has asset protection trust statutes like Utah, like Nevada, like Alaska, we can create that kind of a trust and it still should not be included as part of the estate for estate tax purposes. So it gives us a tremendous amount of flexibility to deal with those potential issues. Got it. Okay. We wanted to talk maybe a little bit about grantor retained annuity trusts, but at this point, I think I'm going to skip because I do want to touch base. We have a whole season on charitable giving, so when we get to that season, we'll dive into it in much more detail. But maybe Eric, you could give us the quick overview of what is a charitable lead trust? What is a charitable remainder trust? How they're a little bit different and, and how you've seen a couple clients use Kratts Crus. There are lots of different acronyms for this. If you talk to Eric, you're going to hear things like even Nim crus and all the different
[00:33:00] ways of setting these up. But maybe just give us the quick version so that people know when they should potentially use them. Yeah. You can get lost in the alphabet soup of charitable trust, but a charitable remainder trust, as it sounds, is a trust that is set up for. The benefit of a beneficiary that's not a charity and then a beneficiary that is a charity. So there's two parts to the trust, and typically a charitable remainder trust is set up either for a term of years or for the lifetime of the beneficiary. And so, as an example, I take a million dollars and I put it into the trust and I take back an annuity from that trust. So it pays me, you know, let's say I set up to pay me a hundred thousand dollars over a 10 year period. Right. That's probably not going to work with the numbers. I have to have 10% of it go to the charity. But we, we could talk about this cause we had a case where if we were careful and don't say any names or anything, but we had a, an individual who was selling a business and was exploring, putting, this is one Eric and I worked on together 10 million
[00:34:00] into a charitable remainder trust. And I think he was going to pay himself back around $500,000 a year. If I remember correctly and when this didn't work out because it was an S corp that had certain restrictions and the taxes didn't quite work out like we hoped, but had we proceeded forward, he would've, before selling the business, dropped the value or the actual ownership of the business into his charitable remainder trust, and then he would've been paid on that asset after it sold. He'd have 10 million in wealth sitting in this trust. Of which he could send himself half a million dollars a year as a retirement income, but then later the rest of it, when he dies, goes to a charity of some sort. Right? So I put the 10 million business in, and I say right at the outset, I want the charity to get 10% of the remainder right? That's the minimum requirement. Charity has to get 10% in order to qualify. So I set that up. Charity's going to get a million bucks. We know that. The 10 million business goes in. I know that this business is probably going to be sold in the next couple of years. Once it
[00:35:00] goes into the trust, the charitable remainder trust is a tax exempt trust. So if I sell my business two years down the road, there is no immediate capital gain, which could save him three to $4 million in that case. So I'm going to defer the tax on that over, let's say I set a 20 year term for this, for this crut. So I've got 20 years and I sell in year one. I've got now 20 years to defer the tax over. I've gotta, I'm going to smooth that out instead of have spiking my income in one year. I'm going to smooth it out over 20 years. I'm going to get an immediate charitable deduction for the million dollars that's going to the charity, even though the charity's not going to get it for 20 years. I get the deduction today, so that million dollars is going to help offset any of the income I do get from the sale. But as the annuity payment is paid out to me over that 20 year period, I'm going to recognize gain. On those distributions that come out. But the charitable remainder trust is really going to be used by somebody who is a potentially going to have a liquidity
[00:36:00] event in the near term that wants to defer the taxes on that. So if you want to benefit charity and you want to get a tax er on top of that, the charity will Remainder Trust is a really strong mechanism for that. And then the lead trust just reverses the order of the beneficiaries. Right. So lead trust, beneficiary, one of getting the income is the charity, and then at a certain term or period, then it goes to a non charity. Is that right? Correct. So, so how, why would somebody. Do either of these. Yeah, so the charitable remainder trust is primarily going to be done by somebody who's about to have that liquidity event who hasn't had it yet, because it's going to get 'em that tax deferral piece, which is really key for a charitable lead trust. It's going to go to somebody who has already had that liquidity event, right? Somebody who's already got the cash and now they want to do something, but it's too late to do the charitable remainder trust. The charitable lead trust is going to give them the ability to make a charitable contribution, get that charitable deduction to offset the income that they've just received from their liquidity of end or whatever it is that they've done, but it
[00:37:00] also puts them into a position where, They can get assets out of theirs if they want to benefit charity. Again, these are only options if you want to benefit charity, but if you want to benefit charity and you want to get additional assets out to your heirs, it can be a really strong way of doing that as well. So for example, let's say that I've got that a 10 million business, I sold it. Now I've got 10 million bucks just sitting here and I say, look, I, I think I want to give this to my charitable lead trust. So I put the 10 million in there. And I set it up to where the trust is going to pay over a 20 year term to the charity, and the remainder's going to go to my, my kids for that 20 years. I might set the first 19 payments at $10,000 a year. So I've got 10 million in there. I pay $10,000 a year for 19 years in the, there's no limit. They don't have to pay a certain amount to the charity on the charitable lead? No. Okay. So I'm going to put that 10 million to work and I'm going to grow it as fast as I can, but if the actuarial calculation. At the beginning of this is that I'm
