191: What you MUST know about Estate Planning!
Buck: Welcome back to the show everyone today my guest on Wealth Formula Podcast is Joseph Longo. For more than 25 years, Joe has focused on delivering unparalleled service in the areas of estate planning, asset protection and sports. His clients have range from businesses to high net worth families and professional athletes. In addition to practicing law Joe is also in the sports agent space, which is really interesting and has represented 22 first-round draft picks which I think is pretty darn cool. He himself was once a starting defense back at Brown University as a football player in the mid 80s. Joe welcome to Wealth Formula Podcast.
Joe: Thank You, Buck, thanks for having me.
Buck: Yeah absolutely. Hey Joe, what was it like to play Division one football back in the 1980s?
Joe: Yeah well we’re going on plus 30 years now so hard to remember but I think for a guy from Los Angeles it was it was a great joy in my life. I still have very good friends from teammates in that time but you know for me, Brown was in Providence Rhode Island so to go see all those schools and all those yeah it is as a young man it was it was great I had a really good time I really enjoyed my time there in Brown.
Buck: Well that’s great so and I want I want to talk a little bit about sort of your journey before we get into sort of the nuts and bolts because we talked about your practice and I thought it was kind of neat you’ve taken that you know the experience in sports and you’ve sort of you know relayed that into being an agent. How did you end up ultimately sort of in the you know estate planning space?
Joe: It’s a great question. I get that a lot because it’s somewhat of an odd practice. I’m a lawyer by trade. I’m about to hit my 30th anniversary as being an attorney in June and when I first started, I was a business litigator at a law firm and it was probably six or seven years out into my practice and we had a Dodger reliever case come into the firm and my boss and I know you know who he is because you read the sports page all day every day and he ended up taking on his case and we ended up you know litigating for a year and app became very good friends he turned to me at the end of that case and said I’d like you to be my agent and that’s sort of opened the door, I had a sports bin anyways so I began becoming a MLB certified agent and then I never did give up my law practice it just evolved from business litigation to some probate litigation and then I had a client an outfielder for the Padres passed away in a car accident and I got to experience on behalf of his wife and children you know the probate process and I said to myself there’s probably not 20 years ago how do these guys all not have living trusts this is crazy that we’re stuck in probate. You know everybody needs to get a living trust because it would make life on your loved ones so much easier and ultimately I joined a group of estate planners and my practice has been in that direction ever since and I enjoyed very much because you know you feel like you’re really helping people, you’re certainly helping the loved ones of your clients and and I also enjoy you know the tax aspects of estate planning as well. And so you know it’s a really fulfilling area of law and all my athlete clients need the same type of planning is you know the business owners and they doctors and I have lawyers as clients all walks of life and so both practices you know meshed together nicely and and I enjoy it. That’s kind of how I got here.
Buck: So at a high level, let’s back up and ask the question, how would you define estate planning and really what are its primary objectives?
Joe: Estate planning is the planning you do for when you’re gone, like what’s the old saying, death and taxes, right? So we would you spend a lot of time during our life planning on taxes but you know estate planning is the planning for your exit and it’s really you know most people want to be responsible and care for their loved ones upon their passing because we all didn’t work so hard to put together all these assets and not take care of our family when we exit and in my area of law I deal with it on a daily basis. People you know pass away and the people to do the planning it sure is a lot easier on your loved ones versus the people who don’t do any planning because you know there are people who go through life and say well when I pass away that’s not my problem you know and that’s okay that’s one view but I think the responsible thing to do do the planning get a living trust and a minimum and that way your loved ones are taking care of like pass.
Buck: So you know in my mind I think of the estate planning the primary objectives really are twofold. One is to avoid probate and then the other if you have large enough of state to avoid the taxes. We talked about probate a few times and we’ve mentioned that we you tell us exactly I mean listen a lot of people don’t even know what probate is otherwise they would not end up in probate right, like your your professional athlete that you talked about if he had known about it he probably would have taken steps to avoid it. So what is Probate?
