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- [00:00]
Ann
Foreign.
- [00:10]
Thomas Koppelman
What is up? And welcome back everyone to another episode of the Practical Planner podcast. I'm your co host, Thomas Koppelman, here with me, Ann and Dave. And they're actually live at a conference out by a pool in Florida. Even though if you see the video, it definitely looks like it's not in Florida and it's not by a pool and they're not warm and they're not getting tan, but that's where they're at right now. But you know, we have a pretty cool episode planned for you guys today. A lot of topics. We're gonna talk, we're gonna talk at the end a little bit about conferences and how to get the most out of them. But we still want this to be an episode around estate planning before that. And so really where we wanna start with is how do you make estate planning happen and how do we make it like actually integrated in people's lives? Because one thing that, you know, Ann and Dave are talking about is that they see often people will get these estate plans and we as financial advisors see the same thing, right? You give this amazing plan and all of a sudden like it goes way over the person's head. They don't really know what to do, they don't really know how to implement it. And I think this is an important topic to talk about because I actually yesterday was meeting with one of my high net worth clients and delivered a plan. We reviewed it and they were like, you know, trust structures, you know, there's something we need to do. Two years ago, we mouthed an attorney, we had a few meetings, we got our revocable trust. Nothing has happened since. They get the form of fill out your assets and let's work on implementing it. They've done nothing in two years. And so I think this goes right into this topic of it's super good to have this idea and this plan, but if it just stops at the here's the delivery and the explanation, most times we're going to find that nothing gets done.
- [01:48]
Dave
Yeah. And I think when we come to conferences like this, especially Heckerling, it's a place where when you're going to these classes, they're getting really in the weeds. They're talking about really finite areas of the tax code, they're talking about revenue rulings, things that if clients sat in, their eyes would glaze over. They wouldn't catch a word of what was being said. But what's really critical to be able to bring back to clients is a lot of the anecdotal knowledge that we can take from it. And these speakers who are just very highly regarded in the industry and have a lot of knowledge and, you know, they can take away things and give you value that you can bring back. For things like, is the estate tax going to sunset? Right. You know, this type of anecdotal knowledge that is really valuable, that really gives us insight into where we think things are going. And also things like, if you take this strategy, what are the risks as far as an audit? What are the risks as far as a dispute? These are the types of insights that you can get from these types of conferences with all these great people here.
- [03:08]
Ann
And I would add to Thomas's point, sometimes when a client hears of a really cool wealth transfer strategy, and particularly if they involve irrevocable trust structures, you just want to make sure that as the financial advisor, you're still involved. Because oftentimes what will happen is that irrevocable trust has to live its life. It has to do the thing that was sold to the client. It's not like irrevocable trust where you kind of like, maybe if you set it and forget it, it really is just there to capture assets during death. Right. For an irrevocable lifetime trust that's doing some sort of tax strategy or, you know, control strategy, you have to make sure the client understands what they're getting into. And so I think that's what you're getting at. Also, Thomas, in this particular case, you know, we're hearing a lot of, you know, that bad cases, bad facts make really bad case law. That is true all the time. So you hear a lot about death time planning where, you know, a beneficiary or a family member uses a financial power of attorney to do some, you know, very aggressive planning towards the end of the life of the wealthy, you know, individual and get themselves into trouble doing that. Right. And the IRS then uses that as the cudgel to be like. And nobody else can do this kind of planning. So. So this is a kind of, you know, I think case law or in the weeds rulings from the IRS or decisions that have been handed down that then have an impact on future planning for your clients. One thing that I wanted to, you know, chat about is, for example, we're hearing a lot, of course, about the tax exemption that's been doubled and what that means for clients who want to be doing some sort of irrevocable trust structure in the coming years to try to take advantage of that. As we all know, currently, the tax cuts and jobs act, many of the provisions are set to sunset in on December 31, 2025, at the stroke of midnight. And on January 1, 2026, magically, you know, a whole new set of provisions will apply. And that includes the doubled tax exemption that's currently 13.99 million per US person. And so I'm sure that you're curious to hear, you know, at Heckerling, where all these giants of estate planning are meeting currently, what the thinking is there. And Dave, do you want to give us some of the sort of, you know, what we've been hearing and especially with the legislative procedure that might affect what people expect?
