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386: Back to School: Estate Planning

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Welcome, everybody. This is Buck Joffrey with the Wealth Formula podcast, coming to you from Montecito, California. Today. I’m going to do as promised, another episode of the Back to School series. And this one is going to be focusing on estate planning. Okay, But before we begin, I do want to remind you there’s a website associated with this podcast.

It’s called Wealth Formula.com. And one of the things I’m going to draw your attention to is the Investor Club tab. They’re in a if you are an accredited investor, which means you make either $200,000 per year yourself as an individual have done so for the last couple of years with reasonable expectation of continuing to do so or $300,000 if you are a couple or you have a net worth of $1 million outside of your personal residence, you are an accredited investor.

You do not have to apply, you don’t have to go to school. We just are like, you’re either pregnant or you’re not pregnant, right? So that’s that’s what it is. Now, if you’re an accredited investor, go to wealth Formula dot com and click on Investor Club. If you have an interest in potentially participating in some deal flow. Now what happens is when you click that, you go through an onboarding process that verifies your accredited investor status.

We talk to you a little bit, make sure you’re not cray cray, and then you have access potentially to some of the stuff that we’re doing. And I bring this to your attention in particular because in the next few weeks we are going to have some of some really good stuff. We haven’t had much going on in the face of the real estate markets in the last a year.

But you are going to see some you’re going to see some in the next few weeks. And it’s very exciting. I’m very excited. I don’t know about you, but some some of the things that we had talked about in previous episodes with regard to ways that you may run into deals in this environment are coming to fruition. But if you want to participate, you’re going to have to be part of that group.

So go to wealth Formula dot com and at that point you are going to click on Investor Club, get onboarded June to June soon. Okay, now let’s get back to school. So again, as a reminder, what this whole thing is about is, you know, my kids going back to school, your kids going back to school. And it made me think, gosh, we had to go back to school.

We got to go back to basics because we’ve been talking to economists and authors and all that kind of stuff. But at the end of the day, what we want to really focus in on is personal finance. Personal finance means you and your money and how you deal with it, your own personal philosophies, the things that you do to protect your money, what you want to do with your money after you die or what who you want it to go to and all that kind of stuff.

Last week we talked about asset protection, and this week we’re going to talk about even less popular topic two to address, which is critically important though, in my opinion, and it is estate planning. Okay. Now, again, state planning is basically what happens. Dear estate, you know, all the things you own, all your money, whatever. Once you die and no one again likes to talk about this stuff because they’re, you know, they can they can get a little bit superstitious.

You know, if you plan on having an estate planning going on and, you know, maybe you might die the next day or something crazy like that. But that that’s the way people think sometimes. So they get superstitious. But this is stuff that’s really not difficult to do. And as soon as you have, you know, kids, family or whatever, and you start making a few bucks, this is something that you gotta you got to start thinking about.

You really do. And it’s not that hard. We’re going to go through the whole nine yards, you and me. So but before that, again, let me preface that I what I’m telling you is all the stuff that, you know, just a guy. I’m just a guy who happens to have done pretty well, who’s got some assets myself, got a family.

I’ve learned all this stuff. I’ve done a lot of the heavy lifting, but I’m not an attorney. So this isn’t legal advice. And I never took that several months to become a financial advisor. So you shouldn’t take this as financial advice either. On the other hand, I caution you to taking financial advice from anyone who makes a lot less money than you do, which is often what happens and frankly never ceases to amaze me.

Right? I mean, why would you do that? I mean, I’m not saying like, you know, I’m talking about magnitudes of wealth difference, right? Like people going in who are making like, you know, making six figures a year or taking advice from somebody who’s making, you know, I figures per year or somebody who’s, you know, seven figures a year making taking advice from somebody who’s also, you know, five figures.

But anyway, again, listen, that’s me. You may decide that that that see, I’m being a, you know, anti five figure professional person. I’m not I’m just saying it just, you know you have to live this stuff and in my opinion that’s how you really learn it because it becomes your own personal, personal puzzle to solve.

So again, estate planning, the most neglected aspect of personal finance by far. No one likes to talk about dying, so they don’t do it. Some of the richest middle aged people that I know have not put much thought into estate planning at all, which is crazy to me. Okay, so what happens if you die without making any plans?

Okay. You got no will. You got no living trust. You get you know, you got nothing going on. By the way, the term for that is intestate. It sounds like. I don’t know. It sounds like you’ve got like a I don’t know, like maybe you ate something bad or something, but the term for that is intestate. And if you die intestate, here’s what happens.

