How to approach real estate in an estate plan with Jennifer Rozelle

Summary

Podcast Summary: The Practical Planner – Episode: How to Approach Real Estate in an Estate Plan with Jennifer Rozelle

Introduction

In this episode of The Practical Planner, hosts Thomas Koppelman and Ann Rhodes delve into the complexities of incorporating real estate into estate planning. They are joined by Jennifer Rozelle, an attorney based in Indianapolis, Indiana, and a part of the wealth.com platform. Jennifer brings her expertise in real estate and estate planning to the discussion, offering valuable insights into effective strategies and common pitfalls.

Key Topics Discussed

1. Common Mistakes in Real Estate Estate Planning

   Jennifer Rozelle opens the conversation by highlighting the frequent errors individuals make when handling real estate in their estate plans. She points out that many people attempt to manage property ownership without fully understanding its implications on their estate plans.

   “There's endless amounts of mistakes that are made all dependent on when you initially draft that deed or in some cases, some people just handwrite it and unfortunately those have significant legal consequences.” [02:11]

   Thomas and Jennifer discuss scenarios where siblings inherit a property but face financial and interpersonal challenges, such as maintaining mortgage payments or disputes over property usage.

2. Role of Specific Bequests and Executors

   Jennifer emphasizes the importance of specific bequests in estate planning, allowing clients to designate which properties go to which beneficiaries. She also discusses the pivotal role of executors or trustees in managing these assets and mediating beneficiary relationships.

   “What I always tell beneficiaries in that situation is basically whatever they agree to, I can make happen.” [04:22]

   Ann Rhodes adds that estate planning attorneys can provide reality checks to clients, ensuring that their wishes for property usage are realistic and enforceable.

3. Gifting Real Estate: Pros and Cons

   The discussion transitions to the strategy of gifting real estate during one's lifetime versus passing it on after death. Ann Rhodes introduces the concept of intra-family loans as a method to transfer wealth without immediately impacting the gift tax exemption.

   “As long as you paper it like a loan, you know, as though you were the bank, that's really good.” [20:05]

   Jennifer concurs, emphasizing the necessity of proper documentation to avoid tax complications.

   “If there's one thing I hear from most of my clients, they don't want Uncle Sam in the mix. They don't want to pay more taxes. Well, if you don't want to pay more taxes, then you need to be willing and able and ready to commit to doing things the right way.” [25:05]

4. Trusts in Real Estate Estate Planning: QPRT

   Ann Rhodes introduces the Qualified Personal Residence Trust (QPRT) as a tool to transfer real estate while minimizing gift tax liabilities. She explains how QPRTs allow clients to retain use of their property for a specified period before it passes to beneficiaries at a discounted value.

   “With a QPRT, you can chunk out the gifts to your descendants, but you want to retain for a certain number of years the use over that property.” [30:01]

   Thomas Koppelman inquires about the practical enforcement of usage rights within a QPRT, to which Ann clarifies that while the parent retains full usage, the ownership percentages are clearly structured.

5. Challenges with High Net Worth Clients and Real Estate Portfolios

   The hosts discuss the unique challenges faced by high net worth individuals who possess extensive real estate portfolios. Ann Rhodes highlights issues such as cash flow loss and the difficulty of generating liquidity to cover estate taxes without forced asset sales.

   “Living off of that income and then they're starting to gift away the real property. You have to gift away the benefits, the economic benefits, which is not just use, but the income that that generates as well.” [37:04]

   They also touch upon the importance of integrating life insurance strategies to provide liquidity for estate taxes.

6. Practical Advice and Best Practices

   The conversation wraps up with actionable advice for advisors assisting clients with real estate in their estate plans. Emphasis is placed on thorough documentation, realistic planning, and aligning estate strategies with clients' long-term life goals rather than solely focusing on tax minimization.

   “Do not let the tax tail wag the lifestyle dog. You need to live your life and then worry about the taxes.” [41:57]

   Jennifer Rozelle reinforces the necessity of thoughtful planning to ensure that estate strategies support, rather than hinder, a client's desired lifestyle and legacy.

Notable Quotes

• Jennifer Rozelle: “There's endless amounts of mistakes that are made all dependent on when you initially draft that deed or in some cases, some people just handwrite it and unfortunately those have significant legal consequences.” [02:11]

• Ann Rhodes: “Do not let the tax tail wag the lifestyle dog. You need to live your life and then worry about the taxes.” [41:57]

• Jennifer Rozelle: “Gifts are untake a back able.” [40:22] (Note: Jennifer coined this phrase to emphasize the irrevocable nature of gifts.)

Conclusions and Takeaways

• Importance of Professional Guidance: Managing real estate within estate planning is complex and fraught with potential pitfalls. Professional advice from attorneys and financial advisors is crucial to navigate these challenges effectively.

• Strategic Gifting and Trusts: Utilizing strategies such as intra-family loans and QPRTs can optimize tax outcomes and ensure smooth property transitions, but they require meticulous documentation and a clear understanding of long-term implications.

• Aligning Estate Plans with Life Goals: Estate planning should be a reflection of the client's life goals and legacy intentions, not merely a tool for tax minimization. Ensuring that estate strategies support the client's desired lifestyle and family dynamics is paramount.

