Terry Martine 0:00
Hello, and thanks for joining the podcast on everything financial. On today’s show we have a special guest Charlie Weis, a Board Certified attorney who specializes in estate planning his offices here in West Palm Beach. We’ve asked Charlie to join us today to demystify the simple question I hear a lot from clients, which is, what do I need for my estate plan. In today’s show, Charlie will explain the differences between a trust and a will and which one may be better suited for you. We’ll also provide insights on how to structure your estate plan and what documents are essential for a foundational state plan. If you like this type of financial information, be sure to follow and subscribe to the show. My name is Terry Martine, I’ve been in the financial services industry since 2000. I’m a financial advisor with FRS investment advisors, a registered investment advisory firm, we specialize in working with teachers, firefighters and law enforcement members of the fers Retirement System. Alright, let’s jump right in. If you want to talk a little bit about the trusts and how they are, are talking about why it’s important for individuals to have trusts families as well.
Charlie Weiss 1:13
Okay, well, first of all, my name is Charles Weiss. I’m an estate planning attorney, my offices in North Palm Beach, Florida, and then I’m going to be discussing, you know, the benefits of estate planning. Everybody should have an estate plan, if you do not have documents are directing what you want to have done, the state of Florida provides who gets your assets and there’s laws in place? It’s called intestacy. And it says, Who gets your assets in the event? You die without any documents threatening? What are the assets go in, if you want to change what the state of Florida provides for you as your estate plan, you need to do estate planning documents, the amount of assets that you have should not control whether or not you have estate planning. Done, okay, if you have if you have young children, you need to see an estate planning attorney, you want to provide for estate planning is basically providing for the unexpected, and if something should happen to you, your estate planning documents will direct where your assets go, they’ll direct who’s supposed to be taking care of your children, if something should happen to you, they’ll direct assets that you do have in place for your children, when they get them as opposed to them getting them outright immediately upon your death. Because that’s what the state of Florida says that all these benefits, whoever the beneficiaries are of your state, they get them immediately. If you want to change that, to say maybe that the children don’t get their assets until they reach the age of 21, or some other date, you need to do estate planning documents to provide for that? If
let me ask you. What happens if, say the mother and father passed away? And they have, say, five or 10 year old child? What does the relative have to step in? or What does the courts do? I mean, obviously, a five or 10 year old is not going to live in the house by themselves.
what happens is, there’ll be a determination as to who gets guardianship of the children. And if the parents haven’t planned for this, a lot of times the family members will be fighting over who is the person who’s entitled, the husband’s family may think that they’re the ones who should be taking care of the child, the spouse of the wives, family may be fighting, and you have family members in court battling over who they think should have should be taking care of the children. Not an ideal situation, obviously, because everybody thinks that everybody, your family members will think well, one control the children, you know, they want to be able to see them and they want, they want to be able to manage the assets. And they’ll be fighting, if you provide direction, and in your estate planning documents in your will or whether it’s in a declaration of pre printed guardian for a minor, the court will listen to what you direct. So the spouses get together, and they figure out who they want to take care of their children. And they put that in their documents. And that avoids the fights the only way and the court will listen to those directions. As long as that person doesn’t have anything that’s glaringly wrong with them. If they’ve been convicted of a crime, somebody may come in and challenge it, because they may say that person’s a criminal, they shouldn’t be taking care of children. But if there other than circumstances like that, they do what’s in the best interest of the children. And there’s a presumption that the person that the parents designate to take care of their children, there’s a presumption that that’s the appropriate person. And now that can be overcome if people challenging that saying that’s not the right person, but it’s a very hard presumption to overcome if they’re, you know,
and so would that be also in the will and the trust or would it just either or, like, somebody just hasn’t well,
could they does it? Oh, yes. Usually in the well, there’s two documents that we usually prepare. There’s the declaration of cleaning guardian for a minor, and that document is what controls if you become incapacitated, so you may not have died, you may be incapacitated, something may have happened where you’re incapacitated and can no longer Take care of your children, that’s a document that controls while you’re living, the will only comes into existence upon your death. So the will will say, who, if you die, the will becomes the effective document that declares who you want to take care of the children upon your death. So if you have minor children, you need to have you need to have these documents in place just to avoid the fight to make sure that your wishes are carried out, you might have somebody in mind, who should be taking care of your children, if something should happen to you, right? And you need to express that and give those people the right it might not be family members, it might be a friend. But yeah, of course, you need to speak with these people to make sure they’re willing to do the job before you appoint them. Because obviously an appointment of somebody who doesn’t want to do the job is not an effective appointment, because they don’t look, nobody’s required to do it. It’s not you know, they could just say no, and then you’re left without a designate a person taking care of your children. Now you can have the fights that Yeah,
Unknown Speaker 6:02
and I think it’s important that everybody get a copy of these documents, too, because even in my own family, when my grandfather passed away, he had a will, nobody could find it, you know, the executor of the estate decided on what was going to be divvied up but in essence, because nobody had a copy of it, we couldn’t contest anything, or we could but you know, we weren’t going to we just sort of let it you know, follow its course, right?
