Catch the full episode:https://www.wealthformula.com/podcast/271-is-the-government-going-to-inherit-your-wealth
Buck: Welcome back to the show everybody. Today my guest on Wealth Formula Podcast is no stranger to the show. He’s been on a couple of times before. His name’s Joe Longo. He is an estate planning attorney and if you think that’s a thing that you don’t need and sort of nebulous and all that, you’re going to learn otherwise today. He’s been doing this for 25 years and you know with decades of experience with this kind of stuff and practices law in Los Angeles where he’s also been a professor and taught at multiple law schools there. And he’s also most importantly involved with my personal estate planning stuff. So Joe, welcome back to the show.
Joe: Thank you Buck for having me. It’s probably good timing that we have this discussion.
Buck: Yeah absolutely and you know it’s funny because I think that I was thinking about this and I don’t remember the last time you were on but it wasn’t that long, it may have been six months, who knows. But it’s like I was sitting here starting to do stuff of my own again and realizing that there is this constant moving target particularly you know with the new Biden proposed legislation. And that’s a big disclaimer right it’s all proposed, but it’s important stuff. But I want to start again with some of the basics. I think it’s really important. It’s always remarkable to me how few people think of estate planning at all. So from the very basic standpoint, what is estate planning and why should we even be thinking about it?
Joe: Well first off you want to think about your estate. You know we’re all busy working every day and you know grinding it and taking care of our family and raising our children. But you know this estate planning is really you know documenting sort of your exit from your accomplishments in this life and transferring your assets to your beneficiaries and a good estate plan will accomplish that in a very smooth transition without any court action. And it’ll also minimize taxes because way back before our time they thought it was a good idea to tax inheritance in some form or fashion and you know there’s one school of thought that a lot of people work very hard to create wealth in their estate and they don’t want their children to have to pay a lot of taxes upon their exits. So you can think of it as two buckets. One is getting the assets to your children or your beneficiaries and then two paying the least amount of taxes on the way there as well.
Buck: Yeah so backing up a little bit. I always like to tell people the most basic thing which you probably come across this with high paid professionals is that there are very few people. A number of people just don’t know this, they just have not been given this information. It’s not enough to have a will. Why is it not enough to have a will? It’s a loaded question from a very basic standpoint.
Joe: I think, and I have colleagues in the state of Florida that wills have to be prohibited. That’s just the idea. So what’s probably what’s target is a court action that marshals the assets and debts through a court supervised action to the beneficiaries with a living trust you avoid those for that court action.
Buck: So what you’re basically saying, and then again if you take nothing from this podcast and you say well I don’t need all the other stuff they talk about which I don’t think you’re right about that probably for most of you at this point. But you can’t just have a will. You really need a living trust. And the reason that you need a living trust is because effectively what a living trust does is it helps you avoid probate. And why would you want to avoid probate Joe? Tell us how bad the probate process is and how long it takes and how much it costs.
Joe: Yeah in California it’s a very expensive process. The attorney’s fees are written right into the probate code and it’s around two percent, three percent of the gross value of the assets going through probates or million dollar homes gonna be 30 grand in attorney’s fees you know even that’s with no objections. And number two, but the main problem is it takes a very long time in most California counties because they’re backed up so far now and some states can probate a case in two weeks, not in California it’s not like that. In fact in LA county right now orange county is the same it’s a year and a half and Covid delayed it even further. They’re backlogged forever so you know it’s a different process. With a living trust you avoid all that and it just takes a matter of weeks to transfer the asset not year and a half you know like we’re at now.
Buck: Right so living trust first of all is not very expensive to do right? A couple grand and it doesn’t need its own tax ID. You use your social security number and it’s real simple anytime you would sign up for or you know do subscription documents or whatever you’re doing accounts instead of using your personal name you would use the name of your living trust right? I mean it’s that simple.
Joe: It’s that simple, that’s exactly right and once you get the hang of it you really understand that having all your assets in the name of your living trust protects you and your heirs.