• Preparation for Potential Conflicts: Proper estate planning anticipates and mitigates potential conflicts among beneficiaries, ensuring that property transitions do not lead to familial discord or financial strain.

This episode underscores the intricate interplay between real estate and estate planning, offering advisors and clients alike valuable insights into creating effective, sustainable estate plans that honor both financial objectives and personal legacies.

Transcript

[Ann Rhodes]

Foreign.

[Thomas Koppelman]

Hello and welcome back to another episode of the Practical Planner podcast. I'm your co host, Thomas Koppelman, here with Ann Rhodes, my other co host and then joining with us is Jenny Roselle. Jenny is just an awesome attorney in my neck of the woods, Indianapolis, Indiana. Obviously you're outside of Indianapolis, but nobody's going to know the small towns anyways, so we'll stick with that. And Jenny's also a part of wealth.com as of, I don't know, maybe like was it like six months ago or so that you were one of the attorneys on the platform?

[Jenny Roselle]

Time is weird. We'll go with it.

[Thomas Koppelman]

Yeah, sometime since they've been created, you got on the platform. But Jenny, we're really excited to have you here. Talk all things real estate. Everything from simple titling to complex transferring of assets between family members.

[Jenny Roselle]

Awesome. Well, thank you guys for having me. And I have to tell you that I listened to your guys podcast the last, last guest you had, Tyrone and I hope that I can mimic his energy level so you guys can grade me towards the end.

[Thomas Koppelman]

That's actually funny because Tyrone's maybe the highest energy person but you actually do match it. I don't think there's very many attorneys that we're going to bring on that the energy is going to be that high. But that's actually perfect back to back, now that I think about it.

[Jenny Roselle]

Setting the high bar, right?

[Thomas Koppelman]

Exactly. So I think, you know, real estate is obviously this really complex area and I think what you wanted to do is really start with some of the more basic side of things and just even just go through like documentation, titling, et cetera. So I'd love to hear from you kind of how to get this right and some of the mistakes that you often see happen.

[Jenny Roselle]

Yeah. So you know where my head instantly goes when I think of real estate and estate planning is all the mess ups I see honestly all the people that will pull deeds and things, things online and they try to do it themselves and they don't understand how property ownership may affect someone's estate plan. And it does. There's just endless amounts of mistakes that are made all dependent on when you initially draft that deed or you know, in some cases, some people just handwrite it and unfortunately those have significant legal consequences. So especially when people pass away and really what transpires with that person's ownership interest depending on how they own the property and their interest as well as what type of estate plan that they have. So from a very high level, that's where my Brain instantly went. Was, unfortunately, the mistakes that I see and that I clean up all the time.

[Thomas Koppelman]

Yeah. I think one of the most common things I see, like, from the Wall Street Journal to the regular Market Watch or whatever those articles are, like, what do we do? Parents passed away, Two of us don't want the house. Other sibling wants the house. They can't pay for the house. They can't buy us out of the house. They can't maintain the mortgage. What do we do? And so maybe it's interesting to kind of think through some of these conversations and, like, is this really, like, the parents issue? Right. Should they have thought about this better ahead of time and clearly spelled out and helped mediate these conversations? And how do you do that?

[Ann Rhodes]

Yeah.

[Jenny Roselle]

Oh, my goodness. Well, you know, first that the parents, you know, let's call them Mr. And Mrs. Client, they actually have the ability to spell things out pretty specifically like that, whether it's through things that are called, like, specific bequests, where they may want, say, like, you know, their lake home or their cottage in Michigan or whatever to go to very specific people. So very much you can do that. Though what I find mostly people will do of leave it to the kids or the beneficiaries to sort of, quote, figure it out later. And, you know, at that point, it's really the executor or the trustees responsibility to sort of weigh what the beneficiaries want and also kind of take into account, right. Like, you know, how much time do we want to give beneficiaries to line up financing? Or how much time do we want to give beneficiaries to, you know, figure out what they want to do? And so, you know, what I always tell beneficiaries in that situation is basically whatever they agree to, I can make happen. But so often they get into. One of my favorite things in the world is analysis paralysis, where they get into just throwing out all these different ideas and sometimes don't take any action. And the executor, trustee, they've got to keep things moving forward. And so it really can get a little hairy pretty quickly. And so, you know, to answer your question, sure. The parents, you know, whoever created the estate plan can put some pretty specific provisions. Most of the time, at least I find they don't. And then the beneficiaries are left sort of deciding what they want to do and how much, you know, time they want to waste. I shouldn't say waste, but how much time they want to spend kind of working things out. And I've Seen it work both ways. I've seen it where beneficiaries absolutely will come to a consensus and come to an agreement. I've also seen beneficiaries start duking it out World War Three style, unfortunately. So I've seen it all, as I'm sure Anna's seen it all too. But unfortunately, at the end of the day, you know, estate planning documents can. They can do a lot. They can do, you know, pretty little as well. But when you start adding people and personalities into the mix, that's when things get a little different.

