234: What You MUST Know about Estate Planning!
Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast is estate planning attorney Joseph Longo. Now for 25 years, Joe has focused on delivering unparalleled service in the area of estate planning asset protection, and sports actually. His clients have ranged from businesses to high net worth families and professional athletes he has taught law school Los Angeles City College, Mission College, and Pasadena City College. He is currently an adjunct professor at Loyola Law School. He’s also sat as a judge pro temp in the Los Angeles Court System. Joe is an Ivy League guy. He received his BA from Brown University in rhode island where he was a starting defensive back on the Brown University football team in the mid-80s. Joe, welcome back to the show.
Joe: Thank you, thank you very much Buck for having me.
Buck: Hey Joey I gotta ask, did you play at Brown when this guy I think he was on the Vikings, I think, Steve Jordan?
Joe: No he, okay so it’s funny, he was a little bit ahead of me and I think I was a senior in high school and I was like a mid-major recruit like you know Washington State, San Diego State, Utah and my father who never went to college and lived the American dream when Brown University came to visit us to talk about going to school there my dad was really into it and Brown did a smart move they had that the one NFL player called the house Steve Jordan so my dad at that point said look if you go play in the NFL you got it covered but more importantly you’re going to get a good education and of course I went there and got a good education.
Buck: That’s great, that’s great. Yeah it’s funny I was trying to think actually when I read about the Brown thing I was like you know and I’m such a rabid NFL fan I’ve been a Vikings fan since kindergarten and Steve Jordan played a while ago but I was like he was tied in on a Minnesota Vikings you know late 80s I think and he was a very good player. At any rate it’s interesting, just a little side note there. Well listen Joe I contacted you because you know we’ve been on the show before, but you know we’ve got some timely things going on right now with regard to potential change in the state law tax, the potential Biden administration etc, however I do think it’s always important you know for many new listeners all the time on this show and it always helps to review some of the basic concepts so if you’re okay with that, what I’d like to do is just kind of you know brush over some of the basics here. And so why don’t you want to you know at a high level just say for example what exactly is estate planning? I mean I know it seems like such a basic question, but you know I’ll tell you what, when I finished surgical residency and started making money for the first time, I had no idea what estate planning meant. So why don’t you just start with a basic definition.
Joe: Well I always tell clients I say look when you’re just coming up and just out of school you might be able to get away with it, single you might be able to get away with it, you’re married and you have a joint tenancy on a house that’s I call that a poor man’s trust you might be able to get away with it, but once you have kids you need in my area of law you need your dose of medicine and what that is is a living trust. And a living trust is the entity that will hold all of your assets and it protects your loved ones, your wife, your children, your husband if anything ever happens to you and that really is the key document. Wills are also very helpful but in today’s day and age it’s the living trust is what you want.
Buck: So you know and this is just to expand on that point, a living trust is not that big of a deal right I mean listen people think oh trust whatever but it’s a document that’s ultimately you know it’s not like it even has its own tax ID, it’s just you know taking things out of your estate and to and basically putting it in this trust. Tell us why that is important.
Joe: You know under the law a living trust is looked upon as a contract, a customized contract by you on where all your assets go when you pass. So the law recognizes what you want and therefore you avoid probate and all the costs and fees that are associated with it your family I should say avoids probate and things transfer much more smoothly under the law and then your loved ones are ultimately able to mourn your passing and the assets transfer smoothly and ultimately your state’s resolved in a much quicker more efficient manner as opposed the complexities that are involved in probate court.
Buck: And that’s exactly the point I was trying to emphasize here and I tell people all the time, the living trust is not burdensome at all but what it does do is in the event that you die, which you will eventually, it allows your assets not to go through probate. Now for people who don’t know what probate is, what is probate and how painful can probate be? I mean it’s a very leading question but I think this is something that a lot of people just have no clue about.