Buck: So if you live in California and you don’t have that done yet, go give Joe a call and we’ll give his information at the end but that’s the bare minimum. Will and living trust no matter what because the last thing you want your family to do in a situation where god forbid you die especially if it’s unexpectedly or something like that is now they have maybe a will or whatever but then they have to wait a year to actually get what they should be able to easily get. What’s supposed to be theirs. A year, two years who knows how long it takes. So you don’t want to put them in that position and it’s so easy to do so please do that. Now let’s go to more complicated stuff because again people I think don’t think about very much and we talked a little bit about this offline Joe is they think of the more you know the more sophisticated estate planning you know strategies are things that they don’t really need to worry about because well frankly you know they don’t make enough money or they don’t have enough estate but you know the typical listener of this show I think you know we have an accredited investor group which is probably averaging at least a five to six million dollar net worth I mean and we have a lot of people who are way over that. So I want to talk a little bit about some of the legislation that’s coming down the pipeline that may make people kind of change their minds. So first of all, what is an estate tax?
Joe: Yeah so transfer taxes is just one area of the tax code they’re trying to overhaul you know that’s beyond income tax and everything else that’s out there in the ether at the moment but estate tax is one type of transfer tax and as we sit here today if you pass away today the tax year of 2021 your heirs can inherit up to approximately 11.7 million tax-free for every dollar above that it’s 40 in tax and if you’re a married couple you can double that amount. So it’s almost 24 million. So that’s where we sit today.
Buck: And again that’s where a lot of people are thinking well gosh you know we’re not going to be at that number right. What’s the current legislation looking at right now? I’ve seen a few numbers here.
Joe: Yeah we’ve had at this point a lot more questions than answers and we’re trying to get some clarity like the green book came out last month from the treasury department but it didn’t talk about an estate tax. But then Biden’s campaign made mention of 2009 rates which was three and a half million exemption and then from 40 going to 45%. So your heirs could inherit three and a half million, every dollar above that would be 45% and then everywhere in between.
Buck: Right and then the 10 to 50 million which we do have, a number of people who are in that 10-20 range or will be by the end of their lives it goes up to 50 percent
Joe: Right it starts to increase you’re right they’ve layered it up or it starts to increase
Buck: So 3.5 million all of the sudden that is gosh that is a lot more people that is a lot more high paid professionals who are looking at a potential estate tax problem and that is why this is so very important
Joe: Can I mention one other thing you need to consider because this is out there a lot. They think one of the proposals is doing away with the step up and basis. Now remember that when you inherit a piece of property the step up and basis of really great track tax savings if you you know now they’re talking about upon the death of your parents okay and you inherit the property that’s a triggering event where you have to pay capital gains tax and I know this sounds complicated but capital gains packs they’re trying to take from 20 up to 39 somewhere in that range so another death related trigger well
Buck: And then just from my research here it says okay so I’m gonna I’m gonna try to clarify this for people with an example okay so cap okay so typically okay so it says the Biden administration has proposed an elimination of the step up and basis so while it’s not been specified you know how it would be implemented it’s it’s most likely means that upon one’s death the capital gains tax would be imposed upon all unrealized gains that exceed one million so under the current law if a person buys a stock for ten dollars never sells it and the stock is worth 100 bucks when the person dies the 90 dollars of gain is never taxed and the basis of the stock in the hands of the heirs will be increased in other words they don’t do that now so tip so basically you’re going from being able to get your kids you know that not you know that profit to essentially forcing them to sell it so that they can pay the tax at that point
Joe: That’s exactly what most likely would happen is if you owe the capital gains tax upon the death of your parents you’re likely going to be able to see a lot more assets being sold to cover the tax where currently when you inherit the property there is no capital gains tax you can hold on to the property and you know again if you consider that along with the estate tax reduction you know those are two big triggers that you know appear to be on the horizon now to me if you implement both that does seem like double taxation so I’m not sure how they would work that out but they’re just two big things that we benefit from today they’re trying to change