Joe: Probate is the court monitoring the distributions of the decedent’s assets, okay somebody’s got to keep an eye on it and that’s how you do it that’s how the courts, once you pass if you don’t have a living trust or you don’t have any documents or maybe you just have a will in California anyways and in most states, you’ll end up in probate okay, and that’s where the courts oversee the distribution of payment of your debts, payment of your taxes, and then the distribution of your assets, because if we didn’t have any probate court, you can imagine what would happen is it would just be a free-for-all and I’ve actually had cases where somebody passes away, an elderly person passes away with no spouse no kids no family you know the house sits vacant until somebody files a probate action to distribute the assets to whatever heirs and for instance it’s a very long process, it can be a very expensive process with court costs and attorneys fees, and on your loved ones you know it just prolongs the closure or you know because like for instance in LA County where I’m based probate it takes about a year and a half okay. I know in some states it’s much quicker but you know it’s a year and a half of until the court actually can grant the final order and you can distribute the assets. If you have a living trust, you can distribute you could you could likely pay the debts and distribute those assets in a matter of weeks at a fraction of the cost. And by the way it’s if you have a living trust it’s private. Nobody gets called your attorney and find out what share did I get or what am I entitled to. In a probate action it’s all public it’s all public record you can just google Jackie Kennedy and right now and you can her will will pop up on the internet you can see what she left her friends and in it. With a living trust it’s all private the transactions are all private and you get it’s a custom document where you can leave whatever assets you want to your loved ones.
Buck: So if you have okay so backing up just a little bit we have you know the bare minimum ultimately I think for anybody who’s making pretty much any money at all is a will and a living trust. You’ve talked about the living trust is a way to circumvent this thing called probate. Probate basically it’s you know for your loved ones it’s time significant expense in some cases maybe for five percent of an estate even and then they have to deal with you dime right you want to avoid probate. So if you would tell us exactly the role of the will then and what is the role of the living trust and how are those are those differentiated and how do those work together.
Joe: Great question yeah that’s a really good question. So a will originally was the document that you would put all your requests in when you passed away okay. Then and that has to be probated by the way if you have a will and no living trust it does have to go through the probate process.
Buck: Okay so basically it means that going through it’s basically saying okay it’s a will, the court is going to basically say that this is a will that is that we are saying is okay.
Joe: That’s exactly right. That’s the first step. The board’s gonna confirm that this is a valid will. Now we’re going to follow the terms of the will okay let’s get the creditors paid. Now what the law said is if you have a living trust you don’t have to go through the probate practice a process why because it’s like a contract okay and if the contract is validly executed and the provisions in it are valid and are contrary to any existing law, then you now are authorized to distribute these assets outside of the probate process and you know it also helps streamline the process which is what courts want the goal is to streamline the process, not to make heirs wait a year and a half to finish distributing the assets okay. So that’s the difference. You can look at a trust like a contract that allows you to avoid probate the will it’s like a living trust because it’s got the provisions in there for the years but it must go through the program.
Buck: But you still need both them, right?
Joe: Yeah how do they work together in California we call a living trust supported by will a pour-over will okay. So what that means is if anything isn’t properly disposed of through the living trust then the will says basically in layman terms, court please follow the terms of the living trust okay pour over being any assets to go through the will get poured over into the living trust and go through the terms of the living trust.
Buck: Okay so bottom line is and this is the the really big take home and this is gonna cover probably ninety percent of the people who are listening to this podcast. You have to have a will you have to have a living trust. And a living trust is actually not that burdensome. Can you talk a little bit about sort of you know you know once you have a living trust how do you use it?
Joe: Well this is a this is a good question too because when you have a living a lot of people think well I just need to do a living trust and this is probably this is why I would recommend more a qualified attorney handling your estate plan versus one of those self-help companies because I get this all the time where somebody comes into my office and says you know my mother passed away but but here’s her living trust from you know one of those self-help do it yourself and I say and then I find out that none of the assets got title titled into the trust because you know the home’s not in the name of the trust the bank accounts aren’t in the name of the trust so I say you know what the good news is she tried, the bad news is she and fund the trust that she didn’t put anything in it so we have to go to probate court. So a really good a state plan has a living trust like you said with a pour-over will that protects anything that didn’t make it into the trust. And then you title all your assets in the name of that trust, so don’t if you if you just do the trust you know putting anything in it won’t work you’ve got to do the trust and then put your assets in the name of the trust that’s how you do it.
Buck: And that’s actually this is a really an important point I think because I think that you know people get all these documents and they don’t end up using them and ultimately what I found is the reality is that even if you use really good attorneys you use you know people who are you know what they’re doing a lot of times the documentation is created and then there’s not a lot of education that goes to the client thereafter and so in this case really what we’re talking about is not something terribly complicated because the living trust at least in you know and if I say anything wrong correct me, but you know you don’t need a tax ID number etc Social Security number but instead of you owning it anytime you’re you know deeding something buying something say you’re investing in a private placement, it’s not you anymore it is you know living trust and this you know your social security number just adding living trusts to they’re basically funded the trust, is that i right?
