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Foreign.
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What is up? And welcome back to another episode of the Practical Planner podcast. I am your host, Thomas Gopelman, co founder of Allstreet wealth and head ofcommunity@wealth.com and I am here with Ann Rhodes, chief legal officer of wealth.com and thanks for joining me.
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Thanks, Thomas. It's good to see you.
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B
Yeah, it's good to see you, Thomas.
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Like meeting with you to record these podcast episodes is actually one of the easiest parts of my job. I feel like we just like pop on, have a really organic conversation about these topics, you know, things that have come up in your practice, my practice, you know, and just kind of jam.
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B
So, yeah, I'll also say that this has maybe been like my core learning area of my life right now. Like this year I was like, you know, I think I know estate planning decently well, but like, my goal is to know it really well. And then naturally this whole role came about and now I get to sit down with like the best estate planning attorney I've ever met and just pick your brain and learn. Like, I don't know how I'm getting paid for this. It feels like I should be getting, like I should be paying you guys for all this learning I'm getting.
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A
Well, Thomas, let's spread the wealth over here, as it were. Pun totally intended on that one. Let's carry the brand.
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B
Let's do it. So I think there is a lot of confusing terms in the estate planning world, and this was something I brought up to you after the last couple episodes is like, you know, we're starting to go through things and I think we're getting a good foundation laid. But then we realized, like, there's a lot of terms that we're bringing up that advisors don't know. I know my clients for sure don't know. Like, I even I signed a new client a couple of weeks ago. Like, high net worth person, they own a great C corp, like doing a great business. I was like, you have your state planning done. And their response was, what is estate planning? And I think we forget that this is like, you know, a whole different world for most people. Most financial planners don't even talk tax planning, let alone estate planning. And so, like, laying the foundation is really important. So today's episode, I have a list of 21 terms I'm going to bring up to you that I want you to help explain. And some of them are like, hey, this is, you know, two words mean the same thing. People just use them interchangeably or different states use them. But let's just start off. I think we have a, you know, hopefully they all build on each other, but first word is grantor.
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A
Grantor. Okay. Well, Thomas, I have to say, asking a lawyer to define terms, that's probably our favorite thing to do. But if this episode gets a little dry, you know, hang in there with us. So grantor is, is the person who creates a trust, although it is also used for income tax purposes. So let me unpack that because this is one of the important terms. So a grantor, a settlor, a trustor, all of those terms really is the person who has created a trust and given it something. Right. Like funded it. And the income tax code uses grantor specifically to mean a see through trust, in effect, where even though you've given something to that trust, there is like somebody who has to file the income taxes on the income from those assets inside the trust. And if you have a grantor trust, it is the owner or the grantor of the trust who files the income taxes on it. So I wanted to throw that out there because it's used in two ways. One is just simply who's created the trust, and the second is an income tax result.
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B
Perfect. Well, we might as well stay on that topic. So then if it's non grantor, then what does that mean?
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So non grantor means the trust itself pays income taxes. Right. Because then all of a sudden it's as though the trust became its own taxpayer. Right. That's what the code treats it as. And so the tax brackets will be those of the trust and estates brackets. Right. So we all know, you know, they're like joint, individual, joint individual, separate, you know, all these different tax brackets. Well, there actually is a tax bracket for trusts and estates, and that bracket is actually even more compressed, meaning you hit that 37% marginal, the highest marginal tax rate at a lower income threshold. So anyways, trusts get to pay their own income taxes if you want them to.
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B
Perfect. I love the depth that we got into there. What about trustee?
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A
Trustee, okay. Trustee is the word that most people are most familiar with when they think about a trust. That's the person who takes the assets and holds the legal title of those assets, but on behalf of somebody else potentially. Right. So this is the person you trust. It's like in the name trustee trust. So let's say, for example, if I am creating, I am the trustor, the grantor, I'm creating a trust for you, Thomas, because I love you so much. Then you, you know, I may think H. Thomas is not Ready to, you know, take those assets, like enjoy them himself. But I trust, you know, my husband to be holding the assets on your behalf. So the person I trust to hold the assets is that trustee. So my husband in this case would be the trustee.