Unknown Speaker 6:25
Of course, it’s important that people know where to go, you don’t have to tell them what’s in your well. But you should tell the people who are going to manage your state where the will is and where to go to it’s at the attorney’s office, you give them the attorneys card and say if something should happen to me, go to this attorney, they have all my documents that are required, if you so not only do you need it for the children, you need it, to prepare for the unexpected preparing for incapacity. If you become incapacitated, and you can’t manage your assets, you need to have a durable power of attorney in place that directs who’s to manage your assets. In the event you’re unable to. If you do not have a durable power of attorney in place, you’re going to need a guardianship to have somebody appointed to manage your assets. And a guardianship is a very expensive proceeding because to determine somebody incapacitated, somebody’s got to bring the petition before the court, there’s a panel of three experts that have to come in. And there’s two doctors and a lay person, I should say that come in and examine the person and see and give their opinion to the court about whether or not the person has capacity. And the person who’s being declared incapacitated, they the court appoints an attorney for them to and it’s usually a month long proceeding before the court either determines that they lack capacity or that they have capacity going to cost in the area of $5,000 just to get somebody appointed. To me that sounds
Unknown Speaker 7:51
like a nightmare.
Unknown Speaker 7:52
It’s a nightmare. So you can avoid these proceedings by having going doing the state planning and providing for what’s called a power of attorney. healthcare surrogate designation. This is the person who you direct to, to make healthcare decisions in the event that you’re unable to, and a living well. And that’s the document where you appoint somebody to decide whether or not to remove life sustaining measures, if there’s no chance of you getting any better, that you direct the persons that you name in there to remove life’s just to keep me comfortable, but don’t keep me alive artificially, okay, that’s the pull the plug document. And if you don’t have these documents in place, it’s just a lot and the unexpected happens where you become incapacitated, you’re gonna have guardianship proceedings, you might have family members fighting over whether or not to remove life sustaining measures, because one person may say no, that keep them alive. No, the other person will just say basically pull the plug those type of fights, you try to avoid those. And that’s what the estate planning does,
Unknown Speaker 8:51
right. And even when you looked at mine, you found that mine even though it gives that determination to somebody, preferably my wife, but they gave that authorization to somebody, but it didn’t say whether or not I wanted live support or whether or not I want to be left comfortable or whether or not one of the bright like, even that though, if you want your wishes and needs to be in there.
Unknown Speaker 9:12
So that it can be followed, right. Some people want to be kept alive in all circumstances, and you can express that to that person. And now the person has got the comfort of knowing, okay, don’t pull the plug. Or if you want, most people want the life sustaining measures removed, because it’s very expensive to keep somebody alive who has no chance of recovery. So most people will will express their intention saying please don’t keep me alive artificially, if there’s no chance of recovery. And the person who’s making that decision has comfort knowing that those are your wishes instead of guessing. So you’re you’ve given them direction, and in very difficult circumstances, they know that you’ve spoken and they’re out there listening to your wishes, right. So, estate planning is necessary for even if you don’t have a lot of assets. If you do have assets and you You can direct through well how they’re to be distributed, you can hold assets and trust for somebody else through your will, or trust, you could say, these assets are to be held in trust for the benefit of husband, let’s say or a benefit of wife for their lifetime. And their to get distributions of income and principal, maybe they’ll get all the income, which is like dividends and interest on securities and rents for land, they’re entitled to all the income for the rest of their life and discretionary distributions for health, maintenance, education and support in the discretion of the trustee. And the assets that remain in the trust can be protected from the surviving spouses, creditors, and other people that you may not want to get the assets and then you can provide upon the surviving spouses death, it goes to your children, that way, you guarantee that surviving spouse can’t change the beneficiary of that trust to somebody that you don’t want that to be the beneficiary of your trust. And you could do the same thing for your children, you could say, My children aren’t going to be, I don’t want my children to get the money out, right, because I don’t know if they’re going to be good with money, or maybe they’re already old enough. And you know, they’re they’re not good with money, or you don’t like their spouse, you know, maybe you don’t want them to get the assets outright, you want it to remain in trust for them. And you could provide the same provisions, you can say they get all the income, discretionary distributions of principle for health, maintenance, and support in the discretion of the trustee. And then upon their death, it goes to their children, maybe, or you could say they don’t get it until they reach the age of 35, or 25, whatever you want to say, you can say anything you want to in in your documents, and you can provide when the beneficiary gets it, most people do not want their children to come into a lot of money at an age where they think that they’re going to blow it. So they keep it in trust for a period of time until they feel that they’re going to be ready to mate to handle that the kind of money that they’re going to be inheriting.
Unknown Speaker 11:54
Right, and even ours for our children are spaced out over time. I mean, they get a certain amount for I think it was 18 and 26. Or I think it’s kind of standard for attorneys to space it out over time, right?