Joe: Yeah you know what you hit the nail on that. You explained it perfectly and then to go one step further, I tell clients after you’re done with me and we fund the trust properly, if you’re getting any statements mail on any of your investments or any or properties or any of your bank accounts that have your name and not in the name of the trust then we miss something. All of you all of your assets should be named and the trust so when you’re getting those monthly statements or quarterly statements when you’re getting those private placement deals that you invest it in those should all become in you as trustee of your living trust. If it’s just coming in your name we probably it’s probably not in the trust.
Buck: And just to add one more layer to that because I think you know we get into so much complexity and the asset protection side and as you know we you know I used Doug Lodmell, he’s a friend. He’s the one who actually suggested we talk, you know we use a lot of the actions LLC’s etc. One thing that I have to admit that I have to be careful of myself is to instead of using my own name as a member on in a particular partnership or owner in an LLC I’ve used my own name instead of using my living trust and that’s a mistake isn’t it?
Joe: Yeah that is a mistake. When you look at those those type of deals let’s just say it’s a group and you own 2% of this deal if you notice when they send you the operating agreement and they have the members listed there, people have a property in their trust but then you see individual names and I always wonder well why don’t they have it a trust it needs to be in the trust okay. Or what you can do asset protection wise is you can do your investments in an LLC owned by your living trust okay. So they have the living trust you have it be a single member LLC owned by your living trust that way if anything happens to you, your loved ones just you know now they’re there they have access now to this LLC that you set up and a living trust can own your membership interest in the LLC and it should.
Buck: Yeah and just just for example we have my wife in me where the you know it’s a partnership between us where the LLC is actually the membership is owned by my living trust and her living trust there you go perfect and anyway that’s that’s kind of what I was getting at because they think that’s one more layer where I think people are not using the trust once they have them. So I think we’ve got a pretty good idea that everybody needs for the most part you know a will and a living trust and I don’t care what state you live in you’re gonna need that. At what point is a will and a living try living trust no longer sufficient or adequate estate planning?
Joe: In first glance it’s probably when your assets are above the federal and some states have this too the federal debt tax exemption, which is currently around eleven point four million, and so if your assets exceed that amount okay it’s your children that would owe the debt tax which is currently the exemptions about eleven point four million and then do forty percent on every dollar above that, so just let me give you a quick example this is an extreme example. You know when I was ports franchise owner passes away okay and and typically there was an NFL team owner in Buffalo and it was written about you know he was one of the original owners of that team and I think his basis was like four million dollars to get into the league. Well of course when he died the team was worth over a billion dollars okay. So on that asset and I’m sure you had other assets you you put all those assets in what’s called a 706 death tax return okay and then you put the value of all those assets okay, so his wife had pre deceased him so it was his children owed forty percent on every dollar above eleven point four million. Now some people are like well that’s a lot of money even on a twenty million dollars estate yeah it’s forty percent on every dollar of about nine million dollars there’s to do the math and your children know that. How do we get around that there’s some advanced state planning techniques that you can do for instance gifting some assets during your lifetime to your children. Sometimes life insurance you can buy a policy and then the proceeds will cover the death tax there’s probably more that you need added to your estate plan once you exceed the eleven point formula, by the way for a married couple you can double that okay so like twenty two point eight million can go to your kids tax-free as long as you have a properly drafted joint Trust okay. So that’s when you need more advanced estate planning to avoid death taxes. One other thing I mention in addition to a living trust and a will a competent estate planning lawyer will also provide the healthcare directives for instance if you’re a coma you know allowing your wife to make decisions for you or do banking or whatever she needs to do also you know if you have minor children you’re going to need a guardianship nomination what if something happens to you and your wife who’s going to raise your children, you know there are some things that may be appropriate to one estate plan that’s not through another but a competent estate plan will last the right questions and give you all the documents that you need that you’re ever going to need you know in the event that somebody is injured and incapacitated and can’t make decisions for themselves including in your area you know health care directives so that the doctor can talk to the spouse or the doctor can talk to your brother about your medical needs and also as we are talking here today the living trusts in the will that transfer the assets to your loved ones, all those documents are necessary and a good complete estate plan.
Buck: One of the things that you know and and I’m glad you mentioned all that because it’s you know it’s not just issues related to living trusts and Wills but there is this comprehensive element that you know people don’t know about don’t think about and you know most people don’t don’t plan the day they die and that you know that becomes a problem. But one of the things that you mentioned too is with regard to the estate tax, you know people are listening in this thinking well you know I’m not worth not worth 20, you know my wife and I are not worth 25 million, but I would just like to point out a couple things one is that I do know that in in our group we have a number of people who are you know certainly in the you know four or five million plus range and then they have significant life insurance policies on top of that where you know the life insurance policy certainly you know the death payment that your heirs would be getting from your life insurance policy could get you to the point where you’re starting to get closer to those estate tax numbers. The other thing to remember about the estate tax is that this is about as high as that minimum has ever been and it’s very likely that the estate tax minimum will come back down. What are your thoughts on that?