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B
Perfect. Okay. And then beneficiary.
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Beneficiary. So in my previous example, I love you so much, Thomas. I want you to have these assets and you know, enjoy them. You're just not ready, you're too young or something. You're not ready to have them. Yeah, you are the beneficiary. So I create, I create a trust for you. You get to go and enjoy those, you know, the fruits of the assets. But my husband will be making decisions for when you get those assets, how you get to enjoy them. So he's the trustee, you're the beneficiary and I am the grantor.
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B
Perfect. Okay. What about trust protector?
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A
Trust protector? Oh, that is a term that different lawyers like to call that different things. But by and large it is like a trustee but with special powers. It is somebody who is a fiduciary, meaning you have to trust them. They have a lot of different responsibilities under the law, but they do things like perhaps modify your trust after you passed away. Right. So this is like a really important power they have. They may have the power to fire your trustee and you know, replace them it in under different state laws. You know, the trust protector role has different specific powers. But think of it as like a powered up trustee. Like this is somebody who really has like one time very significant powers.
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B
Okay. Oh, that's a good one. What about sub trust or testamentary trust?
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Okay, so I like to think of them as basically the same thing. I use them interchangeably. But some people get like a little fancy about it because testamentary has to do with wills. What they are is you create a will or trust. That's your main like legal document for saying what is going to happen to your assets when you pass away. But within that you might say, hey, I want to create another trust that is going to continue on even beyond my death. So that way, you know, somebody who's too young to have the assets, you know, I'm going to wait until they're 25 or 30 before they have the assets. That kind of trust that is built within a will or irrevocable trust is called a sub trust. It's a trust within a trust or trust under a will and it just continues on for longer. Right. So think of it this way. If you pass away with a revocable trust, it takes about two years at most to like, really get your affairs in order, distributed them correctly, etc. So that Rev trust, just like its life, ends in about two years. But if you want it to continue on, you know, because you want to protect assets from divorce from your kids or whatever, that's when you create a sub trust. And these sub trusts have all sorts of crazy names based on, like, the objectives you have for them.
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B
Yeah. So that's where we kind of go into like marital trusts or family or bypass or credit shelter trusts. Do you want to go into any of those or you think it's just good to know trust?
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A
Yeah. So each of those types of trusts and it really becomes an Alphabet soup pretty fast, is again, remember, this is a person who's passed away and they just want a trust to continue on past their lives. And so there needs to be an objective. Like, why do you want to continue a trust? Because potentially they're paying higher income taxes. And like, it's annoying sometimes to deal with trusts. Right. So there needs to be an objective. Marital trusts. The objective is to, you know, let your spouse, your surviving spouse, enjoy the assets during their life, but once they've passed away, you'd like to say where it goes after that. Right. So this is the perfect kind of vehicle for like a blended family situation where you're a little worried about the surviving spouse completely disinheriting, like, your preferred beneficiaries. So you put that in place. Credit shelter trust or bypass trusts is a tax planning tool. Right. So the objective there is let's form a family piggy bank where those assets, regardless of, like, future beneficiaries passing away, will not be subject to the transfer taxes. And we'll go over that term too, but that's your estate tax or your generation skipping transfer tax. So like, regardless of who lives, who passes away, there's a family piggy bank created where that those sets of assets will not be subject to those taxes again.
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B
Okay, perfect.
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What about trust or something? Yeah, or like an issue, a trust for issue or whatever term. You know, trust for Thomas. It's like a trust that you put in place for usually a younger beneficiary, somebody from a lower generation. And you just think, hey, they're not going to be ready to have these assets outright if ever, honestly. And I just need to form this protected trust for them so that they get to enjoy the assets but they can't control them. That's the baseline.
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B
Okay. Okay. And then what about education trust?