[Ann Rhodes]

Yeah, I'm happy to jump in here and say, you know, a couple of things, you know, kind of horror stories or, you know, ways to plan around the horror stories as well. But the first thing I think that's commonly misunderstood is, you know, you, during your life or your client, you know, during their lives, may really be enjoying, you know, this property. And they think, oh, when I pass away, of course my children will all come back to the shore and, you know, remember the good old times and everybody will maintain the. This property. And, you know, it'll be great. But actually, you know, this is where an attorney can be so, so helpful to kind of give a reality check to the clients and say, do you really think this is going to happen? You know, is there a structure that we can put in place here so that it improves the chances that this will happen, that your dream, you know, for what happens upon your death will happen? Because the default, if you just leave a property to two or more beneficiaries is something called a tenancy in common. And that is a form of ownership where, you know, yes, there can be a specific percentage owned by the folks on the title, but actually every single one of them is on the hook for 100% of the maintenance costs, the taxes, etc. And then each individual beneficiary can actually use 100% of the property too. So it's not like, oh, you know, if I only own 50% of the property, I can only own half the house, like that. That's not how it works. So all of a sudden you're already seeing, like, antic. You have, let's say, one child who really loves that property, uses it all the time, but may not have the resources to, like, actually maintain it. And then all of a sudden that causes jealousy with the other sibling where they're like, I never come to the home, or I come once a year and you go every weekend. So now all of a sudden I'm supposed to be on the Hook for, you know, the taxes. And so that really creates a headache for the family. And you see beneficiaries really like, you know, siblings start fighting over whose usage and maintenance, you know, it's who contributes to the property. So then with some of my, you know, higher net worth clients, when they have a dream of passing on the same property to multiple beneficiaries, we used to have a very real conversation with them about potentially forming a trust for that vacation home or whatever. But when you form a trust which you know can be very detailed, as Jenny said, you can put anything in there, how they use it, you know, you can, you can really go into great lengths and you set up a trustee who's going to be then managing kind of that, that property. You have to also think about an endowment for your trust. And that's where even the high net worth clients are like, what is this endowment? It's like who's going to pay? How is the trust going to generate money to pay for the income taxes, etc. So with our clients, we basically, you know, modeled this out and said unless you have an endowment of usually it was like half a million to a million dollars just to start it, you know, then it's not even worth doing that trust potentially because you still have the same maintenance issues. So those are some of the things, you know, that you start thinking about. And the last thing I'll point out is sometimes you just give real estate to one beneficiary, right? So you may have a client who like owns the home for one of their children and we'll talk about intra family loans as well to help that child, you know, get started, down payment, all that stuff. But maybe that client owns a significant interest in that child's property and it's just one child. So they say at my death I want to just forgive the dead or, or just pass that property because it's in my name right now straight to that child. So they just own it outright. The issue then becomes one, if there is debt on that property, what do you do? Do you also pass it free of debt or is it subject to the debt? So that comes to Thomas and Jenny, you know, saying how, how do you service the debt? And the second thing becomes what about other beneficiaries? Because real estate tends to be a really significant chunk of that person's net worth. So are you treating all the other kids equally? That can become a huge issue, right, of like equalizing gifts between kids. So that gets tricky as well.

[Thomas Koppelman]

Yeah, I think the other issue I See, is that, like, even when you pass on an asset like this without a mortgage, right, there's all of these, like, quickly growing areas, right? So, like, I think about where my parents live right now. They live in Lake Geneva, Wisconsin, really nice lake. And it's like there's all these issues of all these people on lakefront properties that literally can't even afford the property taxes anymore because, like, just to have a spot on the lake is like $2 million. So, you know, parents maybe weren't that wealthy. They just had this place for 70 years. It gets passed down, and you're sitting at 50, 60 thousand dollars a year of property taxes. And that's just like a whole issue in itself to maintain.

[Jenny Roselle]

Yeah. And one thing I thought of while you guys are both talking is I'm sure all three. Well, I know I've heard it. I'm sure you guys have heard it, too, that, you know, properties come in different shapes and sizes, right? And so here in Indiana land, I work with a ton of farmers. I have a ton of farm families, farm clients that, you know, I really have to counsel a lot of clients into. You know, when they call attorneys, counselors, sometimes I really do feel like I'm a counselor because I will hear them say things like, I want this to stay in the family forever and ever and ever and ever and ever and ever and ever. And I hear that a lot with farm families. And, you know, what I see from my sea is, sure, it may go down the first generation, but when you start talking about generations after that, I consider that I'm not doing them a very good job if I don't really advocate for some sort of ripcord where beneficiaries are locked into this, you know, trust like Ann talked about, or any other kind of mechanism where, you know, by golly, they are going to keep that property in the family until Lord knows what year. And it's like, that is very unrealistic. You know, if someone came to the table and offered to them bazillions of dollars, you seriously would want them still to keep that. And most of the time, they will say yes. And so it's. It's to each their own, right? To each their own. And there's just so much counseling that goes on through these conversations from. From the legal end, from the financial end, from the tax, all of you know, all the different perspectives. I just immediately when you guys were talking, I was thinking about my many, many farm families that. And I've heard it before with, you know, lake houses and you know, houses down south in Florida and Arizona that they wanted to see the family. And it's, you know, there you just have to really weigh. I always say, tee it up, you know, talk about the pros, talk about the cons. And as long as my client knows what the pros are, what the cons are, I can say I've done a good job. If they understand totally what that options, pros and cons are and from there it's their decision.