Buck: So the other thing along that line Joe is and I don’t know if you’ve thought about this because I don’t know how many of your clients are heavily into real estate. But the mantra in real estate is or in other stuff too is buy, borrow, and die and specifically real estate investors rely heavily on the tax benefits of depreciation. So one of the beautiful things about the current law is that upon death, there’s a step up in basis, basically resets the basis so then the recapture is eliminated. So how would that look because now you’re talking about a triple whammy, you’re talking about capital gain,s you’re paying recapture and estate taxes
Joe: So this is all something that we’re all looking for clarity on and what can you do now I think it’s just move up the timeline for some of these estates, especially people with children is the most common example. How do we get some of these assets to the younger generation to not only delay this you know proposed tax changes but maybe even outlive several administrations to get in a more favorable and tax environment down the road. Okay and so 2021 would be the year to sort of take a look at your plan and let’s see what you said real estate. California, a lot of real estate investors you know, let’s see, let’s target some real estate and see what we can get transferred to our children during our lifetime either by gift or other transfer and delay any of the implementation of any of these transfer taxes that we’re talking about today. That’s the most common and estate planning advanced estate planning technique that we recommend implementing is the transfer to the younger generation.
Buck: And let me ask you about something else that I just read and I don’t know that I completely understand. So right now it says there’s an annual exclusion of fifteen thousand dollars per donee per year to individuals without any limit on the number of donees. What does that mean exactly? Because I don’t even know what that is.
Joe: There’s two kinds of exclusions to avoid gift tax which is another tax. Two kinds. One is the annual exclusion that’s per year you can give fifteen thousand dollars to anyone you want without paying any gift tax okay every dollar about that above that subjective tax but is your lifetime gift exemption. And the lifetime gift exemption is the 11.7 million that we talked about earlier and for a married couple you can double that. And so you can use up that for instance I can leave my son 11 million dollars worth of real estate without any gift tax or any tax at all or I’m sorry I can gift during my lifetime the 11 million dollars with the real estate because it’s under the lifetime gift exemption. I just have to file a gift tax return informing the IRS that I’ve used 11 million of my 11.7 million
Buck: What’s the limit? Is it the same limit as the estate tax?
Joe: it sounds very confusing but it’s the same limit as the estate tax and then upon your death, if you’ve used the 11.7 million you can’t use it again. It’s credited at the end of your life.
Buck: So basically it’s fronting the estate tax
Joe: Exactly Buck, great analogy. You’re fronting your estate tax but remember with real estate you know all the insurance companies say we’re going to live until 85 or whatever their actuary table say. So let’s say you’re 60 and you gift to your child well you still have 25 years for that asset to appreciate and guess what upon your death it’s not subject to any of the 40 or 45 estate tax you know and your child now owns it you know estate tax-free.
Buck: And can you continue to control that and benefit from it financially yourself in those situations?
Joe: Well technically no when you make a gift you no longer own it right, but there are structures, for instance, a family limited partnership where you could be the general partner which gives you a hundred percent control but you only own one percent and your children own 99% but you’re the general partner so you have still have 100% control of the property you know how things are run just like you do today but your children actually own 99% of it for estate tax purposes
Buck: Got it. I just have so much stuff here and I know I’m just bombarding you with it so I apologize. Let’s see so gift exemption reduced to 1 million though so that would be the what you’re talking about working
Joe: The lifetime gift exemption
Buck: The lifetime gift exemption which currently is like is essentially
Joe: 11.7 million
Buck: The same thing is the estate they’re talking about making that to one million
Joe: That’s correct so again what could you do between now and the end of the year you can use up some of your lifetime gift exemption. By the way, it’s the highest it’s ever been. During the Obama era I think it was 5.5 million just to give you an idea of how much higher it is right now
Buck: Yeah okay. There’s a mention of an estate generation skipping transfer exemption. What is that?