Unknown Speaker 12:06
Yes, I, you know, it’s, it’s not the attorneys, it’s the people’s wishes, and I can make recommendations or whatever, but it’s the, the person determined, the client determines however long they want to keep an interest based on how they, what their feelings are about how long they keep it from their children, while it’s in trust, they can’t take all that money and invest in a Ferrari, okay, they can only use the income and if they need it for their health met, for the term for the provisions that you provide, if they needed for surgery, or they needed for it to go to college, or they need it because a lot just lost their job and they need some money. You know, that’s one of the distributions from the principle what happened, but they can’t blow it on on something that you wouldn’t want them to blow it on. Now, once you give it to them outright, once they get it outside of the trust, they can go out and buy, if it’s enough money, they can go and buy that Ferrari But till you give it to them outright, they can’t blow the money that you have a trustee that you designate a fiduciary, somebody who you do trust to manage the money on their behalf, that person invests the money for their benefit for the benefit of the beneficiary for the benefit of the child until the trust provides that they get it.
Unknown Speaker 13:16
So a lot of questions I get it the workshops is that you know, I don’t have enough money or Yeah, I don’t I don’t know why this should be set up. For me. I guess it’s twofold. One is that some of our clients are single, and I think you had mentioned the ladybird deed or something, maybe you can touch on that. And and what kind of assets Do you think somebody really should have? Where a simple will? wouldn’t take be adequate? Really?
Unknown Speaker 13:39
Well, let me start out with if you do, let’s start out with somebody who doesn’t have a lot of money but let’s say they have children or somebody that depends on the maybe their if you have a family, in Germany, you’re earning income, if something happens to you, that income goes away. So part of my discussion with anybody that comes in for estate planning would be you know, what you might need to go out and get some life insurance to provide for the unexpected, you want something unexpectedly happens to you, you know, there’s going to be this, the income that you’re earning is going to go away, and the people that you that are depending on that income, are going to need something to replace it. So if you have children, life insurance is an absolute necessity to replace the income that’s going to be lost. At least during their their minority.
Unknown Speaker 14:27
Yeah, a quick plug we have a I have a video and also just a little show on how to calculate your life insurance needs as well. That’s kind of a side note, you can go see that show. It’s really a quick calculator.
Unknown Speaker 14:40
Right? And so that’s an important you know, that would be part of my my part of my advice to you is not just oh, here’s here’s documents. See you later out the door we examine. This is like estate planning was planning for the unexpected what’s going to happen in the event of unexpected death and how are your family members going to Move, move forward and not be affected in the least amount, at least from a financial standpoint in the financial burden that comes with death as well.
Unknown Speaker 15:11
And again, so most of the most of the folks that are going to watch this podcast are going to be people that are retiring. So they’re going to be, you know, I’d say late 50s to early 70s, depending on where they are. In the mix, I would say about 40% of the folks are single, so maybe you can address how they should do it. I mean, not everybody is going to have young children, but certainly they’re going to have assets that may be they don’t want to go to certain people, or the way I really set it up is where we try to set it up is that we get the people that own their house, if they do need long term care, or if they do become incapacitated, and they are single, then we try to get some sort of long term care to keep them in the house for as long as they can, but then they may need to sell the house. But then what do you do if somebody say one of their children has to move down and take care of them? Maybe you can touch on how that could be rectified figured out as well,
Unknown Speaker 16:04
from it, like I’m not sure so so they’re single, what’s the circumstance there? So just saying
Unknown Speaker 16:09
if you are single, some folks don’t say, Well, I’m single, I’m just gonna give it to my kids, and they don’t bother with so they have kids. Right? But they’re older. They’re old, right? Okay. But also maybe one of them, it would be designated to come in and take care of them in the event that they become incapacitated. In other words, like your your trust, normally, you set up 5050 each child or each child. But a lot of times we ask that they talk to their attorneys and get some sort of provision put in there that if they become incapacitated, one of the children comes in, because we always get the pushback, it was unfair, I took care of mom for three years, I uprooted or I moved here from Alabama, or whatever the case is. I just think it’s important that
Unknown Speaker 16:57
if you address me, that is a common feeling and potential dispute for after the after the person dies. One thing we haven’t talked about is a living trust versus a will that there’s two types of trusts. There’s a living trust, which is a trust that you create while you’re living in a testamentary trust, which is a trust that’s created through your will doesn’t come into existence prior to your death. And a living trust has its benefits over a well in that there’s basically three main benefits. The first one is that the assets that you fund into your living trust, avoid probate at the time of your death, and in probate is a is court oversight wrapping up the decedent affairs with court oversight. If you have a living trust the assets that are in the trust, you can wrap up the decedent affairs without court oversight. So that’s the people usually like that much more than they liked the probate process because they could do it at their own time. And they can make distributions when they feel it’s necessary without court approval and without court oversight. So they like that better. And the other benefit of a living trust is in the event of incapacity. Okay, while you’re living you can the assets that are in the trust, if you become incapacitated, the successor trustee takes over which is the circumstance where you were talking about maybe where your children are taking care of the adult, the pert, the child that you designate to take care of the of the assets becomes the trustee of the trust, and the trustee of the trust is entitled to reasonable compensation for their job. So they can be paid from the trust for what they deem is whatever’s in appropriate compensation for the work that they’re doing. The other documents, the health care surrogate is the person who who takes care of their medical decisions. You can designate the child you want to make healthcare decisions for you as well. And the child that’s taken care of the adult of mom, okay, one of the one child is taking care of the the person, they may ask for compensation while they’re living, okay, just for the work that they’re doing. And that would be a fair way doing work, they should get compensated for it, that might be a fair way of addressing the fact that they are, all the work that they’re doing are getting compensated for it. A lot of times, though, they’re doing it for free. And whenever the the person passes away, if you just say 5050 to each child, the child that did all the work feels like they’ve been slighted, you may want to adjust the distribution. You know, the parent, the parent that’s being taken care of may want to adjust it to account for the fact that they’re doing this for free. They’re taking care of you and maybe you think they should get a little bit more. That’s not uncommon. Of course, the child that’s getting less invariably is very unhappy about it. As long as that’s your wishes. That’s what you can address that the last benefit of having a will Trust, a living trust versus a will that creates a trust is that a will becomes public record upon your death. It gets probated, and anybody can go see your well. The trust is a private document, it doesn’t get automatically probated, it’s not doesn’t become automatically become public record where anybody can go and see what’s in your trust.