[Thomas Koppelman]

Yeah, I love that you brought this up because I think you would apply this to businesses too. Like I'm thinking about, I have a few friends who like their parents own super, super successful businesses. And it's like the two boys are anesthesiologists and pharmacists and the daughter's a pt. Like things are not looking good that anybody's going to be taking over your business. But it's been passed down from great grandpa to grandpa to dad. And I remember asking one of my buddies about this recently and he's like, yeah, I have no idea. Like, we haven't really talked about it. It's like, yeah, that's, you know, your dad's like 60 something. Like you guys are very wealthy. Like you might want to retire. You guys are going to take it over. Like a lot of these estate planning things are just conversations that people put off and never want to have versus like let's have the hard conversation. But I know there's a lot of kids you don't want to like upset your parents. So you're like, well, mom and dad die, farm's gone. But right now we're keeping the farm, mom and dad for sure.

[Jenny Roselle]

Yeah, wink, wink. Yeah, keeping it. Yeah, yeah, yeah.

[Ann Rhodes]

On that note, with the businesses, I have to say, you know, it's interesting because my father in law has one of these businesses that was like grandfather to, you know, his dad and him now and he's looking at his kids, four sons and like, don't think I want to saddle, you know, two of them are lawyers, the older ones, the two younger ones, who knows? Right. And so it took him like a year and a half to two years to sell off his business in pieces because he came to the realization like this was the end of the road for his family owning this business, which I think is very prescient.

[Thomas Koppelman]

Yeah.

[Ann Rhodes]

And kind of like very self aware. But then I have, you know, I've worked with clients and their families where for their businesses. You know, they did keep them in trust and they set up whole structures, you Know, voting agreements or like voting trusts so that the kid who runs the business keeps, you know, voting the stock the way that he feels like it. And his sisters, I think, just trusted him. You know, they got the economic interests of the business, but they just trusted him to run his business accordingly. So you can do some really interesting estate planning structures for businesses, but yeah, you have to be really realistic about what it looks like. Yeah.

[Thomas Koppelman]

Okay. So let's kind of transition into some of the, you know, passing this on between family members. And the way that I think about it is I'm actually like working on a client right now who parents own a lake house. Parents are like, okay, this is going to you. Your siblings never use it. They don't really want to. But like, dad's not in great health, Mom's not in bad health. And they're like, well, you know, we're pretty close, like almost 60s, planning to retire somewhat soon. We'd love to have this place, but, well, why would mom and dad, they could gift it to me now and use the exemption, but then like now I have to take on and get a new mortgage, right? So that doesn't feel like a good idea. You know, the other one is like, well, what if we just like wait till they pass away, but then it's like, what if that's 15 years and their big thing is they don't want to put money into a property that potentially isn't theirs. Then you know, when they pass away, you know, their siblings fight about it and it doesn't work out their way. So I think I'm just saying that to like bring out like there. It doesn't always feel like there's like a really good way to do this.

[Jenny Roselle]

Where my head was instantly going is, you know, my practice is split between estate planning and also elder law. And you know, when I, when I start hearing people talking about gifting, you know, my elder law brain just like about extra explodes because, you know, there, there's a lot of considerations there. Kind of. We keep anchoring back to the same theme I think of, you know, there's just, there's a lot of conversations that have to happen and with all sorts of property, whether it's that, you know, someone wants to take a property like that, you know, gift it, possibly use some of the exemption, maybe not, and let it pass through their estate plan. Of course you get your potential step up in basis at that point. From my elder law side of my brain. Most of the time, gifting doesn't make a ton of sense. Because that could bite us in the rear at some point down the road. But that's just one piece of a much larger puzzle. And so it really comes down to what is the parent's goal, what are they trying to accomplish, and what are the true realistic options when the kids get involved and what they're able to do. Because last thing you want to do is get this house, you know, gifted to one of the kids and then the parents watch the kid not be able to afford it. And so just a lot of conversations have to happen in regards to these sort of things.

[Thomas Koppelman]

Maybe, maybe the best place to step back from this example and just talk and just educate people on like, what are your, what are even our options to think through in this side of things?

[Ann Rhodes]

