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Foreign hello and welcome to the 37th episode of How Tax Works. I'm Matt Foreman. In this episode, I'll discuss. I'm and to be honest, I'm not sure how to name this episode. I guess I'll have to figure out because it does get named, but it tries to respond to the prompt. If you win the lottery, the first thing you should do is call a tax attorney. So we'll see how that goes. How Tax Works is meant for informational and entertainment purposes only. It may be attorney advertising, and it is not legal advice. Please hire your own attorney. How Tax Works is intended to help listeners navigate the intricacies and complexities of tax law, regulations, case law, and guidance to demystify how taxes shape the financial and business decisions that we all make. Before we get started, a few administrative things. First, new episodes every two weeks, obviously new. Next episode is going to talk about Updates to section 1202 qualified small business stock and 174 research and experimentation expenses. Section 174 under OB thrice. That's what I'm calling it. I don't, I don't care. That's. That's what I'm calling it. If you have any questions, comments or constructive criticism, you can email me at my FRB email address. Upcoming Webinars I have a bunch that we're putting on as a firm FRB is doing called the Advanced Tax Strategy series. I didn't name it, so we're rolling with it. They're all Thursdays at 1pm Eastern Time. I'm, I'm in New York, so that's Eastern. So that's when we're doing it. They're free. November 6th is 704C allocations. November 20th is succession planning using profits interest. December 4th stock sales and asset sales, talking about every org 338H10S et cetera. And December 18th QSBs common mistakes and misconception. All right, let's talk about the 37th episode. You know, where did the title, the title come from? Where did that prompt come? The question is. I was at, at a birthday family birth birthday party and I was talking to a cousin. And one thing that happens as you get further and further from your 20s is the things that get discussed change somewhat. Right? You still talk about sports and other stupid things. But also my cousin, also very much not in his 20s anymore, said, you know, I have a question for you. And this is when the lottery was around 900 million. It later went to 1.8 billion, which is a lot of where sort of this, you know, the, the, somewhat, at least the impetus for this episode came from. And he said, you know, people always say, if you ever win the lottery, right, your first call should be to a tax attorney. Why is that? And I had no answer. I was somewhat dumbfounded. And anyone who knows me knows that I'm rarely dumbfounded, or I should say often dumbfounded, rarely without words. So I didn't really have an answer. And I said, you know, I don't know if that's true. I actually think it's. If you win the lottery, the first thing you should do is call an estate planner and a wealth manager, which I think is correct. I'll get to later. But also, when the lottery was 1.8 million, you know, I work with someone in our office, asked me, you know, should you take the lump sum or over the years. And Which I said, well, you take the lump sum. And she said, yeah, yeah, that's what everyone says, but why? And I thought about it and I ran some math and I'll come, I'll discuss the answer later. But before I go there, I. I'm going to tell one of my favorite stories that I really don't tell very often because it really does not come up often at all. My dad had. It was either his assistant. My dad was a dentist. It was either his assistant or his office manager slash receptionist who won the lottery. It was back in the late 80s. We lived in upstate New York at the time. And my dad got a call on a Sunday night. And I remember this. It was either the Sunday between Christmas and New Year's, you know, when schools are closed, or it was right when school ended. I don't remember which. And there's a reason I don't remember which one it is, I'll get to in a second. And she called and said, I won the lottery. It's two and a half million, which at the time in New York State was the amount that it reset to after someone won. And I quit. I'm never working for you again. What gets sort of amazing about it, she took the lump sum, so you figure 1/2 million, some subtracts with tax, probably got about a million dollars and 100,000. I'll get into how the math works in a second. And what she did was she went out and she, she, she burned it. She just spent on dumb things. She never bought a house. And the reason why, I don't know whether it's around Christmas or when school, it's out. For those who don't Live in, in New York, school in New York, gets out the end of June 20th, 24th, somewhere in that range. So it's, it's later. So the reason I don't remember is because the other one of the two, right, late June or late December, six months later, she called and she's gone through every single penny. And what was sort of amazing is thinking about this is she spent basically 30 years of her salary, maybe more, maybe less. I don't know. I have to work through the math on it in six months, which is sort of amazing. And again, did not buy a house, which is really pretty. It's special. So she called my dad and asked for her job back. My dad's like, well, no, you know, we hired someone else. Can't really hire, you know, extra people. But there was a pause. I remember I was in the kitchen and my dad says along the lines of, but we do need a babysitter for Saturday, parents are going out, whatever. I don't remember whether she ended up babysitting me. Maybe she did. Maybe she did. It's a funny story about it. So when people talk about, you know, you don't want to win the lottery, it leads to