Joe: Well probate is the court overseeing your estate now and it doesn’t matter that you were married to the decedent it doesn’t matter that you’re the child of a decedent the court is in charge and that becomes very cumbersome when you can’t access any of your father’s account because the court’s overseeing it and if you do access the account you owe the court in accounting and the attorney’s fees are great and then in California and most of the seven southern California counties where I practice, the wait time for a simple probate that has no objections whatsoever right now is running about a year and a half to two years. For me to run assets through a probate it takes me about a year and a half to two years to get those through into the heirs or the children or whoever I’m getting it through the attorney’s fees are very expensive, it runs about you know around two percent and up of the gross value of what you run so just take a a regular million dollar home. Your attorney’s fees for pushing around paper for a year and a half to here is going to be about 20,000 there’s core costs there’s an appraisal involved I mean a simple living trusts are running anywhere from three to six thousand dollars in most cases and that includes all the health care directives and everything else so you understand just the fees alone are burdensome on your loved ones and most people in my practice once you explain them what a living trust is, how it helps your loved ones, most people are willing to invest in getting their estate plans set up and not and being taken care of you know.
Buck: That’s right and the thing here to emphasize is and it’s not just California. Of course you know everybody thinks California is slow and clunky with everything they might be right but this is probate is an issue in every state to a certain degree so imagine this if you are you know you’ve got a wife or a husband or whatever and you’ve got a few kids and you’ve got a 5 million dollar net worth and you know you have a bunch of stuff that’s in your name right it’s in your name and all of a sudden you die. And in California your assets don’t go you know they’re I mean in any state they’re not going to go directly to your kids just because that makes sense, it’s not going to happen. So your assets are going to be hung up at minimum in California two years and in other states it’s you know it’s not going to be any shorter than six months to a year right. And then it’s going to cost you a bunch of money. Imagine that your family is going through you know this pain of losing you and all of a sudden they don’t have any money. It’s crazy so this is exactly why Joe saying the living trust is basic and fundamental. Did I see anything wrong there?
Joe: o your analysis is exactly right and like I said it it helps your loved ones with the transition.
Buck: So now this is the next the next issue I want to bring up here is that now once you get your living trust, use it right. This is something that’s again something that I see all the time I’ve got a will I’ve got a living trust but I’m investing in my personal name I own my assets my investments through my personal name I own my LLC’s that you know I’m deploying capital through or have holding companies and they’re owned by personal names so all of those things then should actually be owned by a living trust is that correct?
Joe: That is the number one problem I see in just over 30 years of practice is people do a trust and then they don’t bother putting things in it and we call that funding the trust. So let’s make this clear it’s not what you list in the back of the trust in schedule a that’s not in the trust just because it’s attached, it’s the title of the asset being in the name of the trust is what makes it in the trust and that’s the biggest problem I see is people who do the do-it-yourself trust through those companies or maybe just a you know didn’t get it done correctly or gathered a bunch of assets after they did the trust and didn’t bother you know remembering that they were supposed to put in the name of the trust. I tell the clients the children usually of the clients look your father you know did a good job by making a trust the bad news is I gotta go probate these two homes or these two pieces of real estate because they’re in his name not the name of the trust.
Buck: It’s funny because again it’s one of these things that it sounds like this is not sexy stuff but this is critically important stuff right I mean this is critically important. You know when I have an LLC and now it’s a little different because most are owned by you know different types of trust which we’ll get into in a minute but you got to go back and look at your LLC’s to make sure again just because it’s an LLC does not then preclude it from being part of probate. If you have an LLC with assets or investments etc it again has to flow into that living trust to avoid probate. So okay and by the way again just to emphasize it’s so easy once you get the document you know I just bought a couple cars this year and you know I was like well where should I title these? Well I just put it in a living trust and you know big deal I use my social security number for anything that information it’s not even like there’s a different tax ID it’s just you know it just avoids probate. So it’s that simple okay. So now we wanted to make sure we hit that stuff to begin with because I always feel like you know get the basics get the basics if nothing else you didn’t know that now you know that that was the price of entrance for this podcast. So there’s another level though Joe as we so to speak as we start getting we start getting trusts involved right and other types of estate planning that’s more sophisticated. So from my understanding that’s when you start get concerned about you know as you’re when your net worth is going up when you’re when you’re starting to accumulate assets so that’s when these issues come up potentially where you start thinking about estate taxes. Now most people even in my group so my investor club etc really didn’t need to worry too much about that kind of stuff because you know they really didn’t kick in these you know state taxes until like if it was a couple maybe 20 million plus range in net worth and you know most of our people are still probably below below 10 million and so it didn’t really affect them but something’s happening now that that could really change all that and it and it could be the case that it affects most of the people in for example in our investor club or accredited investors and that is the change in when these estate taxes start kicking in. Can you talk about the what you know sort of the buzz is in the in this space right now?