Yeah, so I'm happy to kind of jump in here because I had a lot of clients like in New York and San Francisco who did a lot of interesting planning with real estate, particularly because it was like quickly appreciating and you know, they had some wealth to be able to like play around with, you know, and real estate is, has so many sort of benefits under, under both the income tax and the state tax side that it's kind of worth, I think, unpacking some of this. So the first things first, I think is, you know, just helping a child. Like when you're thinking your client is wealthy enough to do a wealth transfer, like, how do I help my child grow? You know, their slice of the pie, like the American dream. Right. And so much of that, I think for us is tied up in real estate in this country. And so, like, how do I help them with the first down payment or potentially even just buying the property. And so for my clients, the first thing, you know, if it's just a small chunk of that, let's say the down payment. There's a really cool article that just came out today, and this is, you know, April 1st, April Fool's Day in the Wall Street Journal that I encourage all of our listeners to listen, to read. And it's about using intra family loans to do some of this wealth transfer because it doesn't use your gift tax exemption or client's gift tax exemption. Right. So you're not touching the 13.61 million. You don't have to, you know, necessarily start doing even like gift tax returns because what you do is a loan. But the line between a gift and a loan can be very thin when it's intra family, when it's, you know, a mom or dad helping their kids. And so some considerations so what happens is you make a transfer of, let's say, $200,000 to your child to help with their down payment. But you structure it, you paper it, and the papering is very, very important. You paper it like a loan, as though you were the bank for that child. So you have to have a promissory note of some sort. That's the debt instrument. You should have a mortgage. So that's a, you know, kind of deed, you know, titling, you know, thing that attaches on the deed. And you should have some sort of payment schedule that outlines, you know, at this percent interest, you know, we're going to be paying, you know, on this kind of schedule. So think, is it amortized? Is it interest only With a balloon payment. You can structure that loan in different ways. There are certain ways that are more aggressive than others, you know, and then it starts looking less like a loan and maybe more like a gift. But by and large, as long as you paper it like a loan, you know, as though you were the bank, that's really good. You should talk to an estate planner at that point just to make sure you're on the right side of the loan versus the bad side. And giving a gift, right? Then you can actually forgive interest payments or principal payments using your gift tax exclusion every year. So every year every American is able to give $18,000 to any individual, right? And so that could be your child. And if you have a spouse now, it's $36,000. You just forgive that on the debt. And that's actually something that can also fast forward kind of, you know, the gifting of wealth transfer, although it's papered like a loan. So that was a commonly employed technique that my clients did. You can be very creative. I had a client who was so smart. So one thing I didn't mention is that interest rate, right? Like, why is it so good for you to loan versus a bank? And the reason for that is because you can gift at a much reduced interest rate compared to what like a private bank would give to your kid. So let's say right now the average interest is 7.5%. You can actually, you have to gift it at a certain level called the applicable federal rate. It's just a rate that's published by the irs and depending on the length of the loan, you know, it's a slightly different rate, but let's say it's a long term rate, it could be as low as 4.5% right now. So right there you've given your child a gift of like that 3%, you know, like difference. And so anyways, all of that is to say, you know, that's a really creative technique. Another technique. Oh, sorry.

[Thomas Koppelman]

I just want to add, I think there's levels to this, right? Like, I think there's like the maybe more middle class family who it might be like, let me help you on the down payment, right? And if you think about like the family that has like two parents, three kids, like you could give them quite a lot of money or you could even split it between a December and January payment where if you think about that, I mean 36,000 from the two parents per person gets you a long way. But then I think you're talking about like this next level of wealth of like, hey, we got to get money out of our name. Well, we couldn't pay for the whole house without using a lot of our exemption. So let's set it up in the loan this way. And even on like a $2 million property at 5%, even with that whole family structured in there, you do it right. You could basically forgive principal and interest every single year. But this is something that needs to be documented. Well, I want to definitely go into how to do that because I've come across a lot of people who they are doing this with no documentation. Like parents are just gave us a mortgage, right. And we're just doing it at 3% and they'll just follow market rates or whatever. Or hey, parents do this, this and this and they didn't even know. They just thought they were borrowing money from their parents and they didn't even know about AFR rates. They didn't know this was a, it would be a gift. If not, they're just like, mom and dad helped us out and we'll figure out how to pay them back when money comes our way.

[Ann Rhodes]

Right. Jenny's face said it's watching this.

[Jenny Roselle]

We like paper. We need paper. We need paper.

[Thomas Koppelman]

Kind of like how the IRS gives you like a three year thing. Like if, if it's past three years, statute of limitations limitations is passed. So like in all likelihood it's like, what is the chance that you're in that 0.1% that's audited, probably low, but you don't want to be the chance that it is. And then you're just climb back. Even though I guess it'd probably be you just lose some of that exemption. But still.

[Ann Rhodes]

Yeah, yeah. The issue with the irs, you know, that three year rule that you're talking about is, you know, there are ways to Start the three year clock. Because if you don't even start the clock, then the IRS is like, I'm free at any time to come and audit transaction, which is kind of an issue. And then the way that you actually do, you know, start the clock is by filing a gift tax return, which we can talk about in a later episode. But the idea here is like, how would the IRS even know that this was happening if the whole point is you structured it not as a gift, but as a loan. It shouldn't even be on your gift tax return. It's not a gift. So it's. That's. That becomes a very interesting question, which is why when Jenny made that face, I wanted to make the same face. Because it's like papering is so important. Because the first thing the IRS auditor will ask is like, do you have paperwork to show this, that this is not a gift but a loan? Do you have payments to prove, like literally checks from your kid showing that they've been making these interest payments for X number of years? And I will tell you, I once, for a client, had to go back and try to figure out the paper trail. And I was sent all of these Venmo screenshots from the child for like, you know, a few thousand dollars every mom and dad. And of course some of them are missing because the child forgot that month or it was Christmas and they were spending the money on something else. And that starts to like, really muddy the water. So you have to kind of commit to this idea of the loan if you're going to go that way.