Unknown Speaker 20:20
So now the poor overwhelmed it’s my understanding that any assets that aren’t strictly in the trust document just get put into the trust. So therefore, that wouldn’t be a matter of public record
Unknown Speaker 20:32
either correct? No, that would be well, okay, the pour over one a pour over Willis. Okay. So if you this is if you have a living trust, which means the trust, you’ve created a trust while you’re living that can be funded. And the goal is to fund as many assets into that trust, as you can during your lifetime. So that when you die, the assets Don’t, don’t go through probate. But if you forget to fund something, or something just couldn’t be funded for whatever reason, and you do have an asset in your own name that wasn’t funded into the trust, a poor over will says anything that I forgot to fund into my trust, put it in the trust upon my death date sweeps everything into the trust, that document becomes public record, but they cannot see who ultimately is the beneficiary under the terms of the trust. So they don’t know that son, a got 70% and somebody only got 30. Nobody, nobody can see that. Okay, except for the children ultimately see it because they’re beneficiaries, but just some random party can’t go down to the courthouse. And so I wonder who this person left their assets to they have no idea, okay, because the world just says everything goes to my trust, and they don’t know what the trust says the beneficiaries will know because they are entitled to copies of the trust upon person’s death. So but you can, if you don’t care about probate, the will can do this concrete, you can leave your assets through a will to a trust that’s created upon your death. And you can say that the terms upon death can be the same in a will as they are in a trust, oh, all my assets go into trust for surviving spouse saying that? Well, you could say that in a trust. The main benefit of a living trust is that the assets that are funded in the living trust, avoid probate, also a valuable tool for incapacity because of trust. Now, because if you become incapacitated, the successor trustee steps right in and manages the assets for your benefit, while you’re living the assets that are held for your benefit in a living trust.
Unknown Speaker 22:27
Somebody described the ladybird deed or I think you had mentioned it, what is it and what how does that affect somebody? Or why would they need it
Unknown Speaker 22:36
a ladybird deed? Is that specific
Unknown Speaker 22:38
to Florida now, right, or is that everywhere?
Unknown Speaker 22:40
So some other states recognize ladybird deeds, too, but Florida recognizes the Lady Bird deed and ladybird deed as a deed that where the person where you can retain a life, estate and real property, the meaning that you get, you own that property for your life. And the upline provides what happens upon your death, because there’s remainder beneficiaries named in the way in the deed itself, it might say, to my three children or whatever, life estate to me, remainder to my three children upon my death, and the the ladybird aspect of it is that if this were just a normal deed with not a ladybird deed, just so you can create a data says life estate to me, remainder to my three children. But if you ever wanted to sell that property, you would need to get the signature of the three remainder beneficiaries to to sign off on the sale, the title company would say, We need your signature and the three children signature to sell this, the ladybird deed says, I have a life estate remainder to the three children. But what if you want to sell it before you die? You don’t need to three remainder beneficiary signatures, you’re able to sell it without their approval and divest their interest totally. So they, if you sell the property, you just need your signature, and you can take all the money from the closing. Without worrying about the remainder beneficiaries. I was
Unknown Speaker 24:06
a little bit confused. So you have somebody that say they have 300,000, and they have three children, because it will just make it easy. So assumably if the somebody died, then each child would get the $100,000
Unknown Speaker 24:19
Well, first of all, ladybird deed deals with real property.
Unknown Speaker 24:23
Right? So she’s living in the house, but she’s gonna be
Unknown Speaker 24:25
living worth 300,000. You’re saying, right. Okay.
Unknown Speaker 24:28
So the children will essentially get the $100,000 each, I guess I’m a little confused. How does this benefit somebody? Because they could, or is it because when they become incapacitated, or what, what? what triggers that?