The distribution of your assets are determined by intestacy laws, and those are determined by where you live, what state, what jurisdiction, all that kind of stuff. And while the specific rules can vary from state to state, there are some general principles that we’re going to just run through because I think, again, I’m trying to be comprehensive here. So if you’re married and you’re intestate and your spouse is usually going to receive the significant portion of your estate, particularly if there are no descendants.

Now, if there are children or grandchildren, they typically inherit a portion as well, with the exact division varying, again, by your particular jurisdiction. If you’ve got no surviving spouse goes to the kids. If you have no spouse or kids, then your parents might inherit everything. Now, if you’ve got none of the above, then the estate typically goes to siblings.

Now, if you don’t even have siblings, that’s okay. First of all, that’s lonely, right? No, no children, no siblings, no parents. Kind of sad. But anyway, if you got nobody, you got nobody. And when you die and you’re no one can find any anybody who’s related to you, then the estate is called a st. That’s s c h e 80 st.

I don’t know if I’m pronouncing that right, but that’s what it is. And this means this state becomes the owner of your assets. So you might look at what I went through just now and say, hey, well, you know, that sounds about right. You know, I got my wife, got my kids, so I’m all good. I’m doing anything.

Well, that may be true, but probably not, because the thing about it is that most people probably have some specific, you know, things rather than equal distributions going to equal, you know, him or her. And the other thing you might want to leave a little bit to your nephew or niece or whatever. So anyway, in order to really just clarify what you want to go, where you need a will and a will, often referred to as a last will and testament, that’s it’s a legal document and that articulates an individual’s wishes and tells people who gets what you want distribution of the assets.

You know, if you want your uncle to get something, you want your aunt to get this much, you want a certain things to go to certain children, all that kind of stuff. Okay, So now say you have a will and you die, okay? Your family’s upset. They’re really upset. They’re mourning your loss and you happen to be the primary breadwinner in the family as well.

So they need to pay their bills, but they can’t. Even though your will is very clear about who should get what. Why is that? Why can’t they get their money? Because there’s something called probate. All right. Now, typically a will has to go through probate. And that probate is just a legal process where a court oversees the distribution of assets.

And this is, you know, unnecessarily time consuming and it’s also expensive. Okay. So probation duration, you know, how long probation goes? It’s going to depend completely on depend a lot on what state your in and also the complexity of this state. Any disputes that come about, the efficiency of the court. So think about if you’re in an inefficient state like, say, I don’t know my state, California, or say like Illinois, where I used to live, very inefficient.

Lots of other factors in California where I live. Okay. A straightforward probate process, very straightforward, still going to take 8 to 12 months. But again, the get a little bit more complicated, get other things in there and boom, you’re off to over a year. So you drop dead in. Your family is trying to stay afloat while they mourn your loss and the money you clearly state goes to them and you tell the state this is who I want it to go.

And all that stuff still doesn’t go to them for 8 to 12 months or more. Crazy, right? I this stuff is maddening to me and this is why I think it’s important that I tell you about it, because if you if you listen to this and you don’t feel like, yeah, that’s just a stupid system and man, I better, you know, just in case, I better go and just do a couple little things to prevent this kind of pain in the butt.

I mean, that’s that’s what I’m trying to do here. I want you to do that. Okay? Okay. But you know what else is crazy besides that whole 8 to 12 months thing? Okay? In California and this is just in California, you can calculate this because it’s not necessarily, you know, that California is the only one that does this because most states have a cost to doing all this.

And in California, probate on $1,000,000 is state just $1,000,000, right? About $46,000. Right. That’s almost 5% of your estate not going to your family that the state charges you while not giving your family its money. So they’re waiting over a year and they’re charging you 5% nuts. It’s crazy. It’s crazy. Okay. So before you get too pissed off like you should be, you need to know there’s a simple way around this whole probate thing.

And it’s called a living trust. Now, that might sound complex. Okay, we’re talking about trust now, but the living trust is actually really, really simple. And it’s it’s really inexpensive. So living trust is just like think of it as like a little special container where you can put all your stuff. You put your house in there, your car, your bank accounts, you know, all that kind of stuff.

And while you’re alive, you can still use everything inside this container just as you normally would. Again, if you if you ever get sick and can’t make decisions for yourself, someone you trust, who you chose beforehand can step in and manage those things for you. And when you die, whatever is inside this container can be directly given to the people you’ve chosen in your will without probate.

Okay, So the other thing to so it’s that simple. By the way, these in these living trusts only what me couple couple grand couple grand compare that to you know paying that 5% I mentioned earlier. Okay so also living trusts are typically revocable which simply means you can change your mind and adjust what’s inside the container or its rules as long as you’re alive and well.

