C (4:03)

I mean, I would just say that there's nothing worse than when you get to start an estate administration and you owe tax and there's nowhere for it to come from, and then you have to start going back to beneficiary saying, hey, listen, we need to pay tax time to start giving money back. So there's just always so many different things that happen. Whether it's everything is labeled as transfer on death or all you have is real estate and needs sold. So just so many things go into it that a lot of people tend to not to not think about because they don't want to pay taxes, they just want to get their assets to their beneficiaries.

A (4:37)

Yeah, I would say the two things you want to avoid, absolutely, to Rachel's point, is, number one, having to force the sale of something because then you're not getting the best price on the market, potentially because you have that nine month ticking clock. And then the second thing is to claw back from beneficiaries because they somehow ended up with the liquidity and the liquid assets. So think in a prototypical way, beneficiary designations or pay on death or transfer on death designations. So all of a sudden your bank accounts, your brokerage accounts all have these designations. They by operation of law, have already left the estate into the hands of a survivor or that beneficiary who's been Designated and then you have to call back those assets from them. That is not a good look.

B (5:26)

Yeah, yeah. So you mentioned this a couple times, but somebody passes away, estate tax is due nine months after. But what about, I think it's just good for advisors to know to help. Like what is the last tax return for somebody after they pass away? Look, like what is that timeline? Is it the next year? And then how does it work for the surviving spouse? Right, the surviving spouse files their own tax return. Correct. But they still have like the married filing joint tax brackets for one year or two years. Do you know Rachel?

C (5:53)

Correct. So, so in the year of death it's still going to be a married filing joint because you know, your spouse was still alive for part of that year. And then after that they, they changed it. I think I was called technically qualified qualifying surviving spouse. Yeah, they changed, they changed what is called for after that. But then you still get for up to two years certain things. So if you want to sell the personal residence, you could still get that full $500,000 tax tax or capital gains exclusion as opposed to just 250 as a single person. So they do give you some specific things for two years after death.

B (6:30)

Okay, super interesting. But then that's kind of the side where I'm sure there's less tax planning to do there other than like, okay, maybe you do Roth conversions and realize those years or maybe you do some capital gains harvesting. But in general, like that's not the big surprise tax bill that's going to come most likely. Unless you really didn't plan well. It really is that estate tax side. So this is really thinking more in the high net worth space to say, hey, you have nine months. We need to make sure that we plan for nine months around this. Because you know, one question I have is what happens if your estate plan is a mess? Obviously we assume that most people over this estate tax threshold, that's not the situation. But I think we will find this to be more and more common today because I think there's never been more DIYers than there are today. Like even the people that come in to work with me, I have people coming in that are 30 to 50 million net worth with, you know, they might have some advanced tax strategies, but they don't even have a regular estate plan set up. So let's say they pass away, they have an estate tax due, but they are going to have to go through probate in California. So how does somebody plan around that when maybe these assets are going to be Frozen and not even have the ability to be used within that time frame.

A (7:38)

Yes. So there are a few strategies. And of course, you know, I think whenever you think about liquidity and generating liquidity at death, you think insurance. And I want to just say, you know, there's life insurance and there are different forms, so we can talk about that, but there is actually insurance even to like pay for funeral expenses and things like that. Just because, you know, we're talking here a lot about estate taxes potentially. I just want to say to our audience, like, you may have clients where if you actually, you know, ask them what they expect, their, you know, their. How their remains might be disposed, like what kind of life, life celebration they're expecting, you actually come to realize that even generating liquidity to pay for those funeral expenses and some of those costs, or let's say they have kids who are in college. Right. And they need to be able to pay tuition, still all those things might actually necessitate generating liquidity even at the mass affluent end of the spectrum. I'll give you a quick example. I had a friend whose parents were from Guatemala, and what they expected was that upon their death, they would bury their bodies in Guatemala. And so all of a sudden you think about expenses like that. Right. For a family that may not have the means normally to be able to just pull out, honestly, thousands of dollars to do it, that becomes a burden on the family potentially as well. So ask your clients, because you don't know if they expect a big mausoleum to be built or something like that. People have expect how they want their end of life to go. And then of course, our medical expenses as well, which come a little bit before what we're talking about here. But still, those debts, they end up being debts of the estate and so paying the hospital bills, et cetera, for all of those reasons, you need to generate liquidity even at the lower end of the wealth spectrum. But, Rachel, perhaps you want to give some strategies for the upper end of the spectrum where maybe the estate tax or probate, significant probate fees do come into play.