Joe: You know it’s a similar same concept it’s just it’s going now instead of gifting to your children and somebody you know over 18 years younger than you like your grandchildren okay okay so you would skip a generation down your grandchildren which you know has different taxes and I do get a lot of clients who like using that lifetime gift exemption for their grandchildren
Buck: Sure that makes sense okay so here’s I have to tell you so one of the things that I have done as far as planning and I you know I’ve told people this on this show is you know I have what’s called a dynasty trust. And essentially it’s a trust, it’s an irrevocable trust called a grant which is considered a grantor trust means I pay taxes on the income on it but essentially what it allows me to do is this trust is owned by my daughters and actually won’t actually buy their trust. And the initial idea here was that if I you know transfer things over there it comes out of my estate. And that has two benefits. One is obviously you know it streamlines, gets you out of the whole probate issue. The second issue was very much intended for this idea of being able to legally avoid these estate taxes because now it’s not in my estate it’s actually owned by them. Now as it turns out it says what I read and I don’t know if you know again Joe I apologize I’m pulling this stuff off of google. It’s almost like having a medical interview where somebody’s pulling his stuff off and saying what do you think of that right. But so I’m going to read this to you. Revital granted trusts which remove assets from an individual’s taxable estate but are structured so that the individual is deemed to own the trust assets for income tax purposes by having the grantor pay the income tax it leaves the trust property intact while further reducing the granters taxable estate which is essentially why I did it. Now this act would require that granted trust be included in the taxable estate of the grantors upon death and any distributions to the beneficiaries would be subject to gift tax. So this proposal would also apply to insurance trusts which would affect more than just the ultra wealthy. So this is huge because currently you know I use the dynasty trust for this purpose. I have islets for insurance trusts. So essentially what it’s saying is all that money they’re going to count towards the total estate ta. Iit doesn’t matter, it’s out of your state anymore.
Joe: That’s right they would pull it back into your estate for estate tax purposes and you know these are common techniques that we’ve used now for a long time insurance trusts you know putting your life insurance inside an irrevocable life insurance trust that’s outside of your state for estate tax purposes the dynasty trusts that you’re talking about again gifting just like we talked earlier in the show, gifting assets to that trust so it’s out of my estate for gift there for estate tax purposes. These are two techniques that you know they’re thinking about doing hey you know the grantor who made these two trusts, those assets should go into their estate for estate tax purposes and we should be taxing those assets. You’re correct when you say that’s one proposal on the table. You know that it’s hard to say how that’s going to end up. I know the insurance lobby is very powerful in Washington these islets as we call them for short have been around a long time you know hard to believe that they would overturn that technique but you know again these are all proposals on the table and it’s a little foggy right now on which ones are going to come through and which ones are not.
Buck: Yeah the question I wonder again I’m not an attorney but if something is already out of your estate I mean how is it even legal to pull it back into your estate I don’t even know.
Joe: So in the grand scheme of estate tax law that’s changed over the years they traditionally do not make these retroactive okay and the reason is because it’s not fair not only for the people who went to great expense to do this planning and you know maybe their heirs like earn a lot of property now but you know you can’t get that back. But you know it’s likely that any changes in that part of the tax code will be effective as of January 1st 2022. And remember a lot of these you know so any planning done in 2021 would essentially clear some hurdles. Some of it wouldn’t because a lot of these estate tax laws are applied to you in the year you die. Okay 2010 was the only year we didn’t have any estate tax laws because congress was held up on some other texts and it just was gone and that was the year George Steinbrenner died. It’s the example we used so his children inherited the New York Yankees tax free.
Buck: The mortality of millionaires and billionaires went way up.
Joe: That’s right that was the one year in our lifetime but again you know as we move into the second half of 2021 you got to keep an eye on this stuff and it’s a good time to really sort of look at your plan look at your children’s estates and if you have younger children like I do we’re not talking about just giving them assets outright. You can put it in a trust like you did, you put your assets in a dynasty trust so it’s in trust for your children when you pass.
Buck: Although the challenge there again is that even at least from the looks at it right now any grant your trust doesn’t matter right?