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Education trust is Like a subset of the trust for descendant or a trust, you know, for specific beneficiary, but specifically for educational purposes. So usually people say, you know, having a college degree like that will set you up for life. Right. And so do I want to pay for your wedding or something else? Maybe not, but at least education, like if, if I've set up my grandkids to have an education and pay for it, that seems worthwhile. So it's almost like a 529 account, but you don't yet know who these people are. And so you just set up like a generational piggy bank for education.
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B
Gotcha. Okay, cool. So now moving past some of the trusts, what about durable power of attorney?
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So now we're getting into other kinds of like non trust documents. And so durable power of attorney is any document where you say, if something happens to me, if I'm not around to sign or make a decision for myself, then I want my agent so somebody else to have that power for me and be able to sign on documents on my behalf. That's the power of attorney. And you can have two kinds, generally speaking. One is over financial matters and one is over health care matters. Right. So those are going to be kind of the same concept but just different kinds of powers. And durable, that term durable shows up in a lot of places. What that means is you have powers of attorney that just terminate when that person, like the principal, the person who signed the power of attorney, is not able to supervise. Right. So if you've lost capacity, you're, you know, in a coma or something like that, that power may just go, poof, go away because you're just not around to supervise. Durable means even if I'm not able to supervise, even if I'm incapacitated, I want this agent to continue having that power. So by and large for estate planning, you want all your powers to be durable. Because that's the point, you know, the point is if something happens to me, like somebody needs to pick up the ball and be able to sign my tax returns or do whatever else.
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B
So yeah, that's an important note because like for us as advisors, we have limited power of attorneys over like investment accounts, but obviously very limited in the scope of what we can do there.
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A
Yeah, exactly. And you can imagine, you know, you understand why, which is your client still wants to like supervise. Right. And so if all of a sudden, you know, they're in a coma, they don't want you necessarily to be investing on their behalf without them knowing.
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B
Yeah, yeah. That makes Sense. Okay, cool. Now we're kind of taking another turn here, I would say. So what about community property state versus common law? Again? Like, I think something advisors just like here, but then they're like, yeah, I know those two exist, but that's, that's where, where it ends.
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A
Yeah, it's hard to kind of wrap your mind around it, especially now because you have certain states that weren't traditionally community property that where you like get to choose as a client to have community property. It's like kind of getting messy. But traditionally there were nine states out of, you know, the 50 plus DC that were community property. And that's like kind of historically think of it as like a holdover from like Spanish and like French law. And so, you know, think of like California, Washington, Texas, like the states out in the west, like Southwest that tend to be the community property states. And what happens there is that titling, it takes a backseat to the fact that you earned an asset during marriage. Community property is at the end of the day about marriage and what gets to be controlled by the two people who are married to each other. So what I mean here is. Let's take an example, right? I am in California, but I used to live in New York. I work at wealth, where I'm getting some equity compensation at wealth. Because I am married and living in California, my wealth stock is in my name, right? But because I'm earning it during my marriage, my husband actually has a half interest in my stock, even though his name never appears on my stock, right? So if we were to divorce or if I were to pass away, technically my husband has the ability to take half of the assets, a divorce or death, into his own name. But that is not necessarily the case in a non community property state. So think of your, what we call common law states, right? These are like the traditional, like the 13 colonies. So like Massachusetts, New York, whatever, all the other states. So there titling matters a lot more, right? So if I were to divorce or if I were to die, there becomes a question as to like, what's equitably split. But that stock is only in my name. So the presumption is that it should be mine first and foremost. And only then do you get into like, well, what other assets do people have to like make up, you know, the other half of the spouse or whatever else. So that's a huge difference. Like automatically by just working at wealth while married, while in California, my husband gets half my stock.
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B
So he's like, go, yeah, go work somewhere with a lot of equity. That's great for me.
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A
I mean, the typical example here was Jeff Bezos when he got divorced. Think about that. People were really worried. The shareholders were worried about McKinsey Scott, and because she gets a half interest in what he's made at Amazon. So, yeah, that's crazy valuable.
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B
Okay, what about joint tenancy?