Unknown Speaker 24:41
Well, first of all,
Unknown Speaker 24:43
in other words, if somebody’s just between
Unknown Speaker 24:44
owning it outright, if they own it, without the without the remainder interests, when they die, it’s going to pass through your will or your trust to the beneficiaries, and there’s going to be some process that’s required to Get it to those three beneficiaries. Because if it’s homestead, you have to have a homestead determined determination and a court order that says the three people get it. Or if it’s not homestead property, let’s say it’s your second home, or it’s just a just real property that that’s not sure that you’re not living in, okay? Whatever it is, maybe it’s a rental property, it’s going to go through a probate or it’s going to go and it’s going to be you have to wrap up the student’s affairs before it goes to the beneficiaries. If it’s life, estate, remainder to the three children, upon your death, it goes by operation of law and the three people, there’s no process, it goes by operation of law to bring people in the ladybird aspect of that is that if, before your death, you want to sell it, you can divest their interest without them without any say from them. If you give them just a pure life, estate remainder to the three beneficiaries, they are immediate owners and you need their permission to sell it. Okay? Because they they have a vested interest, the ladybird aspect of it is that you retain the right to sell it and take all the proceeds and divest their interest totally without their approval. So if somebody needs to sell their house to go into a long term living facility or something like that, they they wouldn’t necessarily have to contact the beneficiaries, they would just go out outright and sell it. And it would be when the ladybird deed correct. Okay, if they, if you if it was not a ladybird deed, and it was just a life estate remainder to the three children, you need all three children to agree to sell the house, nobody’s going to buy a house, that, that that the only interest or getting is the life estate that you own, and two thirds of the remainder interest, they’re going to want all the all three of the remainder interests, so one person holding out would be problematic. So the ladybird deed allows you to do what it says though you still own 100% of it, for the purposes of the sale, okay, then the the buyer would only require your signature on the deed, and they would have 100% ownership in the house.
Unknown Speaker 27:07
Any other gotchas that you’re seeing? Now? I mean, you had mentioned that they change the law, what about four years ago, five years ago, when when should somebody have their estate plan looked at? If it’s every five years? I mean, when should that How was that? Yeah,
Unknown Speaker 27:23
every five years is a good start. And anytime there’s a major change in your life, you need to have your state plan re examined. If you have a new child, if somebody dies, if you come in to more money, if you get a divorce, major events in your life should trigger an A visit to your state planning attorney to say, does this affect my estate plan? And how does it do I need to make changes, maybe a child getting married, maybe you don’t like the spouse, okay, and maybe that might change how much whether or not a child gets an asset and trust or outside of trust. And one other aspect I really want to hit on here is retirement accounts, and life insurance policies. Those are not generally governed by your will or your trust, the disposition of those assets are governed by beneficiary designations. So part of seeing an estate planning attorney is going over those beneficiary designations because a lot of times those are where most of your assets are, you have to. So part of your state plan should be where these assets go upon my death. And is this what I want, you may, if you don’t want somebody to get assets outright, you may have to designate your trust as a beneficiary of the proceeds. Okay, so you don’t want your your retirement plan to say, spouse, and if spouse, previous spouse, predeceases, me, then to my children, if your children are minors, you may say I don’t want my minor children to come into my retirement benefits, I want it to go into trust for their benefit, in which case you would name instead of naming your children as beneficiaries, you would name your trust, as the beneficiary and the trust would hold those assets. for however long you want them to be in trust for your children. And the same thing with life insurance, the life insurance is going to pay to whoever you designate as a beneficiary, and you don’t, you may not want your children to get that slug of money, or even your spouse to get that slug of money, you may you may want to hold it for that person’s benefit in trust and make sure that they don’t blow that money or it doesn’t it doesn’t go You don’t need to trigger a guardian for your children. Because if children can’t own assets, before they’re 18, they there’s if they receive assets outright from your trust, they’re going to need a guardian to hold the assets and once and now you’re right back into the air to court oversight over the child’s money. Now you’re the guardians gonna have to report to the court what they’re doing with the minors money until they reach the age of 18. It’s better to designate a trust as the beneficiary of these assets so that it’s held in trust until they until you’re you believe there. Well, they’re able to manage it and get it at least until the age of 18.
Unknown Speaker 30:04
You had mentioned too, that they changed the law, I believe is last year. Whereas if you left money, say, say you had $200,000 in a 401k, or IRA, and you left that money to the trust, you had to take the money out over a 10 year period, whereas if you left it to an individual, it was slightly different.
Unknown Speaker 30:25
It’s the secure act. And what it says is that used to be that if you lend money to your children, they can hold the money in the retirement account for their remaining life expectancy, their minimum required distributions would be a function of what their life expectancy is. And the idea of 401, K’s and traditional IRAs is to keep the money in the IRA, as long as possible, because there’s, there’s tax deferral, when you pull the money out, you have to pay taxes on the money that you pull out. So if you pull out, let’s say, $5,000, this year, you’re gonna have to report in your gross income $5,000, for income tax purposes, and you’re gonna pay taxes on it. What the secure Act says is that now, if you leave your money to children, it has 100% of the assets in the retirement account have to be distributed within 10 years. And so that means that the government is going to collect the income taxes on those assets, within 10 years, rather than the course of their life, which would be much longer drawn out, there’s going to be a large, when you pull that money out of the the IRA, or the retirement plan, what they’re going to have to report whatever they pulled out on their gross income, and it’s going to increase the taxes that they owe for that year, by the amount of the withdrawal in the new laws, if you have to do it within 10 years. Now, that is not true with respect to spouses, spouses can still roll the assets over to their retirement account, and they can hold it in there as long as though their their own retirement account. And it’s then distributed over the course of their lifetime, as well. So there’s still those benefits for spouses. But there’s not that benefit for children. And that’s not true for minor children, you’re allowed to draw it out more slowly if your children are minors, but once they reach the age of majority, you have to pull it out within 10 years. Okay, that that date.