[Jenny Roselle]

Can you imagine the, the professional fees and doing this like, cleanup work? Right? Like, it's kind of the classic, like, you do it right and you probably save yourself money in the long run versus you don't do it necessarily the right way. And you very well could be paying, you know, people like me significantly more money to do this cleanup work. And the cleanup work may not indeed, actually clean it up. We just cross our fingers and hope it does. And so it's kind of the classic, like, you just need to do it right from the get go. And I hate to, I hate to be so, you know, kind of, you know, old school about it. But at the end of the day, you know, if there's one thing I hear from most of my clients, I want to say like all of them, but is they don't want Uncle Sam in the mix. They don't want to pay more taxes. Well, if you don't want to pay more taxes, then you need to Be willing and able and ready to commit to doing things the right way as well. And this is to do things the right way is documenting your way through this kind of transaction.

[Thomas Koppelman]

Yeah. I think this applies to so many things, though. Like I said, recently met with a prospect who DIY to holding company with three businesses. And I was like, they're like, we want to check the structure. I'm like, you need to go to an attorney. Like, I could tell you that this is not right. How to fix it. I don't know about that part, but, like, the amount of things that I see people to try to DIY to save a few thousand dollars that is going to end up causing tens to hundred thousands of dollars in fees, taxes, penalties, et cetera down the line is just. It's crazy what people think that they can do from Google.

[Jenny Roselle]

Yeah. And a lot of times it's not even malicious. Like, a lot of the times it's not like, oh, I'm not gonna pay a darn lawyer to do that. It's that they just genuinely think. Like when, you know, when I was at the very beginning of this episode when I was talking about, you know, them people pulling deeds and things online and going to the county office to, you know, fill out their blank little forms like, like people are like, maliciously trying to cost themselves more of a hard time. It's just, they just don't know. And unfortunately, when you know, you don't exploit your options, that's just the way sometimes the cookie's gonna crumble. And, you know, I dare say if you start talking about real estate at all with the whole topic of this episode, when you start talking about real estate at all, it is never going to hurt you to get an attorney's advice. Even if it feels so simple, it's not going to hurt you.

[Thomas Koppelman]

Totally, totally. Okay, cool. So we hit on inter family loans, AFR rates. What are some other ways to maybe be passing on real estate? And the good and the bad of.

[Ann Rhodes]

Those routes, I'll mention a couple if I can jump in here. The second way that I've seen clients pass real estate specifically is a trust called a qprit, and it's qprt. And what that does is try to reduce the amount of gift tax exemption that you're using on those transfers. And it's specifically for property where you yourself or your client owns it and is trying to retain some sort of, you know, usage right over that property. One of the things that can be confusing for clients when they're doing these big transfers is in order to have made a successful transfer out of your own estate. Right. So it's no longer within your taxable estate for your client is that you can't keep using the property, you know, you can't retain the benefits of it, it has to go to your descendants. And so with a Cuprit, what happens is you can chunk out the gifts to your descendants, but you want to retain for a certain number of years perhaps the use over the potentially the whole property. And so what you do is you retain an interest within it and that is calculated at an interest rate that is set by the government. So you know it is reflective of the current interest rate that you're in that environment. And we'll talk a little bit about why that matters. But anyway, so you retain an interest in it and what remains after a number of years when that property has been sitting in that trust and that trust terminates, let's say after five years, that remainder interest then passes to your descendants and you can take a property, chunk it up, do a five year cupid, or let's say a three year cupid, five year, seven year, ten year and kind of like give out little pieces progressively to your beneficiaries. It was very popular and it is very popular when interest rates are really high. So this was a technique that we didn't really see for a little while, you know, until more recently when interest rates have increased and all of a sudden right now qprits have like resurged in popularity as a result.

[Thomas Koppelman]

What's the discount part of it? I always see people talking about like there's a discount component, I've seen like posts recently that like through using them you can get pass on real estate at a 45% discount. Now I think I just saw a thread about that last week.

[Ann Rhodes]

So the idea is that that's the value that you've retained, you've retained the use for five years, that's calculated at that interest rate. And so when you calculate the difference between the remainder interest and your retained interest, that's where you got the discount. Because let's say you passed property, a property chunk or like a value of 100k and the remainder interest was valued at 55% of the total and your retained interest was the 45%, that's where you're seeing that discount because you passed full value of 100k but you didn't claim a tax exemption.

[Thomas Koppelman]

Usage of 100k usage mean living in it pretty much. Or like how does it really enforce? Because like if that was My parents. And I'm like, I can bring guests whoever and whenever I want. Like, what is there to say? I can't invite my parents to come up for 18 weekends a year.

[Ann Rhodes]

Right, so exactly. So actually, you know, as long as the parent still has that retained value, they can actually use the whole thing. Remember we talked about tenancy in common? How like x percent, you may own only x percent, but actually you retain the use over 100%. So that kind of follows this retained use. So you own only X percent because that's your retained use. But actually the entire property is available to your parent to continue using if they're the ones doing the Q print, if that makes sense. So it's, it's a really nice way to like slowly have the parents kind of like let go, take the value of the property out of their taxable estate so that, you know, when they pass away it's completely out of their hands and doesn't, you know, inflate their own taxable estate but also not use the tax exemption over the whole value of the property. So again, in that example, let's say it was a hundred k house, instead of filing a gift tax returns, that uses 100k of my tax exemption. Instead you've just claimed, you know, 55% of that, like a 55k gift and you retain 45k.