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Joint tenancy. Okay, so that's a way to hold property, right? That's where we get into, like, titling. Like, how do you, as a, you know, joint owners, co owners decide to hold property and that actually, joint tenancy is just one of the many ways there are things like tenancy in common and tenancy by the entirety. And like all these tenancies. Right. But all that it means is under law, the title gives you some sort of default rights with your co owner. In the case of a joint tenancy, the very important thing that happens is there's a right of survivorship. And sometimes it doesn't even need to be clearly spelled out in the title with like, ros, or right of survivorship. And it automatically applies. So this is usually. So let me paint you a picture here too. Okay? Let's say you, Thomas, do you have a sibling? You have a sister?
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Yep, I do.
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A
Yeah. So you and your sister get to choose. You want to buy a rental property together, and you want to choose between tenancy in common and joint tenancy. Those are the two available to you. If you choose joint tenancy at your death, Thomas, your half of that property goes automatically to your sister. It does not matter what your will says. You know, you might want to protect, I don't know, your parent or your spouse or something. It does not matter because you had joint tenancy. It came with the right of survivorship. Your sister automatically gets the whole property as the survivor. But if you had chosen tenancy in common, you actually get to split between you. Like, do you want 40, 60, 50, 50. Like, you actually get to assign a percentage to it. And whatever that percentage that you own is, goes by your own will. Instead of going automatically to the co owner, your sister, it could go to your spouse because that's who is the beneficiary of your will. So that's a very different distinction.
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B
Okay, I mean, learning something new every day here. What about intestate?
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A
I hope you never have to use intestate. Guys, if you're getting in the world where you're using intestacy as the term, you really got like an estate planning degree. Intestacy is just a fancy term for. You don't have an estate plan. So it's like, yeah, default law. It's like, you know, you passed away without a will. You weren't even like writing things down on a napkin. It was just like nothing. And so there is a whole set of laws, you know, from the legislature of that state where they've decided, hey, if you pass away without, you know, that document, then by default it's your spouse, otherwise your kids, otherwise your parents, whatever. Whatever that hierarchy is.
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B
Okay, perfect. What about testator is that. I mean, like, I'm not the best at pronouncing these things. I'm like, I know, like these top terms. And earlier today I was like, hey, maybe we should go over some of these terms. And I was like, no, I think I'm good. You correct me on everything.
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A
Yeah, no, so testator is. We're getting into the tes. Tease of the world. So that all has to do kind of with wills. Right. So like testamentary trust. Testator, like, think Will Testament. That's like the old school name for will. And so testator is the person who writes a will. And so it actually, very funny enough, in old school, the old school New York law firm I worked in, some of the partners like to use testate tricks for a woman as opposed to testator. And so you might still see that actually, like executor. Executor tricks. So you can see some really old school terms in wills.
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B
These are. Yeah, some of these, like you hear from an estate plan training every once in a while, and then I'm like, these are terms like maybe I've heard twice in my life.
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A
There you go.
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B
All right. Executor. I know, I got that one right.
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A
Yes, exactly. So actually, I just mentioned you can have an executrix. So that is the person you trust to divide up your assets and to represent you in front of the court. There are different terms for it as well, because, you know, there is that probate process if you pass away with a will, so, you know, your trusted person, the executor, is going to have to show up in court and, you know, represent your estate in front of the judge. And so sometimes it can be called an administrator or personal representative. The different states prefer their own terms, but by and large, like, people kind of get executor. I think it's like your trustee before will.
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B
Yeah. Is it? Do you feel like it's an honor to be selected as it.
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A
Oh, my gosh. So I know I've been selected as somebody's executive.
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B
Me too.
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Not excited to be honest, I'm like, thanks, man. No, thanks. But I guess, you know, I'm in this business, like, if I say no, who's gonna say yes?
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B
Exactly. I. Like, my dad asked me, and I'm like, I'm honored, but, like, I will do it, but I don't want to at all.
- [20:39]
A
Yeah, yeah. And that's actually the reason why it's so important to have backups, because you just never know what that person. Like, they say, yes, no now, but maybe they'll have kids or something's happening in their lives, and they just can't handle that responsibility. Give them an out, you know, give them somebody else to. To help them with that. But, yeah, I think it is an honor. It's just a lot of work.