problems. It's really leads to a problem, to the fact that people have unrealistic expectations and don't properly budget. It's really a budgeting issue or anything else. Same as, you know, professional athletes who suddenly have huge amounts of money. You know, you have hangers on, you're buying stupid things. And that's why I talk about the need for estate planning and wealth management assistance. That's really the key. Which, which will get to later. So what, you know, people talk about, like, what, what can you do? You know, what can I actually do to save on taxes? And I don't really think there's anything you can do from an income tax perspective. Again, estate planning, you know, gift tax, wealth management, that. Wealth preservation. Maybe that's what he meant, right? A lot of people, when they say a tax attorney, you know, they, they include trust and estates attorneys. And trust and estates attorneys really come in a variety of flavors, I guess, for lack of a better word, where some are very tax focused, others are not. You know, most, most people don't need to worry about taxes. The vast majority of the world, right. Of people in the US Anywhere, really don't need to worry about estate taxes. Not a major concern, et cetera. So. So really don't have to worry about it. But, you know, there are a lot of state planners who do really complex Tax work. Really interesting stuff. I'll talk about a bunch of it during this episode. So, you know, the first question is lump sum or annuity? And the answer is lump sum. I went on the website and I went through the mechanics of how it's paid and how the lump sum's done, et cetera, et cetera. And for the $1.8 billion, you get about $800 million. You get 826 million based on sort of what, you know, how the, how their math works out. The 1.8 billion is over a total of 30 payments, one the first year, then 29 years thereafter. And what you do is you take the amount you get the first year, $100, for example, and the next year you get 105 in bit, so on and so forth. You add 5% each year. 5% constant compound. Anyone who knows anything about investing or money management knows that 5% is not a tremendous rate. Some people would even go so far as use the word poor rate. It's not really a good one. You can get that more or less with munis with no taxes. So you'd almost be better off actually taking the lump and then putting the money into munis and you end up better, neither here nor there. So you take the lump sum and then I, I wondered, you know, what is better. Take the lump sum tax now, basically 826 million 45% tax rates, about 450 million. If you take the full 1.8 billion over 30 years, time value of money, 45% rate, right. You end up with somewhere in the neighborhood of 990 million. They might say, well, yeah, 454 is less than 990, that's true. But then if you were to give a 30% tax rate, which we're probably gonna have less on, on the 454 million, you'd end up with somewhere in the neighborhood of $1.4 billion. Or again, if you're to take the 454 million post tax on the lump sum, put it into munis earning 5%, you're going to be almost at 1.9 million. You'd actually end up better off, right? As I point out to people, $454 million is amount of money you probably can't spend unless you're trying to spend it, spending for spending sake, so to speak. And so I'm not really super worried about it. You know, go out, have fun. You can do a lot of stuff. Fun stuff, right? Can you delay it? Or gift as a qu is a way. You know, I was thinking about like, how could people from an income tax perspective, you know, do some stuff on this, right? And do some planning. And the answer is, can you delay or gift it? No. Actual or constructive receipt. When you get that ticket and the lottery happens, that's when you have the money, even if you don't actually claim it for some extended period of time, right? You think back to Oprah, you get a car, you get a car. As soon as you get that car, that's yours. It's not earned income. So it's ordinary income. But there's no payroll taxes, which is good, unlikely to be credible, creditable from a state tax perspective. So if you were in the lottery, same rules for gambling actually for the most part is if you were in the lottery, one, you're in California and you live in New York, you actually paid to state taxes in both. Just kind of brutal, not great, suboptimal. But you know, take the money. Look, it's found money, it's the lottery, whatever. One idea that I had I think about is buy the lottery like a year out because you can buy it, you know, some out in the future, put it into a trust, right? Then gift the trust. What's it worth? $2 after you paid for the ticket? I think it's worth $2. I don't really buy lottery tickets. It's just, just not my jam. So let's say it's $2. That's the gift amount, right? If it wins, you've gifted it out of your estate. Now the trust is paying the taxes, but taxes get paid anyway. So I'm not really sure that works. But anyway, so let's talk about estate planning. Like what would you do, right? What should be done? What can you do? Let's set up some trusts, right? Trusts are big in this aspect because you want to take the money out of your hands. You want to make it so you are no longer in control of the money so that you have a more set of income. You don't have the ability to access it. You're not going to burn through through it like nothing else. An acronym, soup, crt, clt, grt, asap, mta, whatever you want. What won't work, right? Grantor, same trust, same taxpayer. So grantor trust would do nothing but make state administration easier. A Q TIP trust, Qualified terminable interest property trust. Basically, the Q TIP is the first spouse dies, second spouse has the lifetime use of the property. The first dying spouse still controls who gets the