C (9:53)

Yeah. So whenever it comes to the upper end, you want to look more at. I mean, although I think insurance policies are always good to have no matter where you're at on this, on the spectrum, that's just not for the lower end. People also look to just make sure that there are, you know, assets that are not all transfer on death or are tied up. So they'll just, you know, take your look at your plan holistically and just say, okay, where can money be paid from. And if you see, you know, this automatically goes to the beneficiary and there's just at the end of the day, nothing left to go to the beneficiary. Then, you know, before you even get to big planning, you want to, you know, change some stuff to make sure that it makes sense that there are funds to pay from in the first place. So again, for example, say you want to give all the stuff to your beneficiaries, but it's all transfer on death, it's all IRAs with beneficiary designations, it's all property that's joint. So it again automatically joined by survivorship. You want to see within there what can I do to make sure there is untied up funds whenever it comes time to pay stuff through the estate?

B (11:04)

Yeah, because you mean you could create issues here, right? Imagine that you have the scenario you just talked about, but like their taxable investments are not liquid, right? They decided, hey, we're going to have our IRAs and you know, those will get passed on to our kids. And we have a bunch of private investments in real estate. But the issue becomes where we have, okay, great, you're going to owe these taxes, but you have to distribute the entire IRA to cover these taxes. And so now you're already in a high income bracket, is probably a 40 or 50 year old, you're stacking that on top. So you're losing significant amounts of it in the highest tax bracket when you would have been better off to say, hey, let's for one, I think everybody's better off to be pretty liquid. I think a lot of mistakes, you know, wealthy make are becoming extremely illiquid in their investments. But just in general, right? Like you're way better off having a step up in basis and raising funds from that than you are having to really quickly distribute an IRA and lead to more income tax.

A (11:55)

And so in terms of some of the strategies that I've seen, you know, some of these are going to be kind of particular to like the type of asset that's, you know, valuable and that will generate like a big estate tax bill. But for some reason you're not able to like, you know, go ahead and sell it or liquefy, create liquidity out of it. And so a couple of things here there is the opportunity to purchase survivor annuities and those tend to create that kind of liquidity so that the surviving spouse, you know, can continue to pay their expenses, et cetera. So that's something to mention if you're a business owner, you might be able to enter into buy sell agreements with your company or the other owners in order to generate, you know, some sort of liquidity, because there is the opportunity for the other owners or the company to basically redeem the decedent's interests in the business. So that can be an option. The other thing, let's just talk about

B (12:58)

that one a little bit more because I think that one's super important. I think that's probably one of. I work with, I think like 80 business owner households. Like, that's most of who I work with. Maybe two or three of them actually have this set up and funded correctly. They might have a buy sell agreement, but they most likely don't have insurance. And most people do not want the surviving spouse or their estate to come in and help run that business. But you don't really have a choice unless you actually set this up correctly. So it's funny, when we were thinking about this conversation, that is not one that I was actually thinking about, but I think it's extremely important there because one, it helps the family actually get the money that they deserve for the business. I think one point on this is you have to update your buy sell agreement because a lot of people, the first, they're like, I'm not really making real money in my business. There's no value. We'll set up the agreement, we won't fund it. Then a couple years later, they're like, okay, we're doing pretty well, let's fund it. And then five years later, it's like, you know, we're for 20% of the value of what that business would actually be. So you probably want to be revisiting that every couple years. But I think, again, that's a really good point on creating liquidity. And that's typically what's best for the business and the family.