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B
Yeah, it's an honor. And not a fun job.
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A
Yes, exactly.
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B
Okay, what about a will?
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A
A will. So that is a legal document where you get to spell out, you know, who is your executor, who do you trust? You know, with this very important task of representing you before the court and actually dividing out your assets and signing your tax returns, things like that, you get to decide where your assets go and how. Right. So, again, remember, testamentary trusts, you can actually build trust within your will. And so if you decide that you want, you know, your assets to be held up for a little longer until a beneficiary is old enough, that's a sub trust you build out in a will. And then you also get to decide guardians, usually through a will. So those are, like, three of the very important things you get to do through a will.
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B
Yeah. Okay. What about irrevocable versus revocable trust?
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A
So we have a whole episode before about this, but very briefly, you know, these are different kinds of trusts, but the very important distinction is revocable means that you get to just change your mind as the person who, you know, holds the power to revoke and say, I don't want this trust anymore. You know, I created this with this, you know, template that I don't like. And you know what? I actually want to simplify and go to will or whatever reason. You just do away with the trust. Totally fine. Irrevocable, very different. At the point in time where you put assets into that trust, you've created it. Your beneficiaries will start, you know, they have rights, legal rights, and they have a right to complain and be upset if you were to change that trust.
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B
What about trust administration?
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A
Trust administration. So with a state administration, I mean, administration, that's just in the name it just means that process of, like, making the terms of the trust, like, effective. So there's a whole. It's a procedure. So usually for a revocable trust, the person has to pass away, the grantor, the trustor has to pass away, and then you enter trust administration. So this is where you have to gather all of the assets. As a trustee, you have to make sure they go to the places they need to. You issue the notices to everybody, like, et cetera, et cetera. I mean, that's the whole process of making sure the assets go where they're supposed to be. That's trust.
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B
Okay, perfect. You're killing this so far. I mean, this is incredible. Now we're going to tax ones. So let's start with transfer tax.
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A
Okay. Transfer tax is a broad umbrella term for all sorts of taxes that we worry about in estate planning. And so there are three types of transfer taxes. The estate tax, the gift tax, and the generation skipping transfer tax. But all of those, generally speaking, are referred to as transfer taxes. It's like when you give something to somebody else, like a gift. Right. And I usually think of that as a different. Like, I draw the. The comparison with income tax. So income tax versus transfer tax. In estate planning, we worry a lot about the transfer taxes, which, as estate planners, you may not even really truly think about that much. To be honest, you're probably thinking a lot more about income taxes. Right. And so that's why I thought it would be useful to hear what a transfer tax is.
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B
Okay, well, let's go into estate tax next.
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A
Yes. So the estate tax is the tax that's imposed when you pass away, and your estate, you know, is made up of anything that you owned, but actually all the things that you had control over. Right. So we can go into a lot more detail about how, like, your taxable estate is composed of. But generally speaking, it's like your net worth. Right. It's a little broader than your net worth, perhaps, but that's at least how to think about it. And if in the United States you have over a certain threshold amount, and this is different by state, some states don't even have an estate tax. But if your state does, you know, it tends to be lower. At the federal level, it's 12.92 million right now per person. So in any case, if you have a taxable estate, then there's a 40% tax imposed on every dollar above that threshold number. So that's what the estate tax is. And it's imposed on your estate, not on your beneficiaries. So your executor, your trustee, pays the tax out of your stuff before it gets divided out to your beneficiaries. Here I wanted to mention also, there is something called an inheritance tax, but that doesn't exist at the federal level. It's really like states like New Jersey have an inheritance tax. That tax is paid by the beneficiary. So first your assets get distributed out. You know, you, Thomas, could be my beneficiary. You get a big check or something. Then you, at the time you receive it, need to pay the tax out of your share.
- [25:59]
B
Okay, good. Add on. So then what about gift tax?