Unknown Speaker 32:24
So even if you left though the money into a trust on the children’s behalf, where they have to pull it out in 10 years, yes, I mean,
Unknown Speaker 32:32
so essentially, if it’s still not going into their pockets, where they can write or argue with it, it’s still in trust for their benefit. But who
Unknown Speaker 32:39
pays the taxes on that. So let’s suppose there’s a million dollars in a 401k. And it gets left to two children, essentially, both of them have a half a million dollars, is the trust paying the taxes on that 10 year $100,000 bill, or who is paying the tax Ross
Unknown Speaker 32:57
is the beneficiary of the policy. I mean, at the pulse of the trust of the beneficiary of the retirement plan, the trust pays the income taxes, when it pulls it out. When they pull it out the money to the children, the income gets gets passed on to the the children, presumably they’re not going to get 100% of the money. The reason you named the trust is beneficiary because you want to hold it in trust for a period of years. But the income in any given year only gets distributed to the beneficiary to the extent that the the actual money has been distributed to them. If it’s remains in trust, then the trust owes the income taxes.
Unknown Speaker 33:38
If you have to do a 10% conversion, right, you have to do it over 10 years, I’m assuming that we’re just going to do it over 10 years, that $100,000 the trust would have to file a tax return on the $100,000 that it has received even though it has not dispersed it. Correct? Absolutely. So then when the trust disperses it, is taxed again, or is it not taxed?
Unknown Speaker 34:00
Because here’s what happens if let’s say the trust withdraws $100,000 and then turns around and distributes $100,000 to the beneficiary. The trust on a trust income tax return it says gross income of $100,000, but then it gets $100,000 deduction for the distribution. And then it sends what’s called a K one to the beneficiary saying you’ve received $100,000 of income, you’ve got to report this $100,000 on your income tax return. So then in that instance, the trust pays zero and the child picks up the income on their tax return. Okay, so I
Unknown Speaker 34:36
can see the next podcast I do. I’m gonna have to talk to a CPA now because now you brought up a lot of other interesting little nuances. So the $100,000 gets into the trust, and obviously there has to be somebody filing taxes for the trust as well. Right?
Unknown Speaker 34:51
Unknown Speaker 34:51
correct, okay. And then whatever it gets dispersed, then it gets as ordinary income or how do you know how that gets treated as ordinary income Okay, so in theory it because what happens,
Unknown Speaker 35:02
what happens is when you put money into your 401k and T into your IRA, it’s compensation. But you’re, but when you put it in there, you get a deduction on your on your income tax return. So you don’t pay the income tax today, you’ve got a deduction today, it’s tax deferral of ordinary income, it’s compensation that you’ve received, but you’re putting it into this 401k, or there are the IRA. And the government encourages that by saying, we’re not going to if you put the money into those vehicles, we’re not going to tax you today. But when you make the withdrawal from this IRA, or retirement plan in the future, that’s when we’re going to take our taxes. And so that’s the theory behind it. It’s not that you’re getting away with not paying any taxes on it, they’re just allowing you to defer it to a later date, whenever you take the withdrawal out. Okay, so you’re not paying taxes today, but you have to pay in the future. And your beneficiaries will have to pay it in the future. If, if they’re still taxes in there, if they’re still assets in there at the time of your death.
Unknown Speaker 36:03
Right? I guess, let’s see, we’re getting long on time. Let’s go and finish up on a high note and talk a little bit about the taxes. Right now the estate plan threshold, if you have what 10 million there, what’s the threshold now 11 point 7 million private person, alright, so it’s really not gonna affect the average person. But they’re they’re talking about lowering it, you know how much they’re going to lower it to?
Unknown Speaker 36:28
Well, right now, what we’re talking about, we’re talking about estate and gift taxes. And by the way, this is 2021.
Unknown Speaker 36:35
So in case anybody’s listening to this, right,
Unknown Speaker 36:38
this is 2021. And we’re talking about estate and gift tax, the federal estate and gift taxes we’re talking about, you don’t pay $1. And in the state and gift taxes until your assets exceed $11.7 million. Today, as we stand here today, and each person has that $11.7 million exemption amount. But if you’re married, that means you have $23.4 million, that you can each leave to the next generation free of estate and gift taxes. Now, keep in mind, this is a different tax, this is not income tax, IRAs, you’re gonna get hit with an income tax. And what’s the
Unknown Speaker 37:13
percentage this year of what
Unknown Speaker 37:16
on the gift tax or on the estate, it’s a 40% tax for so every dollar above the $11.7 million gets taxed at 40%. The first 11.7 is free of the gift taxes any each dollar above that gets hit with a 40% tax that number, and under current law is set to be cut in half in 2026, to sunset cut, tax law changes, sunset and 2026. So if nothing has changed, it’s going to be half of that in 2020. because
Unknown Speaker 37:50
Congress didn’t vote on it. It was reconciliation or something.