Joe: So yeah it kind of reminds me of 2012 at the end of 2012 we were going through a similar situation but the change the potential change of administration and Biden is the issue and Biden has come out and said that he doesn’t like Trump’s tax laws but what we don’t know is we don’t know exactly what he’s going to do and remember he’d have to carry the both the congress and the senate if he’s gonna change Trump’s tax laws but he has said that he wants to change his laws. In my circles I’m hearing a lot of that he wants to bring the death tax exemption per person down to three and a half million just to give you an idea it’s currently 11.58 million.
Buck: Per person so that’s where we get the 20 plus we were talking about before
Joe: You can double that for a married couple okay. There’s a lot out there that says he wants to bring it down to three and a half million. In fact I believe that we will probably end up in a obama era type a tax exempt estate tax exemption of between five and six million but what does that mean anyway
Buck: What does that mean and then and then how much you know how onerous is this tax
Joe: Context here so you’re married you pass your wife inherits tax for everything okay that’s called the unlimited marital exemption okay so spouses don’t get taxed. But when the second the spouse goes the heirs which are you know 90 times children are to pay a death tax within nine months of that death and what is that? Well right now it’s 40 on every dollar above 11.58 million okay. If Biden were to bring that down to three and a half million then it’s and I don’t know if it’s 40 or 50 I mean I remember Bernie Sanders campaigning at one million dollar death tax exemption at 55 on every okay but what that would mean is our debt tax exemption is going to come down much lower than it is now so a lot of particularly real estate heavy families are coming to me and saying hey is there anything I can do between now and December 31st because because if one gets it takes office I think it’s January 20th or whatever if he gets anything passed in 2021 it will be may retroactive to January 1st of 2021. So we all have between now and December 31st to examine our estate plans and see if there’s any opportunity to move some assets to our children now to avoid death tax when we pass and now how do we do that? There’s some very sophisticated ways to do it but the simple way to do it is gift your children now some of your assets okay so that they are don’t count against the either 11.5 million or the possible pinning three and a half million okay. So do you understand if you get it out of your state now it can grow estate tax-free during your lifetime and then when you pass you avoid the estate tax.
Buck: So and this this is where it gets interesting because when what you just said I think makes a lot of people think the same thing. Well I’m not that old I don’t really want to start you know giving my money away and not having control of it or not being able to enjoy it and all that but in fact that’s not really necessarily what you’re doing right you’re not completely giving away control and there is still some ways in which you can still benefit from you know that money is that is that reasonable?
Joe: Yeah exactly let me give you a simple example okay let’s just assume you have five million or let’s just use 10 million dollars in real estate let’s just say it’s all in one LLC for simplicity purposes. You currently own 100 of that 10 million real estate LLC. How about gifting 30 which is a minority share to your two children 15 each? Well you still retain control okay you still get all the benefits of being in control of that LLC but you’ve now moved three million dollars out of your estate to your two children who are minority owners now of of your LLC and let’s say you are relatively young and you hold that LLC for another 20 years and that thing appreciates just from 10 million dollars to 20 million dollars and then you pass well you just gave your children six million dollars tax-free, there’s going to be no estate tax and that becomes valuable over time and you haven’t given up any of your incidences of control.
Buck: I want to talk about something specifically that you know just in terms of my own planning I do have and maybe could be useful to actually a number of people in this audience because you know some are similar to me. But the way I’m set up and maybe you could kind of explain to people what this is because I know you do this as well is that I have set up a Nevada Dynasty Trust and the Nevada Dynasty Trust has the the owners of that trust are basically my my three daughters their irrevocable trusts so it’s been decanted into there right now that that’s how I have it set up. Now the Nevada Dynasty trust itself holds has a holding company and that’s really where I’m the manager and what that allows me to do is is basically to you know invest that money if the kids need you know if we need to buy a house, well the kids need to live there so that’s fair game right we can we can use that. Can you talk a little bit about that I don’t want to be the lawyer who explains this but I find it to be a very useful structure and I’d like maybe you could explain that and see if you know to see if people think it might be useful for them.