A (14:02)

Yeah, along those same lines, whenever you think buy sell, you can also think loans. And so this is actually applicable to all sorts of illiquid assets. So I had a client in private practice who was an artist, or rather she had been an artist. And so all of her net worth was tied up in art and her own art. And so when you think about something that's really difficult to sell and create liquidity for, you do not want to flood the market all of a sudden with one artist's works because you have to pay for the estate tax. And so that's the type of thing where, you know, a farming business or something like that, where you're going to have a really hard time, like, you know, basically selling the asset or creating liquidity loans can kind of give you some leeway to. To continue keeping that asset within the family, but generate liquidity from it. And then I would say lastly, of course, is life insurance. We call life insurance. It's the ultimate way to create liquidity. So I had a lot of clients who were in real estate, big real estate landlords in New York City. They always had life insurance to create that liquidity. And so if there is already an estate tax that's being implicated, just know that the life insurance proceeds unless they're protected within a mechanism, and we can talk about that will itself become taxable as well. And so the most common way to sort of have the life insurance proceeds but also not increase the tax bill is to put it into an irrevocable life insurance trust. So that's the wrapper around the life insurance to make sure that it's still outside the taxable estate. Rachel, do you have anything to add on that?

C (16:01)

I mean, no, I would say that, you know, definitely getting the trust, having an eyelid and setting that up is important, but then also it's another layer of you get the insurance you put in the trust, but you have to make sure that the beneficiaries and the provisions of that trust allow you to pay those expenses. If they do come, they do come due.

B (16:18)

Yeah, and I think it's a good point, because I think the first myth that most advisors, especially most insurance salesmen have is that, you know, life insurance is not taxable, but if it's just in your name, right. It gets added to what your taxable estate is, and that can lead to estate taxes. Right? So then the eyelid basically gives you the structure where, hey, it is protected from it, but it's not as simple, I think, as many people think, right? What is the amount of premiums? Like, how much are we putting in? Are we using yearly gifting? Are we going above it? Who are the beneficiaries? How this is structured correctly. But then on top of that, right, a lot of real estate investors like to have permanent life insurance because they like the borrowing power from it. These are two completely different strategies, right? You're not using your ILS to fund more real estate purchases. You're using your eyelet to help pay estate taxes. And funny enough, I was talking about this on Twitter a little bit ago, and some advisors, like, you just never know what the estate tax amount is going to be. And so this just makes no sense to have an Eyelet. But I think the goal isn't to say like, oh, we're projecting you to be at 41.5 million. Here's your estate tax number. The permanent insurance is going to get to the dollar. Correct. It's to directionally help you, right? So if it's going to be 4 million or 6 million, we don't know. But if you have 4 million, at least it helps you where you don't have to liquidate as much in other assets to kind of get to where you want. Because like you said, the being a 4 seller is never where you want to go. Sure, you might, but most people don't say, hey, let me buy and accumulate all this real estate. Let me pass away and have all my kids go sell all my real estate. They're probably like, it's paid off, they're going to be covered, right? They can have a property manager get great cash flow and this is going to help them have a really great life. It wasn't. Maybe they thought, well, let's wait for the step up in basis and let you sell it. But I think generally they do want to keep it through their family.

A (18:01)

Right? It's funny because I feel like eyelets are so polarizing. You can probably pull all these estate planners and I'm curious, Rachel, which end of the spectrum you fall on? But then there are some, you know, I worked with estate planners who are like, well, everyone should just automatically put their life insurance policy in an eyelet. Why not? You know, as long as you can administer the islet and you know, as an estate planner, planner for your own family, you probably are like, yeah, easy peasy. Just have some crummy letters issued out, it's fine. Some people are just like, if the administration of the islet was easy, then everyone should just stick their permanent life insurance policies inside of one of these trusts. So, Rachel, I don't know if you have.