[Thomas Koppelman]

Is this more of a strategy for people over the taxable estate? Like if you were, if you were like, hey, we have 2 million net worth, is this even something that you would like? My mind goes like, you might as well just gift it to somebody. Like if you're never gonna have a worry about estate tax issues.

[Ann Rhodes]

This is for somebody who for sure is hoping to squeeze every dollar of tax exemption that they can out of that transaction. So they don't want to just do a one to one transfer of their tax exemption to that heir. Right. So they want to, instead of having a 13.61 million million exemption, they actually want to inflate it to potentially like 20k. 25k. Sorry, 20 million. 25 million.

[Thomas Koppelman]

Okay, that makes sense. That's a good strategy. Jenny, what about just gifting in general? Like let's say I'd love to kind of go through the like, okay, if parents are going to give real estate to one child, for example, let's say they keep it simple. Like what is, what is the upside and the downside of doing that while still alive versus passing, waiting till after they pass away?

[Jenny Roselle]

Yeah, actually that question and your last question sort of go hand in Hand because what I was thinking, you know, if you have someone that's more, you know, more maybe middle class, average net worth, not high net worth, that maybe they do want to consider gifting for whatever reason. Right? I mean, the reason they're gifting sometimes doesn't matter to us. They may have just their own motive or reason to gift something to someone else. You know, a strategy maybe that's, you know, that they could potentially ackn. Explore is maybe gifting as well as retaining what's called a life estate interest, which basically also gives them the ability to remain in the house and they still have the rights to, you know, continue to enjoy it. So it's kind of a. Maybe a more average net worth ability to do exactly what Ann was just describing. But for whatever reason they're wanting to gift the property out of their names, they could. They could do that for whatever reason and maintain a life estate interest. And you know, the reason, you know, that I mentioned right before we started recording, I work with, you know, not a ton of people that are, you know, super high net worth. And so that's why I actually asked Ann to speak more into this. And so, you know, I come more from a place of. Those are kind of my people that, you know, the people I often help, Thomas, are those people that, you know, most of the time, transparently, they're not looking to gift. They're really not too close, or I shouldn't even say too close. They're not close at all to any sort of estate tax threshold. The only time I ever hear people, my kind of clients talking about gifting is when they're trying to gift out of their names for, you know, say, protecting it from, you know, quote, the nursing home and things like that. So from my side of the table, I don't deal with a ton of gifting unless there's some very specific reason to do it. Like they're trying to help their kid get off the ground or something like that.

[Thomas Koppelman]

Well, I was thinking about just the. The thought of, like, okay, what if parents, you know, maybe they have a second little lake house or something. And for them it's like we don't really have the ability to go use and enjoy it and we don't really want to maintain the. The property and the cost, etc. So it might actually just make sense for us to give this now.

[Ann Rhodes]

I do.

[Jenny Roselle]

They still. A lot of my clients still don't do that. They will wait until they passed away and they'll set their estate plan up to absorb Something like that. And I do do a lot of estate plans that, like Ann was referring to earlier, that may build in, you know, a little trust to house that property. And what I usually encourage them to do is to plop some money into that trust as well, to take care of the expenses, the maintenance, the da, da, da, you know, all the things. And still, you can tell, this must be what's at the top of my mind, still give those beneficiaries a rip cord. And so, you know, most of the time my clients aren't really gifting too much. They'll put those kind of specific provisions in their establishment estate plan to say, you know, leave the lake house to the kids or leave the farm to the kids or whatever. And we'll just strategize different ways to, you know, try to accomplish what they're attempting to accomplish and really set the kids up or the beneficiaries up for success as well. And usually that means plopping some money inside that trust as well.

[Thomas Koppelman]

Okay, that makes sense. What about you? Do you think there's any downsides to gifting while still alive that you guys can think of?

[Ann Rhodes]

I mean, it's that you lose the access to the property because the idea of gifting is, you know, you can't, you know, if, if the whole point is to get that thing out of your taxable estate, you have to be willing to like let go of the use who gets to decide what happens to the property, including maybe selling it at some point. Like you have to put that in the hands of others, but no step.

[Thomas Koppelman]

Up in cost basis issues or anything like that.

[Ann Rhodes]

The one thing I will mention also is I did have clients in this ultra high net worth space who, you know, they're like real property landlords, you know, they have like extensive real estate portfolios. And there, you know, the major downside is cash flow loss. Because the idea is, you know, this is how they generated their income, right? They lived a really nice lifestyle, now they're starting to gift away the real property. You have to gift away the benefits, the economic benefits, which is not just use, but the income that that generates as well. So you have to really use a financial advisor's help to model out what that income is. What is the income per, you know, real property asset, perhaps even like they were put in an llc. What's the income that you were expecting and living off of from that llc? And what does that mean to your cash flows? The other thing you worry about with real estate, I'll just point out if in case you have a client like this is that real estate is not very liquid and you don't want to be forced to fire sale it upon death. And so one thing that ended up impacting a lot of our clients who had, you know, extensive real estate portfolio is if they have a taxable estate, if they have huge, you know, tax bills, how are you going to generate liquidity to pay for those things? And sometimes it's actually, as a financial advisor, worth it to talk to that client about having a life insurance wrapper or, you know, life insurance proceeds to generate liquidity so that the beneficiaries are not stuck with an enormous tax bill that they have to generate cash for by selling property at a fire.