Joe: Dynasty trusts are very helpful for our children for a number of reasons. When I was talking about gifting our children, we typically don’t recommend gifting to children directly. We’d rather gift into a trust okay. And why would we want to use something like a dynasty trust that lasts the lifetime of your child? Well a few reasons. One is it’s asset protected for your child so for instance when your daughter has this real estate and cash inside her dynasty trust, the future ex-husband’s not going to be able to get into there. Future creditors on her bad business dealings or her malpractice claim or whatever it is she’s exposed to predator-wise in life will not be able to get into that dynasty okay and so the assets are safe inside there they grow estate tax free inside there there’s some other lifetime tax benefits having it a Nevada but we do recommend gifting assets out of your estate in an effort to avoid escape tax into some kind of a trust and that dynasty trust is probably you know the most common trust we use.
Buck: Let me ask you about the nature of things you can transfer into a dynasty trust. You mentioned real estate. Can you transfer operating businesses into a dynasty trust?
Joe: You can transfer anything into the dynasty trust. We just have to have it appraised so we know the value in the event of an audit we needed to have the value appraised at the time they were transferring it.
Buck: How about this, another question and I’m asking some of these questions because they’re relevant to me so I’m you know I’m basically getting this legal advice for free but how about starting businesses that are owned from day one by the dynasty trust they have no value to begin with, can you do that?
Joe: I one time a very there’s a very famous estate planning story that and it’s out there that Mr. Hughes the founder of PS Public Storage I think he founded in 1981 and he made he he started he already was pretty independently wealthy but he started the storage business and he gave his two children who I think were in college at this time I can’t remember the story but anyways he gave his two children into trust fifty percent of PS Public Storage which those interests are now worth billions of dollars okay when he passes and he’s still around, I think he’s of course just won the Kentucky Derby but when he passes his kids will not pay any estate tax on that 50 percent share of the PS Public Storage.
Buck: So the answer is yes you could have an active business that is starting you know from day one that has no value because it’s a startup and you could have membership and grow it into you know a big pile of money basically right?
Joe: That’s correct and it’ll avoid estate tax.
Buck: That folks is really critical when you start thinking about some of your investments and so Joe correct me if I’m wrong okay on this because there are situations where you are you know you may be thinking about doing something for the first time and you know maybe you’re already over that threshold of where the estate tax might be, you might consider starting, you can still in this situation I know at least in my diagnostic trust I’m the manager of the LLC’s that owns you know the the LLC’s owned by the dynasty trust. Now I actually I don’t use that to go out to dinner and stuff for our vacations, but I can buy real estate because that real estate is ultimately owned by my children right, I can buy you know a home with that because that’s where they’re going to live and it’s their home they own it right?
Joe: And as manager you have 100% control.
Buck: Exactly so I emphasize that because I literally have had conversations with friends of mine who have you know I’ve said you know you got to do something with your estate planning and I got to tell you Joe I don’t know if you come across this all the time but you have very sophisticated people very entrepreneurial types business types who for some reason and I think maybe a psychological thing where you’re just you know worried about you know giving everything away I’m not ready to give everything away and I’m not you know I’m not thinking about dying because I’m well I’m you know a pretty young guy but they just when the the idea of the word gifting comes up it conjures up these images of sort of you know giving it all away calling it a day that kind of thing and it’s just not the case right?
Joe: No and I get that a lot like when the first reaction to sort of you know especially high now with people giving to their children and especially if their children are young you know the first reaction is the connotation of gift like you know and all of us want our children to you know do well in school get good jobs and work hard right, this is a different kind of gifting program this gifting program is into a trust for their benefit and the trust could either say hey you can only distribute for needs until let’s say age 30 for instance, like housing medical or it could be a dynasty trust where it could serve their needs for their lifetime you could even name them as co-trustee at some point so they have access to the principal, who knows maybe you’re one of your daughters want to work wants to work in the real estate business with you you know and she she can help guide your your job as manager. It’s one of those things where it’s a program to help you take some of your hard-earned assets and pass them down to your children tax-free. And right now we’re in a climate where if the administration change happens, that estate tax is coming down not just a little bit probably dramatically okay. In fact in California there’s rumblings about California having its own state tax in addition to that federal tax I just talked about. So your own states might have an additional estate tax you really need to understand if your state has your the state you’re residing in has an estate tax and then keep an eye on the federal estate tax but either way this is an opportune time to look at the law and your own estate plan between now and the end of the year and see if there’s something appropriate for your children. By the way I have a seven and a ten-year-old who both have these dynasty trusts that I gift into they have no idea what they have okay but my plan is to you know hopefully decades from now you know when I pass when they are responsible adults they have access to funds that will come to them tax free, won’t be subject to the tax right.