So for the vast majority of people, the vast majority of people out there, all you need is a will and trust. And you can probably get those done for just a couple of thousand dollars. Now, imagine not doing that and making your family wait for what’s theirs and paying the government tens of thousands of dollars for no good reason.

Well, that’s your alternative right there. So if you are most people, that’s really all you got to know. I mean, again, I’m not an attorney, but that for the most part, that’s really all you got to know now. Okay, This is a special podcast audience. Don’t I know that? Because I am the host of the Wealth Formula podcast, and in my opinion, I bet you I’ll bet you if anyone can figure this out, I’m up for a bet that I have the pleasure of being the host of probably the most successful and affluent podcast audience in the world.

I don’t know how you measure that, but I’m pretty much guaranteed that that’s true, that if you look at our collect of average net worth of listeners, this show, it would rank at the top of the list. You know, I may not be number one on the list for podcast listenership like Joe Rogan or something like that. But net worth per listener, I’m going to question and a question anyway.

And within this group there are a number of you need to be aware of this ugly, ugly thing that is called the estate tax, otherwise known as the death tax, or it’s also called something else by advisors that I’ve had it called the stupid tax. And I’ll get back to why it might be a stupid path tax in a bit, but okay, so what’s what are what’s this tax all about?

Well, this is basically, as it sounds like if you are pretty wealthy, then you get penalized for dying and being wealthy. And right now what happens is that and there’s this estate tax kicks in, federal estate tax that kicks in if your assets are individually, if you’re an individual about 12.9, $2 million for four. That’s for if you’re an individual like me, I’m, you know, not married and stuff.

If you are married, if you’re, you know, a couple, there’s 25.84 million that is of today. Now, the assets that you or your family have that exceed this amount upon your death are taxed at 40%. That’s right. 40%. That is a lot of money or money. Okay. So now I know your you might be thinking, well, you know, I know you’re saying this you got a really affluent crowd here, but I’m not that affluent.

Maybe I don’t need to worry about this problem after all. And I’m going to tune out right now. But wait, wait, wait, wait, wait, wait. After 2025, these triggers cut in half. The individual will have basically start thinking about estate taxes or their heirs. Your heirs will after 7 million. And for couples, it’ll be 14 million. And if you think, by the way, that these numbers are going to stay there, I think you’re crazy because these numbers are going to come down.

I think Bernie Sanders had suggested, you know, an estate tax of right around like 2 million or 1 million or something like that anyway. But in addition to that, so 7 million for individuals, 14 million for couples. I know that for a fact that even if these stayed where they’re going to be and that a number of you already have an estate tax problem for your heirs and if you don’t already have one, they’re probably more than half the people.

Listen, this podcast or potentially are potentially in trajectory to get there over the next few decades. So think about it. If you have a net worth of $5 million today. No, I’m not saying, you know, listen, I’m not assuming anything. I’m just giving you some numbers. If you have a net worth of $5 million today, what do you think it’s going to be in ten years?

I would hope that it’s double that. You know, mine in the last ten years is at least five X, okay. And a lot of you are investing alongside me in these kinds of things. Okay. Now you’ll have some of up years and down years, but in ten years I’m if I’m five X where I was, I can say that with some level of confidence.

Now, at the very least I would hope that you would double your net worth in the next ten years with some good investing. In the next 20 years, you might even double it again. Okay, so what I’m getting at here and what I’m saying here is that if you think you don’t have to worry about this estate tax problem, well, I hope you’re wrong.

Okay? I hope you’re wrong because I know so many of you who are doing really well right now and you’re young, you’re in your four easer fifties or whatever, and you stuck out like 30 years and you know, making bank, right. You’re going to be growing that money and I’m sorry but you’re probably going to have an estate tax problem or I should say congratulations I think you’re going to have an estate tax problem.

But either way, this is stuff that I think you should think about if you’re even you know, obviously, if you’re you know, if you’re not even close, then don’t worry about it, because this is when stuff starts to get expensive if you want to do something about it. But it is going to even be more expensive for your heirs if you don’t.

And you know what? Before I even, you know, leave the whole how much is the estate tax going to be? I haven’t even brought up state level estate taxes. You know, I’m kind of amazed, frankly, that California, my state here, has not instituted a state level estate taxes, but there’s like 17 states that do have it. Some highlights along that line, Massachusetts and Oregon, they they both start their death tax at estates over $1 million.

I mean, it’s it’s insane, right? There are estate taxes that are in many cases very high in Hawaii or Washington. Your state level estate tax is like 20%. So if you if you die in Hawaii or Washington, you’re pretty wealthy. Your estate tax could be 60% all in. What a joke, right? Basically, your heirs would have to sell stuff off just to pay the taxes.