Joe: Yeah I’m getting asked this a lot lately. So we used to say when Obama was in office during his second term the death tax exemption amount was 5.2 million and we used to say that’s the highest it’s ever been. When my father passed away I think it was 1989 the death tax exemption was 600,000, you know. Now if you go and look at some of the platforms on particularly on the Democratic nominees, for instance I think I saw somewhere that Bernie Sanders if elected would try and bring that down to 1 million dollars with 55% on every dollar after that. So you’re right this is a moving target it might be 22 million for a married couple right now but you know who knows where it’s going to be in the next administration, certainly you know it’s something you have to keep an eye on like for instance I tell my clients who have the four or five million dollar estate, you know we’ll give you let’s just do the basic plan right now, you know we can do some advanced estate planning techniques if you want but if not let’s just keep an eye on it because you know it may come down and it likely will during your lifetime so we really need to keep an eye on that and so and I’m telling clients like advising right now look I don’t mean to you know bang the drum about the death tax coming down because there’s always rumblings about that you know but look, we’ve got until the next administration to do something advance estate planning wise, so now would be the time to look at it because it is so high. Ten years from now I don’t know we might be all laughing about remember when Trump was in office and the death tax exemption was twenty two million because again you’re right that’s the highest it’s ever been by double, so we’re got a very high death tax which allows us to do some techniques now that might not be available when it comes back down, if that ever happens. I think in Trump’s current tax provision in 2025 he’s got it where the tax exemption goes away completely but remember this is a moving target that law could always get changed and applied you know moving forward. And by the way just so we’re clear here the exemption is applied during in the year you pass away. So there was a during the Bush administration I believe it was 2010 there was a lapse in the death tax for that one year and and they always pointed out in my estate planning periodicals that George Steinbrenner, the owner of the New York Yankees strategically died during that year so that his children can inherit that team tax free which they ended up doing so. There are a lot of Red Sox fans who think he did that on purpose but he strategically passed away during that year and there was no death tax exemption at that time, but that’s the only year that I’m aware of that there was no death tax exemption.
Buck: Yeah you also mentioned the idea of you know doing something while the you know well the exemption is higher and is that in part the idea the thinking there that you might sort of grandfather into something?
Joe: hat’s right if you look at the history of the you know the code the tax code and the way they implement these laws they typically, when they when they pass new legislation regarding the estate tax it’s it’s from that point forward. They typically don’t make it retroactive. So that’s you you’re right that’s why my statement is now’s a good time to look at some advanced estate planning techniques because you’re right you use the term grandfather. You probably will we grandfathered into the new law if it ever gets no meaning that whatever techniques that are currently available to us right now could potentially be outlawed.
Joe: It’s very unlikely but yeah it’s it’s possible but typically they don’t make them retroactive it’s going forward. So for instance, like I said earlier if they change the law let’s just say we get a new administration January 1st of 2021 right, once they let’s just say they pass a new comprehensive tax overhaul in June of 2021 to be implemented on January 1st of 2022, typically you would have to die after January 1st 2022 to have the current law applied. Now if you did any estate planning techniques prior to that for instance you you did a technique that’s saved on death taxes during your lifetime, those would still be valid. They would not they would not be retroactive and disciplined somehow take away the estate planning that you did, because again the laws are applied going forward not retroactively so it’s very unlikely.
Buck: I know you’d be totally hypothetical but just so that people understand what you’re talking about there I mean is it like gifting or things that you could do now that you may not be able to do later but because you’ve already sort of put things in in motion you may have an ability to continue doing something like that?
Joe: Yeah let’s talk about gifting you bring up this is one good estate planning technique so gifting. What is that? So this might sound confusing, but follow me. You also have a lifetime gift exemption of eleven point four million okay and so what you’re allowed to do is you’re allowed to give your child up to eleven point four million. So let’s just say you give your child during your lifetime half ownership and a piece of real estate that’s nice five million dollars and now your child has gotten two and a half million, which you know at that point that roughly leaves around nine million left in your lifetime gift exclusion. It also leaves nine million left in your death tax exclusion too because whatever you use during the life gift exclusion gets applied to when you pass away on the death taxes. Now, you’ve given away the two and a half million in real estate it’s now gonna grow outside of your state you’re not gonna owe any death tax on it that real estate grows and value from a value of five million and then you pass away and it’s worth 12 million, well only six million of it now gets put in your estate for that forty percent death tax calculation, the other six is owned by your child and that’s subject to no tax whatsoever okay. Now let’s just say you did that technique and then you pass away, that technique will not be voided by the new death tax legislation okay because you gave away you gave away half of that real estate worth two and a half million at a time when it was valid, you could do that and it’s now in your trial time it’s a gift okay and it will not be taxed right in your estate.