[Thomas Koppelman]

This is one of the best permanent life insurance uses, right? Like, I'm not the biggest proponent until you get to that high net worth space. And then there are some good uses, just like liquidity and paying estate tax. I think that's a really good one to add.

[Jenny Roselle]

Can I add two super quick things?

[Thomas Koppelman]

Yeah.

[Jenny Roselle]

Okay. So one is a fun little nugget. So on my podcast, I recently did a podcast episode on Joe Robbie, the founder of Miami Dolphins, and that's exactly what he had to do, Ann, where when he passed away, his entire estate value pretty much was in the stadium that he built and his team, the Miami Dolphins. And so, long story short, they had to sell both of them to pay for all the administrative expenses, including estate taxes. So there's a fun little nugget. The second thing, which is, I guess, I'm guessing on the theme of fun little nuggets, I tell clients when we start talking about gifting, I've totally made up a word that I need to, like, trademark or something, because I call it a gift is untake a back able. Like, it's. Once you gift it, you can't take it back. Like, it's. It's untake a back able. I know that's not a word, but it's a funny word, and it usually makes people laugh. But I have had clients where they will gift, you know, interest or shares of a farm or a business, and, you know, something has happened and they're like, hey, I want that back now. And it's like, I've seen where the kids are like, sorry, dad, not giving it back. So gifts are un. Take it back bowl. Just to add on to what Ann mentioned, that you just got to be okay with it. It's gone.

[Thomas Koppelman]

I think this is. That's like the perfect, you know, way to think about financial Planning, estate planning, et cetera, is like, I think you can really lead with what's the best way to minimize taxes, do this. But it might not be the best thing for somebody's life. And I'm thinking of an example of somebody that I worked with that, like, they were super wealthy for a second. Like, it was like, they sold business. It was worth like $30 million. They were 40 years old, but, like 75% of it rolled into new company. That company went from $10 a share to 70 cents a share. Right. And luckily, they weren't people who ended up using irrevocable trust, moving a lot of this stuff out of their name. Because if they did, I mean, this person went from like 25 million net worth to like 3 in a year. Maybe that's gonna bounce back. Maybe it's gonna be great. Or maybe they're 3 million net worth. And it would have been really unfortunate to have half of that into some irrevocable trust, because in that year, it was the best idea because they were so wealthy at 40 years old.

[Ann Rhodes]

Yeah. You also have to have a real conversation with your clients about what they imagine their future to be. I've had so many clients who, you know, made the money, were like, I'm ready for my next startup or whatever. And then it turns out they just wanted to retire. You know, five years later, they come to you after doing all these gifting, this gifting, and then they're like, actually, I don't want to work anymore. And then you're like, how are you going to generate that income? And so we always had a saying which is like, do not let the tax tail wag the lifestyle dog. You need to live your life. And then worry about. About the taxes. Taxes is a good thing.

[Thomas Koppelman]

But yeah, Gordon, like, as financial advisors, state planning attorneys, to hear this and think it, because right now, like, we have a client we're working on that's very, very wealthy. He should be able to sell his business the next few years for they don't know anywhere from 100 to $200 million. He owns 90% of it. He doesn't want to give it to anybody. He's like, I've helped my kids, you know, over the next five to 10 years, they're still a little younger. We can fund life insurance for the couple million I would give everybody, but we're gonna spend every dollar we have left. And we keep meeting with some estate planning attorneys, and we're like, hey, listen, they care about charity and spending this money, and they're like, here's you should do irrevocable trust for this, this, and this. And he's like, can we go interview a different attorney? Because they're obviously not listening to me. And I think sometimes people forget as professionals in our jobs, it's not to give you the best tax planning strategy. It's to give you the best strategy that funds your life, that ultimately next is tax efficient. Right. Like, it's that before that, not the flip side. And I think a lot of people get really caught up being there.

[Jenny Roselle]

You need to drop the fictitious mic. There you go.

[Thomas Koppelman]

Well, cool. Is there anything else that we need to hit on in this topic as it relates to kind of real estate?

[Jenny Roselle]

Do we dare go down the timeshare rabbit hole? I don't know if we want to or not.

[Ann Rhodes]

Maybe a litter day. We want have you back, Jenny, so that we can talk about those timeshares. I think all of us love.

[Jenny Roselle]

Yes. I'm fine with not going down that rabbit hole. I'm totally fine with it.

[Thomas Koppelman]

Well, perfect. Well, Jenny, we really appreciate you coming on and kind of sharing all the info with us. I think you'll be a repeat guest for us between my podcast and this podcast. But we really appreciate your time and everybody, thank you again for listening. If you want people like Jenny to keep coming back, let us know. Send us our questions. But please leave a review, subscribe and we'll see you back for the next episode.