Joe: Yeah well you’re right. It’s on the table and you know that that technique may be eliminated and it goes back into your estate. Now do I tell people to go ripping up your grant or trust or your dynasty? No I probably keep them in place this is one administration last four or eight years let’s see where this is all headed. You know again if you’re young enough where you’re probably going to look through several more administrations. Let’s see how it goes. I always tell people you know there may be a more favorable tax climate ahead if this all changes at this point it seems Biden’s trying to make deals and compromise in places you know so the end result may not be as bad as we think and some of these techniques will still be around that’s why the last quarter of this year is probably really important to get a lot of this stuff done.
Buck: Yeah and the good thing to remember also is that you know this is all pending legislation. So it’s not like it’s been passed and it is a split congress and you know some of this stuff is pretty extreme I mean even on the tax side. Obviously it’s pretty relevant to not only the ultra wealthy but a significant portion of the upper middle class which I think really changes the ante for even a lot of the democrats in congress who are not really wanting to hurt that part of their constituency. So as a summary of what I’m talking about okay and you tell me right now the biggest thing you know we talked about before if you don’t have a will and living trust get that in place. Two, start thinking about things we talked about specifically you know some of these techniques with you know gifting and stuff which frankly I mean if you gifted something right now like tomorrow or you know next month before ever this law becomes into place you know if this when maybe you do one of these family limited trusts that you’re talking about you could basically hopefully avoid that issue altogether because the current law says you can do it up to a certain amount. So you may be ready to in your life do that pass something on or also work with a good estate attorney like Joe to to figure out how you can pass it along in ownership but but still keep the control of it of the asset so is there anything else that you would I mean and of course right now is the time to make planning. So if you live in California you know contact somebody like Joe or you know this stuff isn’t just California this is across the country right this is everywhere.
Joe: Yeah what we’ve talked about today is mostly you know federal tax issues not state but you know just a dovetail on your gifting issue even just using the annual gift exemption fifteen thousand dollars to each child. Let’s just say you put it in an account at UBS and you just put it in blue chip stocks right 15 grand a year even I mean that account will grow tremendously over the course of a couple decades. So that’s just a simple beginning. It’s not subject to any estate tax when you pass so it doesn’t necessarily need to be the large real estate transactions we were talking about earlier in the show. You could set up, let’s say you have two children, two individual trusts for kids and just do the 15 grand a year that’s not subject to any estate tax when you pass so you know even something simple will benefit your children greatly upon your passing.
Buck: Yeah bottom line is you got to do something and I think the estate tax exemptions are going to affect more and more people I just think that’s one of the things that’s very likely as Joe mentioned it’s as high as it’s ever been it’s going to come back down and it’s very likely to affect you given you’re a high paid professional and you’ve got lots of years to live still so do something about it now. Joe, if we live in California and want to get in touch with you, how do we do that?
Joe: You can either visit my website at www.Longolawgroup.com or call me 310-270-9044 and I’d be happy to talk to you over the phone or Zoom or in person.
Buck: Now one of the things I learned from Doug and you is that you know estate attorneys it’s important to have an attorney that’s in your state. Why is that and how can you find a good one?
Joe: Yeah estate planning is state by state so as you know states enacted our laws some of it impacts federal income tax or transfer tax rules like we talked about today but it’s state by state. So you’re better off where your residency is contacting the attorney in that state and there’s a good website that Doug and I are both members of wealthcounsel.com and that’s a nationwide group of estate planning attorneys and I routinely go there when I have a client in California has a piece of property out of state I need some help on and I’ve met very good attorneys through that group but yeah eah the Wealth Counsel is a good resource for estate planning journeys.
Buck: Joe thank you so much for giving us this update and I think as we hopefully will get you back on once we actually have some resolution on which way this is going. Hopefully it’ll be early enough for us to take some more definitive action.
Joe: Yeah absolutely thank you very much for having me today.
Buck: We’ll be right back.