I have to tell you that, you know, along the lines that I find estate taxes to be frankly unfair and disgusting, the assets in people’s estates have already been taxed in life. Why should heirs have to give half or more of their family’s wealth to the government? It’s complete socialist kind of B.S. But anyway, I’ll stop in that ran to get back to the education.

Okay, now here’s the good news. And this goes back to one of the nicknames I gave to the estate tax earlier writing Give it to him. I just keep I hear people talk about this as the stupid tax and they call it this because it’s actually not that hard to avoid if you’re rich and you do a few simple things.

Okay? And that if you’re that rich, they’re not that expensive. I mean, relative to the alternatives of paying like millions of dollars or whatever. Anyway. So that’s why, by the way, so if you don’t do these things, these advisors will think you’re kind of stupid. You’re just, you know, you’re just rich, dead and stupid. So that that’s why they call it the stupid tax as well.

Now, this this area of avoidance of the estate tax is, you know, it’s there’s nothing shady about it. This is totally legal stuff. It’s totally above board, but it can get pretty complicated. But basically what it comes down to is this concept of transferring your wealth out of your own estate into various kinds of irrevocable trust while you’re living.

So, for example, here’s a conceptual idea of of how that looks. You got $10 million in your estate today. You transfer it out of your estate into a trust. Okay, That could and then and then that money is no longer in your estate that can be invested and grown to really limitless amounts without your ears having to pay estate taxes when you die.

Okay, So that $10 million you put in. Boom, boom, boom had a lot of luck, and all of a sudden it’s 50 million bucks. You die. No estate taxes. Why? Well, that 10 million that you put in today under today’s limits, estate tax stuff and gift limits are under the gift tax limits. And once it’s out of your estate, it’s not subject to estate taxes.

Right. So that’s the idea. And does that mean you lose control of that money for good? And basically you’re just like putting it aside until your kids use it? Not now, not if you set it up right. I have what’s called a Nevada Dynasty trust. And that holds a holding company for which I’m the manager and I manage all the assets through the holding company, but I don’t technically own that money that I don’t technically, and it’s owned by the trust.

And the beneficiaries of that trust are my children. By the way, I should point out, this is also a very, very strong way of of doing getting a little asset protection because again, this stuff I don’t own this stuff. The stuff belongs to my kids through their trusts. Right. Or they’re beneficiaries of this trust. It doesn’t belong to me.

Right. So, I mean, honestly, don’t try to sue me. It’s not going to get worked very well anyway. In my case, I literally started businesses from day one that are owned by the trust, not me. So that income is generated in a generated from out of my estate from the beginning. And and again, this is completely legal stuff, right?

I mean, this stuff doesn’t belong to me. It belongs to the trust. Do I use it for my daily activities and all that kind? No, I don’t. But I do use it for investing. I do use it. I may I could use it in order to fund kids education, because at the end of the day, it is a trust for them.

So anything that relates to my kids, it’s great to do that. They may need a house to live in that could be owned by a trust. You see, you get my you get my drift there. And anyway, so I own nothing that’s in those trusts, but I control everything. And I’m sure you’ve heard that before. I’m sure you’ve heard that that concept before.

But that’s that’s behind the kimono. That’s how it works. Again, I got to remind you, though, I am not an attorney or a tax professional, so don’t take any of this as professional advice. Okay? But if you think I might know what I’m doing and that this is relevant to you, I’m happy to refer you to the lawyers.

You can set it up the way that I have. Just email me. Yeah. And so, okay, so we’ve hit every level of estate planning that I know and hopefully this has been a good day at personal Finance. Back to school that we’re doing here. And if so, let me know. Shoot me an email bucket. Well, for me, AL.com, if you have any questions or you want a referral for some of these concepts that I’m talking about, shoot me an email and let me know what you think.

And if you have other things that you want me to address, the specific big topics in personal finance, let me know because I want to come back to this. I want to start making sure that we address, you know, not only the macro things out there, like, you know, like speaking about the economy and what’s happening and all that kind of stuff.

But also it’s kind of personal, you know, things that you can do at the micro level and microeconomics here. So the bottom line is, again, it is my nonprofessional opinion that the least you need to do if you have any assets at all and a family that you want to see benefit from them is a will and a simple and inexpensive living trust.

Now, if you remember nothing else from this podcast, please remember that little bit and tell all the people that you know to get this done. Okay, that’s it for this episode of Wealth Formula Podcast Special Back to School series. This is Buck Joffrey signing off.