asset after the second spouse dies. Works under 2056, section 25th internal revenue code, but you know, it's in the estate of the second spouse, so it really doesn't do anything. You know, I guess it does defer it until the second spouse dies for state tax purposes. And that's great, but it doesn't really matter. Intentionally defective Grantor Trust. It may sort of work, but you won the lottery, so it's likely too big to avoid triggering some level of gift tax. So, you know, or using your entire lifetime exclusion, although it's cash, so using the lifetime exclusion is kind of pointless. If you have $1 billion in cash, you basically retain the income, but it's out of your estate. Maybe you could do it doesn't really do anything. There are a number of things that I would put into the bucket of things that may work, but probably not. But if you're super wealthy, there are things you should consider before we get there. Let's, let's take a quick break, get some music in. Get, get going and I'll be back in just a moment. Foreign welcome Back to the 37th episode of How Tucker it's kind of crazy hit this long, right? So things to consider. Charitable remainder trust CRTs. There's two basic flavors, right? Many subflavors, especially within one of them. But one basic idea, the Charitable Remainder Annuity Trust KRAT is a flat annuity. Well, the basic, I'll say what's biggest basic idea is that you gift income to someone and the remainder goes to charity. All right, so crack Charitable Remainder Annuity Trust. I'm going to flub these. I'm going to mess them up, but not mess them up. I'm going to stumble over words just because they're too detailed in that way. Basically, a flat or even annuity payment during the term goes to the beneficiary, the remainder to charity. The charitable deduction is taken when the trust is funded. So it's great for assets that have largely appreciated not the lottery. Charitable Remainder Unit Trust crut a variable, an annual payment based on the fair market value of assets. You can't really use it for lottery because there's already constructive receipt. You need to have income after you put it in the trust. If the lottery draw. If before the lottery drawing, maybe you know, it's one where you do it a year before, maybe, but you only get a deduction of $2. You know, it's the value of the ticket. So maybe, maybe not a crts. The way this reason this works is because crts Kratz and Krauts are not taxpayers. They're, they're, they're nonprofits basically so that it's ordinary income for the payments when they receive. So it's not capital gains. So it's great for appreciated assets. Stock real estate that throw off cash or maybe can be sold in a few years to have cash in order to pay the the beneficiary. There's a couple flavors of cruts beyond that. There's the knee crut, net income crutch. Distributions are limited to the income often no distributions good for non income producing assets. Why not just donate the asset to charity? Same thing. Then there's the nimcrut net income makeup crut like a kneecrut, but in later years you may make up amounts that were not distributed for knit income makeup crud. Then there's the flipkrut or FLIP nimkrut, which is absolutely way too many acronyms and things going on. That one, it's a lot like it starts as a kneecrut or a nimcrut and it converts to a standard CRUD upon some triggering event which you can define. The next thought process I had is the Charitable Lead trusts which is the flip of a, of a CRT. CR. CLTs and CRTs are the opposite. With a CRT the money goes to beneficiary now and then the donation is at the end. Obviously you still get the deduction for the donation at the time you fund the trust. CLT is the opposite, which is the charity gets for some period of time and then the beneficiary gets it at the end of it. Two flavors, one idea. Charitable Lead Annuity Trust CLAT and Charitable Lead Unit. Terry Trust is the clut. So so far we've gone to Kratz, Kruts, Klats and Klutz, which sounds like someone walking on a marble four floor wearing tap shoes like Kratts and crutts. Like I said, charity gets in use. Now the basic idea is that the charitable portion decreases the fair market value sufficiently to use less of the annual or lifetime exclusion. Basically there's an interest rate that you have to exceed for it to work. So if you have an, if you have an asset that goes above it, what happens is the charity gets some level, you know, especially with stocks and they get throw off some dividends and then at the end of it it goes to the person you want. The value of the donation is so much sufficiently high over a sufficiently long period where you get the donation and then the value is zero. Because what's happening is the Continent, the beneficiary has a value of zero. They're receiving an interest in something that valuable. Zero. Even though the idea is that when they get it after the trust terminates, when they get it when they say, when they become the beneficiary of the trust, the current beneficiary of the trust, after a certain period when the charity is no longer, they'll have an asset that still has some level of value. Right. The interesting idea for sure, the key is again, and I already sort of said this, you know, the federal deduct. Why, you know, why do people use CRT CRTs? The answer is federal deductions limit to 50% of AGI. States may limit to, you know, New New York, for example, does limit as well. The idea is to contribute far before the capital event, not three months before. I get questions all the time. I want to do this. Oh, when are you selling? Oh, and in like two weeks. No, don't. Doesn't work. Not how it works. You've constructively sold it already, ideally a couple years at least. CRTs and CLTs, as I said before, are not taxpayers. They could