Unknown Speaker 37:53
Yes, exactly. Yeah. Exactly. The it’s possible, though, that there’s there’s affirmative action taken to reduce it prior to 2026. And that’s what Biden said part of his tax plan is to is to reduce it to half immediately. So it would be you know, another democrat and the other people wanted that reduced down to $3 million per person. So it’s unknown exactly where it’s going to be. But even if it gets reduced to let’s say 5 million, then each person can leave $5 million to their, to the next generation free of estate and gift taxes. And so if you’re married, that means you can leave $10 million free of estate and gift taxes to your children, because you both have $5 million that you can use any assets that you leave to your spouse that qualifies what’s called a marital deduction, you can leave a billion dollars to your spouse, and there won’t be any estate and gift tax on that money because there’s 100% marital deduction. However, when the surviving spouse dies, that’s when the billion dollars gets taxed when they try to leave it to their children, the billion dollars that the one spouse inherit and gets hit with the estate tax.
Unknown Speaker 39:10
Right. And I have seen it where the to one of the spouses will leave their portion of the 11 million or 5 million or whatever the rates going to be before they pass and use up their deduction. And then you know, the money goes to the spouse and then yes, it’s a good thing to have, right. I mean, you actually have assets but
Unknown Speaker 39:30
yes, and you know, in 2011 they used before 2011. In order to use the first spouses 11 point 7 million you had to create a trust for the benefit of the surviving spouse, and then remainder to the children in order to you there was like certain trusts that needed to be created in order to take advantage of the first spouse’s credit. Now they have after 2011 they’ve, they’ve provided for flexibility they’ve said If the first spouse doesn’t use their $11.7 million, their surviving spouse is going to going to be allowed to what’s called pork, their unused exemption amount to themselves, so that any unused portion of that, that they didn’t pass to the children, the surviving spouse can get. So if the if the, if the first spouse leaves all of their assets outright to the surviving spouse, they will have used zero of their exemption because there’s no tax, because because they got 100% marriage deduction, so they still have $11.7 million, the surviving spouse can elect to port that 11.7 over to them so that they now have $23.4 million, that they can leave free of estate taxes to the next generation, because they didn’t use any of it.
Unknown Speaker 40:42
Okay? And even if they go crazy, and they lower the deduction down to say, a million dollars, or half a million, or whatever the case is, there are there are strategies to get around it, right?
Unknown Speaker 40:54
Yes, there are ways to reduce the tax.
Unknown Speaker 40:59
The tax avoidance, right, that’s a bad word.
Unknown Speaker 41:02
It’s not tax avoidance, you can lower the tax bill through various techniques. As a for instance, if you own life insurance, on your on your life, okay, let’s say you have a million dollar term policy and you die within the term. If you’re the owner, that million dollars is included in the assets that are subject to the estate tax, that reduces your exemption, because you have to use your exemption to get that money to the next generation. If you put that asset into an irrevocable life insurance trust, and the irrevocable life insurance, trust is the owner, then those assets will not be included in your estate, that million dollars that that’s paid out is out of your estate, because you don’t own it anymore. And you’ll get it out at a very low value. Because Term Life Life Insurance Policies aren’t worth anything until you die. They don’t have any inherent value, nobody. So you get it out of your estate, and you haven’t made any gifts to reduce, because it’s not worth anything, it only becomes worth something when you die within the term that happened after you, after you’d already transferred it into an irrevocable trust, it’s already been transferred, and you don’t own it anymore. So it’s not included in your estate. So that’s, that’s just an example of an idea. If we do have to do tax planning, you try to get the life insurance out of the out of the state, we don’t want that all of a sudden to become hit with if you if you do have a taxable estate, we don’t want that life insurance to be hit with a 40%. Tax.
Unknown Speaker 42:34
Right. I know they’re talking about also having if you sell your primary care or primary house, the that
Unknown Speaker 42:41
your primary residence you get there’s an exemption amount of the in the capital gain.
Unknown Speaker 42:46
Right, it’s 50 for a single and 500. I think for a married couple. Right.
Unknown Speaker 42:49
Unknown Speaker 42:50
So but even like for a second home or,
Unknown Speaker 42:52
you know, something you’ve held on 31 exchange. Okay. 1031 exchanges are, what do you buy like kind property with? And you’ll defer the capital gain because you bought another piece of real property? Right?
Unknown Speaker 43:10
Yeah, I have a whole nother section on dsts, 1030 ones, all those kind of things. We we’ve done a number of those for clients, more for the commercial and more for the, you know, $300,000 or more, which I appreciate you being on the call today. I think it’s very informative. I if people have questions, how do they reach out to you? I’ll put your information in the show notes.
Unknown Speaker 43:32
How can you call me at my office? It’s 561-848-9970.