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A
The gift tax happens not at death, but during life potentially. So this is also the interesting thing here to note is. So you transfer assets out during your life, right? You give a big gift, like a big check to your child because you're helping them pay for a wedding or for a startup business, something like that. That gift, if it's too large, also triggers a tax. And it is also 40% for every dollar above that threshold. And what's so interesting about that threshold is it is the exact same number as for the estate tax, but you don't get two bites at the apple. You don't get to transfer 12.92 million at your death and 12.92 million during your life. You have to keep track of that number as you use it, because let's say, for example, you're wealthy enough to use up 10 million of your, you know, you made a $10 million taxable gift during your life at your death. If you were to die, like in 2023, you can only transfer 2.92 million tax free because the IRS asks you and your CPA to keep track of how you've been using that exemption amount. So those two are called a unified exemption. Estate and gift are unified total. During life and a death, each of your clients can only pass 12.92 million per person.
- [27:26]
B
Yeah, I see myself explaining this all the time to clients because they get so confused about that they are the same number.
- [27:33]
A
Yes, yes. So that's what that pesky tax return called a 709 is for. It's the IRS saying, hey, if you give enough like above the 17k a year, you better start tracking those taxable gifts because at your death, I want to be able to deduct from your tra, your tax exemption, you know, all those gifts that you've been making throughout life, total, you can make 12.92 million.
- [27:57]
B
Yeah. Okay. And then what about the generation Skipping transfer tax.
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A
So think about, like, I'm just going to throw out a name there, but let's say, like, Rockefellers, okay? So they made a lot of money and they're starting to think I could give, like, all of my money to the next generation. But wouldn't it be clever if I actually give half of my money to my children and the other half to my grandchildren and I bypass the tax that is imposed when my kids pass away and give the same set of assets down to my grandchildren? It's the same set of people, right? It's just passing it down your line. Right? And so it's a way to skip the tax to say, hey, I'm just going to make a gift directly to my grandkids. Forget about, like, gift to my kids. And they have to pay the tax to gift to their kids. It's just like, no, I'm the grandpa. I'm just going to give it to my grand grandkids. So people got smart about that and they started setting up trusts and things for, like, lower generations to try to skip the estate tax. And so that's when the IRS got smart. And they were like. Or the treasury, you know, department. And they were like, no, I don't think so. I think we're going to pretend that there's an extra tax that gets, you know, imposed to mimic the estate tax that would have existed had your kids passed away and pass the same set of assets down to your grandkids. So to bypass that, you just need a special kind of trust. It's called the GST tax exempt trust. Any trust, like marital trust, trust for descendants, like, they can all become GST tax exempt if they're structured correctly. And the way to think about how to structure it is you can't give too much power to the beneficiaries, right? So like your grandkid, you set up a trust for that grandkid. Just don't give them so much power. And this is a tax code thing. You just have to structure it correctly, but don't give them so much power that it's basically the kid's piggy bank. At that point in time. The IRS is like, that's. That's not correctly set up.
- [29:58]
B
Gotcha. Super good info. Okay. That was all the terms I had. Any terms that you think we didn't hit on or that you wanted to add?
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A
There are going to be so many that come up, you know, so I don't want to, like, overwhelm people. The only thing that I'll say is I did mention one special term that maybe, you know, caught you guys off guard, but I would draw the difference between a principal and an agent. So, remember when we talked about powers of attorney and I mentioned the principle? It's like, that's your client. That's the person who's signing the power. Right. And so it's kind of like the testator, the trustor, the grantor. Think of it that way, but it's just for powers of attorney. So the principal is the person giving the right to an agent to do things on their behalf.
- [30:42]
B
Gotcha. Makes sense. Okay, cool. And you obviously know your stuff. Hopefully everybody listening is, like, starting to realize, like, you just, you know, this stuff in and out. So thank you again for doing this episode and helping educate myself as well as all the other advisors listening and everybody listening, you know, thanks for tuning in. We're really excited to have you. We're now, I think, seven episodes in, and, you know, if you have any feedback, let us know. Any topics you want us to talk about, let us know. But we have some really cool episodes coming up, so please rate, subscribe, and we will see you back next week.