Buck: Good well I mean I think that that basically sort of sums it up. Are there other than gifting any examples of you know different kinds of strategies for at the higher level they that you have put in place for clients who might start being in the position where they’re concerned about estate taxes.
Joe: Yeah you know like we said the simple one is you know buying life insurance and putting it in an irrevocable life insurance trust that those proceeds, if they’re in an irrevocable life insurance trust will come upon your passing will be distributed to the trust tax-free and that money could go to pay death taxes. Another technique that’s not there particularly with real estate investors is what we call discounting. so let’s say you have a family owned limited partnership or a family owned LLC okay, currently the IRS code says and let’s just say upon your death that LLC or limited partnerships worth 10 million dollars okay. For death tax purposes the IRS says it’s actually worth you know seven or eight million dollars you can discount it because it’s a family-owned company, therefore you wouldn’t if you want to try to sell a share of that to an outside bona fide third party it’s not worth full value because nobody’s going to buy an interest in a family-run company when you’re not non failing okay and the theory and there’s case law support is what we call discounting technique. And so a lot of a lot of real estate investors like the family-owned limited partnership the family-owned LLC’s and their asset protected entities too, so you get a get a nice asset protection features you get some nice discounting features upon your death and which dovetails into some good estate planning that’s another advanced estate planning technique.
Buck: Are there sometimes these shoes with you know and I found some of this to be true where your goals on the asset protection front the goals on the estate planning the goals on your current taxes, all these start to conflict and how do you navigate that?
Joe: You know you’re right. Well the goals typically or the the you know the typical family you’re right it’s where my income tax savings, where are my capital gain and savings during my lifetime, and then where’s my estate upon my death? With a competent estate planning lawyer there is a bit of you know overall tax strategy going into the estate plan that includes taxes during your lifetime and taxes on their death so if you have a competent at statement manner you’ll cover all those goals in one package.
Buck: So Joe, one of the things that we could clearly I think can get from this interview is that you need to find a competent estate planning attorney I know you are based in California tell us how to get in touch with you, but also tell us for people who are you know presumably in other states you know if it makes sense to have somebody from out of state or should they be looking for somebody in state and how would they do that?
Joe: Yeah estate planning is typically a state-by-state process because each state has their own state laws related to estate planning. And then there are some federal laws beyond the tax on the side that apply. So whatever state you’re in you want to find a qualified estate planner in your state. And one of the resources I use is I’m a member of a nationwide group called The Wealth Council and their website is https://www.wealthcounsel.com/ they have a really good directory in there of you know that by city by state and I find and you know and I have clients that you know I’m in California but I have clients who have a piece of property in Oklahoma that I need to put into our California trust and and I reach out to one of my wealth Council colleagues in Oklahoma, I always find them to be so friendly and so helpful and so I think https://www.wealthcounsel.com/ is where I would start if you’re looking for an estate planner the website also has very good information on you know estate planning in general. I serve all of California here I’m a partner in a law firm Glaser Weil which they’re their main office in Century City and you know we we handle most areas of law and I’m one of several estate planners within our practice and I would say most estate planners these days are doing a lot of their estate plans on flat fees. When I first started everybody pretty much did hourly rates and a lot of a planner still do it just depends on the state, but I’ll tell you what I’m finding more and more now that estate planners once they interview the client most initial consults are free so you get to talk to the lawyer, find out what your goals are what your issues are what your assets are. I find that most lawyers now will quote a flat fee so that you know how much it’s gonna cost you for the estate plan upfront it’s it’s also how I operate too, on flat fees, just because clients like cost certainty and they’re not this mystery of what what the hour is and I also like that my clients can call me you know six months from now and say hey Joe I bought a house in Palm Springs, I forgot you know how to title it in the name of my trust help it’s real simple for me to do to help you on that and and I don’t want to send out another bill for a five-minute phone call which you know that’s I know it’s the way you know law set up but I think in this area of law you know it’s not too difficult to advise a client on how to title their home.
Buck: It sounds great so Joe Longo if you’re in California definitely look him up. And Joe I do want to thank you again for being in Wealth Formula Podcast today.
Joe: Thank you very much, Buck. I appreciate it, I enjoyed it. Thank you.
Buck: We’ll be right back.