Unknown Speaker 43:38
Okay, and try. You’re right here in West Palm Beach. I’m here in West Palm Beach as well. I appreciate your time. Any any other closing remarks? No, that’s it. You know,
Unknown Speaker 43:49
let me see if there’s anything else that I want to hit on. If I got everything here, I think I have. I also do asset protection planning. So if anybody has very simple ways to provide protection, that’s part of the estate planning as well. So if you’re worried about creditors or anything like that, is proactive planning, it’s very difficult to plan after you already have a creditor coming after you because you there’s not much you can do at that point. But proactive planning is something that we can do for asset protection planning.
Unknown Speaker 44:20
Okay. And I did have one one client came in, he had some sort of trust setup is and I inherited a couple million dollars and he wasn’t allowed to get it outright because he had creditor issues. So I think that they modified his his trust to where he was only getting interest and benefits from it. But it kept the I think it kept the creditors from attaching it.
Unknown Speaker 44:44
Absolutely. When you That’s why you create trust. If your child is having creditor issues you need you do not want them to inherit your assets outright. You want to provide it and the trust for them that protects them from their creditors. Creditors can not reach inside of trust that you create for your, for your for third parties benefit. You can’t. In Florida you can’t create a trust for your own benefit and protect yourself from creditors, from your creditors, that’s called a self settled trust are not allowed in Florida, but you can create a trust for another party and protect that other party from their creditors. So mom can protect child from their creditors, mom can can leave assets to husband and protect husband from his creditors and vice versa. But mom can’t create a trust for herself and create and protect herself from her creditors.
Unknown Speaker 45:36
So you can’t go out and create irrevocable trusts, throw all your assets in it because you have creditors coming after you. They’ll they’ll be able to reach in and grab the money out of the trust right now.
Unknown Speaker 45:46
If mom’s the benefit. If you’re the beneficiary of that trust,
Unknown Speaker 45:50
that suppose there’s a million dollars and she says, All right, well, I got creditors coming after me I want to basically keep it to creditors can’t get it because I want to live on the interest. But eventually, I’m gonna give it to my child’s self settled trust, they can drop right in and get it. Okay.
Unknown Speaker 46:03
All right. Also, if you have creditors coming after you even if you tried to leave it, gift it to your children, or gift it into trust for your children, that they can try to come after it and call it a fraudulent conveyance. That’s why I said if you have creditors out there already, it’s it may be too late to do this kind of asset protection planning because they can claw back if they can prove that you did that with with the idea of avoiding the creditors, then they can claw the assets back into your estate and recover them. Okay.
Unknown Speaker 46:36
Yeah, I had heard about some attorneys are not attorneys, but doctors the for insurance as well. They they get a line of credit based on what they’re receiving their receivables, and it was all sort of a complex thing where they could shelter for malpractice.
Unknown Speaker 46:54
Yes, doctors do a lot. That’s the kind of people that need. If you’re in a high risk profession, like a dog, like you can get sued, if you’re in a profession where you can get sued, then asset protection planning is a definite part of the estate plan that I set up for the doctor. And we there’s all sorts of different ideas. It’s a whole other discussion of what to do. But there’s very set for people who aren’t in high risk professions and are worried about well, what happens if I if I get into an accident and I get sued and things like that there’s, there’s so much simpler ideas that I just devised like holding assets as tenants by entirety as opposed to in your own name. That’s a very simple way of avoiding creditors because of tenants by entirety ownership, if you which is a form of ownership between spouses, it’s a joint ownership. palaces called tenants by entirety. In order for a creditor to foreclose on assets owned as tenants by entirety, they need to be a creditor of both spouses. So they don’t have a judgment against both. But if they only have a judgment against one spouse, they can’t take assets that are held as tenants by entirety, it’s a very simple way to protect the assets from creditors. Now, if they have a judgment against both spouses, that’s a problem because now they can grab tenants by entirety assets. But if they are, if you’re a doctor, and you’re getting sued for malpractice, they’re not going to have the spouse on the judgment. So they can’t get tenants by entirety assets. If you’re driving your car, and you get into a car accident and you own the car, they’ll only get a judgment against the driver, and in the person who owns the car. So if this, if the other spouse is not the owner and not the driver, they don’t get a judgment against the other spouse. They can’t reach your tenants by entirety,
Unknown Speaker 48:40
right. I think he would even advise me as far as our cars go for my wife and I to have each of us own our individual cars.
Unknown Speaker 48:48
Right? The person who’s driving the car the most shouldn’t be the owner. That way, you if you’re driving a car that your spouse owns, or that you own jointly with the spouse, then the creditor can will sue the driver, the owner and the driver, the injured person.
Unknown Speaker 49:08
Sounds like we could have a whole other show just them asset protection. But yeah, so thank you again. Again. If you’re reached out to Charlie, I’ll have the information in the show notes. And thank you for watching.
Unknown Speaker 49:19
You should consult a financial advisor familiar with the specific circumstances of your unique financial situation before making any financial decisions. Nothing in this broadcast constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature, and are not a guarantee of future returns. Terry Martine is an investment advisor representative of FRS investment advisors, a Florida investment advisory firm