C (18:45)

I'm on the spectrum where I do not see why you wouldn't do an eyelet. I do think eyelets are great. But to your point, and I think Thomas, you mentioned this as well, the administration of it, you said have to. Actually it's not as simple as some people think. Like, it is simple as long as you follow the rules, you do the steps, you file the gift tax returns, and you just keep track of the annual exclusions to make sure you're doing it all properly. Because there's nothing worse than whenever, you know, you get a new client. They had an eyelet that was previously set up and Then you have to go back and backtrack to figure out what happened.

B (19:16)

Yeah, yeah. And I think it really depends on the goal. Right. Like, I'm not a big believer in the use life insurance as a great place to borrow from because I think you have the same thing in your taxable brokerage account, right. You can have liquidity there. You can borrow at low rates. Right. So I think if you think about this as, hey, I want liquidity at death, pretty much always an eyelid does make sense. If you're on the side of, I do like life insurance for borrowing power. I think maybe rethink your strategy there because I think there are better tools and ways to do it. But if that was your route, you probably wouldn't put an eyelid. But the term side is interesting. I think it's very rare to ever to see people put terms in an eyelet. I know, Ann, we've talked about this and you said, you said you have seen people do it, but I've rarely seen it because most people, I think in this high net worth space, they have term for a little bit and then they're using term to then convert. And then you have to just think through do we put in an eyelid at the term in the beginning for when we converted or what's the mechanism to get it there?

A (20:15)

I think that's right. I, I have had clients, but I think usually as a, almost like a secondary policy to a permanent life insurance policy. So Rachel, what have you seen with term policies?

C (20:29)

I don't think I've ever seen a term in an island.

B (20:32)

Yeah, yeah, that's what I figured. Okay, cool. What have we not talked about about creating liquidity here? I think like most people understand, right, you get step up in basis on your taxable brokerage account. So if we need liquidity, that's a pretty good place to create it. You know, I think it's just this, the business side of things, right? Do you get a step up in basis based on that type of business? If not, do you have buy sell agreements? If not, then, then what are you doing? Because that one would, that one in real estate is where things get really hard because especially your business, right? If you just lost a partner, probably not the best time to sell if you haven't brought in somebody new to help kind of grow that business and you know, make it more sellable. Any other thoughts, things we've missed?

A (21:16)

No, I just be interested if our audience has ever had to, you know, come up with a solution to this problem. We'd love to hear from you. And yeah, now these are some of the more common strategies, I think. But not paying attention to liquidity, I think could get your clients into hot waters, especially at a time when things are tough for them from an emotional perspective. You know, Thomas, you mentioned the business as well. You know, it's just, it's not a great time to all of a sudden be like, oh, I need to claw back assets from your loved ones, you know, because we didn't consider this issue.

B (21:50)

Yeah, I think there's a lot of room for advisors to help plan around it, but also the side of like, make they have a good estate plan in place, make sure trusts are set up, make sure beneficiary designations are correct. So if we have these issues where we're having to kind of raise funds, pay tax quickly, that it is, we have a smooth process to get there versus potentially waiting two to three years in California and scrambling to try to figure out what to do.

A (22:13)

Exactly. I think the bottom line, the bottom line, I would say, is just take a look at those beneficiary designations. With liquidity in mind, it is possible to overly, you know, create too many non probable assets. So things that pass by operation of law and then, you know, consider, you know, what that play out for yourself and the client, what it would look like for them to pass away with a portfolio that they have and whether or not liquidity is something they should consider.

B (22:46)

Yeah, okay, Perfect. All right, well, Rachel, thanks for joining us. Glad to have you here. Now moving forward for a bunch of episodes, everybody, we really hope you enjoyed this episode. If you guys have any thoughts or things that maybe we didn't mention that we should talk about in a different episode, let us know. But we'll see you back here in a couple weeks.

A (23:25)

Sam,