Buck: Right a slightly different issue which I think again is important to a number of people in our space is you know there is a lot of talk about at least in the tax plan to remove you know the you know reset basis in real estate you know after death. Can you talk a little bit about what that is for people who might not be familiar and how that might affect them and how some of these things that we’ve talked about kind of feed into that.
Joe: Okay so where’s where I begin in California I think we have three new tax propositions on the ballot. So as a lawyer looking and having read the propositions two of them I just think are poorly written. One being trying to get rid of the parent child exemption property tax exemption under the law. And what that means is in California right now let’s just say your parents own a home your father dies your mother’s living in her property tax basis is 4000 a year on this million-dollar home right. When she passes and you inherit the house you also can inherit a four thousand dollar property tax exemption that’s called the parent child exemption okay. What they’re trying to do is get rid of that okay. So that means and so I’m getting a lot of calls from parents or who are like should I transfer my home to my child now instead of when I die and the answer is you got to evaluate you’re giving up and again this is another tax complex but maybe your real estate listeners will understand if you gift the home during your lifetime your child loses the step up and basis yeah okay but we’ll get the property tax exemption so you got to do a math problem to see which one’s more valuable.
Buck: But as I understand it Joe at the national level one of the potential things that could be eliminated and that’s been talked about being eliminated is the step up in basis right and if that were to happen then it would be like there’d be basically no point I mean you you’d want everything in the trust right I mean there’s no value in having outside the trust anymore.
Joe: You’re absolutely right because if they do away the step up in basis upon the death of your parents you now have a that the date of death is the new valuation of the I mean you get your I’m sorry you inherit your parents basis so now you know if you go and sell the house you’ve got a capital gains tax that you well okay he’s assuming most people most children that I represent that inherit the homes usually they end up selling them.
Buck: Yeah well and in that case you know they’re it creates just a giant mess for real estate investors too because then presumably the they’re they’re not gonna the step up and basis whatever depreciation that that the parents took they’re gonna end up paying recapture on the way out, recapture on the depreciation along with capital gains. So this is a gigantic mess and what I the moral of the story here is folks I think you really, really got to start thinking about this and it’s not just for the 20 million plus crew anymore. This is something that you ought to be talking to Joe if you’re in California. Joe you’re you’re you’re licensed only in California and you you generally like to see people work with people in their own state when it comes to estate planning attorneys is that right?
Joe: Yes and that that is exactly because it’s a state by state, state tax by state tax so you really need somebody in that state to give you proper advice both on the federal issues like the one you just mentioned that’s up for debate and the state issues like the one I mentioned the propositions on the ballot in California.
Buck: Right so Joe if we’re in California how do we get in touch with you?
Joe: I’m currently a partner at glazer while we have offices in century cities San Francisco and Newport Beach we’re at glacierwild.com and you know you’re welcome to I’m always happy to talk to clients over the phone and give and have the console over the phone these days to see where we’re headed and I expect a lot of consulting going on between now between November 3rd and the end of the year.
Buck: By the way if you couldn’t remember that just shoot me an email if you’re in California [email protected] and I’ll just forward it to Joe. People have done that in the past and I think that’s a great way. What about for people who are not in California we have a nationwide and frankly, well we can’t do anything for people outside of the country, but at least in this country how do you find a good estate planning attorney?
Joe: I’m a member of a nationwide group called the wealth council and it’s wealthcounsel.com I have fined those lawyers to be top notch. I many times have to consult out-of-state lawyers for my clients because I have a client in California who has a piece of real estate Nevada or I need to set up a Nevada trust and I have yet to not find the very best quality lawyers and that and that grouping and if you on wealthcounsel.com there is a directory on there where you can go in and put in your city and state and then it’ll give you a list of lawyers in your area
Buck: Fantastic. Well Joe I want to thank you so much for being on a Wealth Formula Podcast again and I would love to have you back again I guess once we kind of know definitively what’s going on and we can kind of deal with the aftermath.
Joe: That’s right. I’ll see you November 4.
Buck: We’ll be right back