have large amounts of income, such as the sale from the sale of a real estate or a business. And the trust is not taxed, is only taxed on distributions in the crt. Distros in the CLT are not taxed because the recipients of charity watch out for unrelated business taxable income. Every so often I'll run into someone who's a great idea, put a business into one and you know, look, it's a nonprofit, it's a charity. So if it has ubti, it's at the corporate rates. Pretty unhelpful. TLT is, are less effective in low interest rate environments. Right. Because you don't have much of a hurdle. So it's not going to shelter as much of the gain of the asset value. Just for fun, because I, I like slacking on S Corps. You have an S corp. Clts and crts are an eligible shareholder. So they'll blow the S election. So don't use them. Before we get to GRTs, Grantor retained trust. Let's, let's have some more music. They really rock out for a couple minutes and then, then I'll bring it on home. All right, we're back. Let's talk about GRTs. Let's talk about grantor retained trusts. Similarly, there's, there's two flavors. Grantor retained Annuity Trust, Grantor Retained Unit Trusts and grots. So we have Kratz and Cruts, flats and cluts, Grats and grots. Right, Wonderful. Sort of so, so enunciate it to tell people what they want by using words, right? Not just the acronym. Because much like me, you know, I, I mumble a bit. So want to make sure don't, don't get that sort of like crts. But the grantor, the grantor themselves retains the interest that the charity received in the crt. So basically the grantor retains the current income and then the future income, the future asset is sent to someone else, right? Someone you like, your, your niece, your nephew, whatever. Except the appreciation goes to the remainderman. There's what's called a zeroed out grat. Sounds like whacked out mural. Congrats to the single listener who got that reference. 0 grat is what many wealthy families do when they have income producing assets. Altons use them pretty heavily. Not throwing shade, not, you know, doing anything bad. There's litigation that is public record on these. So they use zeroed out grats. Anyway, the idea is the assets, such as public company stock, like Walmart stock, right, Appreciates enough that it exceeds the discount rate under 7520. So the gift is made. Now the future value of the gift is zero, but it appreciates above the 7520 rate, the discount rate under section 7520. And so the fair market value of your maintenance interest at the time of the transfer is zero. So there's no estate tax, no gift tax, and the asset is out of the estate. Some people don't like them because you don't get the estate step up under 1014. However, if you have a billion dollars, you are generally speaking, such as Waltons, you're generally speaking less concerned about state step up as you are as transferring without incurring tax. So that's the key. The key, you know, the grantor must outlive the term of it to get the estate. Technically it's a grantor trust, so it's no gift. There's also grits. Grantor retained income trusts. Same basic idea as a grt, but the beneficiary cannot be a close relative. I just kind of like the name. I've never actually seen them used in my life. I've seen all these other ones, but never grit. A book Gritty. You know, if you're a big fan of really weird mascots, Gritty. That's, that's a good one. You already figured this out. I've already said it. But this episode is not really about winning the Lottery. Winning lottery is really about estate planning, wealth management, preservation, asset protection. From an income tax perspective, winning the lottery is not terribly interesting. I mean beyond like we should hang out because I got some ideas and we could have a lot of fun, but it's really not that interesting. From an income tax or really an estate tax planning perspective, interesting is what you can do with it, what you do with the assets and how, how it works out. If you win the lottery, what should you do first? You know, don't overthink it. If you're charitably inclined, grants cruts are great. No increase in value, income tax on distribution, so you can control how much money you get, but don't feel like you need to do one thing. Definitely mix and match. If you're not charitably inclined, zero to grants are great. Get to the next generation. Remember, CRTs are less beneficial in a low income in low interest rate environment. Basic function of time, value, money. And grants are better in low interest rate environments because it's easier for the assets to appreciate sufficiently to exceed the hurdle. It's a lot of tax and a lot of estate planning math. In conclusion, right, I don't usually say this, but in conclusion, if you win the lottery, please let me know because I have some ideas for some things I've always wanted to do. Number one on my list is have a party in the Whale Room at the American Museum of Natural History on the Upper west side of Manhattan. I've always wanted to do this and for enough money you can do it. There are weddings there, you know, all kinds of stuff happens there. And I just think that'd be really fun. Let's be honest here. Life is short, as we all know and far too often reminded. So let's have some fun. Let's have a party. The way we're on the up west side and that's a cool thing to do, you know, and. And so I think that's something we should do. All right, so that was episode 37 of how tax Works. I hope you enjoyed it. I'll be back in two weeks with the 38th episode where I'll be discussing, you know, updates to section 1202 and 174 under OB thrice. I'll explain why I call it that in the next episode. So you got to come back for that. But hope you enjoyed. Hope you learned something. Now for some, some really good Sam.