[00:38:00] giving the charity 10 million. Then any growth above and beyond that goes to my kids tax free. And so the hurdle rate that we have to clear is basically the 75 20 AFR rate, which is, today it's a little bit higher, four and a half percent, but if I can make 10% on this, I'm going to be able to give my kids a couple million bucks gift tax free estate tax free, and give a bunch of money to charity. So it's a really nice way of lever, you know, let, let's say the client's out of exemption or, I mean, there's a lot of different reasons why we might use it, but it's a really strong tool for somebody who's going to give to charity and also wants to get some stuff to their kids as well. So in terms of charitable planning, other things and other tools that we'll talk about later are donor-advised funds and family foundations, and then using charities as the beneficiary on your qualified plans. So in like an ira, 401k, you know, if somebody has a plan of giving a certain amount to a charity and they give away an ira, no one
[00:39:00] has to pay taxes on the income. Whereas if they give away just the bank account, And then their kids get the ira. Now their kids have to pay taxes on the ira, whereas it would've been better to swap those. So we'll talk a little bit about that. We have covered that in a previous episode with naming beneficiaries, so if you didn't listen to that one, go back to that. We covered that, and we'll make sure you know how to do that really, really well. I think in general, these are the main tools that we wanted to just at least touch on. This is a little bit longer than our normal episode, but Eric, other than what we've talked about today, Let's just throw out the scenario where you are talking to someone who has between 20 and 30 million in assets. They will run into an estate tax situation because either they will grow their wealth over the next 10 to 15 years, or maybe the exclusion amount comes down. Like, what else are we missing and what else should we talk about today as we wrap up? I mean, we've covered the big stuff. One of the tools that we really like as part of the intentionally defective grantor
[00:40:00] trust or the slat, is a combination of gift and sale. So if we go back to that slat trust that I've created for the benefit of my wife and kids, If I've got a 30 million estate, I've got too many assets to get out of the estate with just using my gift tax exemption. But if I put a small amount of that, of those assets into the trust as a gift, that trust can now turn around and purchase from me the rest of my assets or some part of my assets in order to get the rest of it out. So what I would do is I would sell to my trust. 20 million worth of assets in exchange for a promissory note. So now I've locked in the value of my estate at basically the promissory note that's got a interest only 20 year balloon payment. And my trust is now going to grow with that entirety. The entire 30 million of of assets is going to be inside that trust growing estate and gift tax and income tax free. cause I'm going to be picking up the income tax on it so you can really leverage that and get those assets out and. If you start to,
[00:41:00] you know, work the numbers on this, you can see that on a 30 million estate, You might save yourself five to 10 million in estate taxes over the long run. So it can be a really powerful strategy and that's when you do, when you have some time to let it grow. That one gets really confusing. So I'm going to see if I can help people understand, with an example, think about your house. When you buy your house, and if you buy it with a mortgage, the bank gives you the money to buy the house, right? You borrowed a certain amount. The price appreciation of the home is experienced by you, not by the bank. So if, if you put in $200,000 and the bank lent you $500,000 and you bought a $700,000 house, it goes up to a million dollars. Well, you get that extra $300,000 worth of equity in your home. So I'm just going to change the players in that scenario to explain what's going on here. You've switched roles. You are now the bank and the trust is the borrower. And so what's
[00:42:00] happening there is the trust has enough money to get started because you gave it some money as part of your exclusion. It's now credit worthy. It's now credit worthy. Right? Right. Mm-hmm. I guess you gotta decide your own credit score for your trust, I guess, but bottom line, it has assets, it has the ability, and now it's borrowing from you the bank. To buy those assets. It just so happens that you're also the seller of those assets. That's the confusing part, is that you're the lender and you're the seller, and that's where it feels like a circle. Like you're, you're selling yourself and borrowing from yourself and paying yourself, and that can be a little bit confusing, but you have to almost put it on paper and pull yourself out of the equation. And say, I've got an entity over here that is buying these assets. So now when the entity owns those assets, any growth on it is experienced by that entity, not by me, therefore it's out of my estate. But the problem, people might say, well, wait a second, didn't you just. Give all your assets outta the estate. How did you do that
[00:43:00] without having to pay a bunch of gift tax? Well, I didn't give anything away. I exchanged equal valued things. I gave it all the assets and the trust basically gave me a promise or a note or a promise or a piece of paper that says, and that piece of paper is worth the $13 million because. It's a loan and if I just hold onto it, that entity still has to pay me back that loan at some point. So anyway, there's no use of the estate tax exclusions there because you've traded like valued things. The note and the assets have exchanged hands. And then the real benefit comes when 10, 20, 30 years go by and the growth has happened outside of your estate by your trust or other entity and not by you. So it's, it's super confusing and I, I just suggest if you're thinking about this at all, one, work with an estate planner like Eric. Two, get a white piece of paper out and draw some circles, and then draw some lines as to where money flows and where assets are. It'll make so much more sense. And I'm a
[00:44:00] big fan of flowcharts. I know you guys do that. I'm at York, Cal Guyman is where Eric is. We didn't really even let you. Okay, so let's finish up there. So Eric, you work at York Cal Guyman, you're in. Is it South Jordan? Because we're, we're like a mile away, but in different cities basically. Right? We are South Jordan. Okay. We Sandy. Oh, Sandy here. We're like less than a mile apart from each other though. So Eric, it seems like you specialize in clients who do need more complex planning, but you still do a decent amount of basic and foundational estate planning as well. Is that right? Yeah. I'm a tax attorney by background, but focus on estate planning and we help those who have an estate tax problem and those who don't. And you've been so gracious to give us so much knowledge. If somebody wanted to just engage with you directly, how do they find you? So they can find email@example.com, Y O R K H O W E L l.com. And yeah, go into the website's probably the easiest way, if you click on my bio, you can find a link to my calendar and you can schedule a consultation. Great. All right. Thanks Eric. Appreciate you joining us.
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