- [05:53]
Dave
Yeah, absolutely. You know, I think a lot of people think, you know, they see the election results, they see that Republicans are going to hold both houses of Congress, they're going to hold the presidency, and they can do what they want, right? Any legislation they want to extend the Tax Cuts and Jobs act, they can do it. But it's really important to know the legislative process because the way that the Tax Cuts and Jobs act was actually implemented was through a process called budget reconciliation. And so, you know, a lot of people think, you know, when a bill is passed, you really just need a simple majority, which technically is the case, but it's not really the case because there's something called the filibuster in the Senate. And a lot of people think of that like Jimmy Stewart, you know, collapsing on the floor of the Senate in that old movie after talking for 24 hours on the floor. It's not really how it works. If the power, the party that's not in power, they can block any bill essentially that they don't want to see pass. However, there is a way that the party that's in power that doesn't have a filibuster proof majority can get legislation passed by a simple majority. And that's through something called budget reconciliation. And so they have to show that the legislation they're offering is only going to affect the budget. It's not going to have a lot of the side things that come into a lot of legislation that goes through a lot of the process when you're passing legislation where people try to fit in different areas that are important to them regarding their state, things that don't affect the budget. It has to only affect the federal budget and help with the deficit. And so when the Tax Cuts and Jobs act was passed, they did it through budget reconciliation. But the way that that process worked was when they looked at how this was going to affect the federal deficit, it said that it was going to be a deficit for the government over the next period in perpetuity. So they had to cut it off at 10 years. And so that's why the Tax Cuts and Jobs act only lasted for eight years. Because of the way that the budget reconciliation process worked. They didn't have the ability to make the Tax Cuts and Jobs act go on forever. And so that still applies today. If they are going to extend the Tax Cuts and Jobs act, they still have to follow that law that the only way to get an extension passed is to go through this budget reconciliation process. So it's still probably going to have another sunset if they were going to extend the Tax Cuts and Jobs Act. And so what's really important to understand is, yes, it's probably likely that they are going to extend the Taxes and Jobs act, but now we're just going to have another sunset that we're going to think about. And what that means is that planning is still critical in getting assets out of your estate. All the estate planning things we talk about, because it's probably not going to be, there's no estate tax or there's a really high threshold forever, it's going to have another deadline.
- [08:55]
Ann
And so if I could add a couple of words here, you know, I think when you think about all the ways in which tax reform or new tax provisions can impact the federal budget, you know, to completely repeal the estate tax would take, you know, buying or purchasing some sort of revenue from somewhere else in the tax code. Right. And so you'd think like increased income tax rates or some other. Exactly. You know, minimizing some other planning strategy potentially. You know, there have been, there's been talk about reducing like the, the power of the grant, the zeroed out grant as a way of, you know, freezing people's estates. And so that that revenue stream needs to come from somewhere else for us to have a complete repeal of the estate tax. That's the bot. And so is it likely to happen? No. And so the bottom line is that what people are talking about here is likely we will have an extension of the Tax Cuts and Jobs act, but it will be limited and it may not be as long as eight to 10 years for the sunset. It may be as short as, honestly four to six years. And so if your clients are waiting to take that wait and see approach, sure, they can go ahead and do that. We're expecting the earliest that something would get done is probably April this year. That's what everyone here is hoping for. So they plan into it. And not have, you know, this mad rush in December. But if you think about the pace or the time when usually this big, big packages of legislation are enacted, it is usually in December. And so if you go past this year's, you know, December 2025, then you're really looking at midterm elections. And they're thinking that would be unlikely, you know, pushing it towards next year. And so if there's any movement on the Tax Cuts and Jobs act, extending it or repealing it would probably come in this year. So we'll find out more soon.
- [10:53]
Thomas Koppelman
Super helpful. So still the same thing of, like, think about it, maybe have the conversations about it, but don't really make any decisions until we see what happens. Because I know when I think about, like, my age range of clients in the high net worth, 30 to 40, maybe even, you know, some touching 50 range, probably not doing too much, is, you know, planning with irrevocable trust at this age, especially if we think it's going to get extended if we know there's eight more years, you're probably waiting seven years before you actually set up these, unless you're the true, you know, 100 millionaire and above. But if you're older, you still might be considering some of this, right? Even with the extension, you still have the, hey, I might be. If I'm over now, I know what my spending looks like. I kind of know I'm already in my 70s. You still get that growth out of your estate earlier. So there still is some benefit to doing it where you have less of that need of flexibility that, you know, my clients would want because they just don't know what you're going to want 30 or 40 years from now. Or, you know, you see all this stuff with Brian Johnson and people talking about life expectancies and how they think in the next five years. If I was listening to a podcast, like, if you can live the next five to 10 years, your life expectancy is going to go up to, like, 140, is what they're saying. And so it's like, do you want to do irrevocable trust planning and live 50 years longer? Maybe. Maybe you don't. I don't know if that's a reality. But we have no idea what the Future looks like 20 to 40 years from now.
- [12:12]
Dave
And I always like to look back, you know, when you talk about those things we talk about like planning state tax planning for someone in their 30s, especially when you're doing some of these things where you're really giving up a Lot of control. Just look back, right? What's your life expectancy? Let's say it's 40 more years. Look back at the tax law 40 years ago and see, you know, how it was and how much things have changed and everything. You can probably expect that moving forward. So not out of the question. I think eyelids and life insurance are really important. But yeah, when you take drastic planning at that young an age, you need to expect that the tax law is going to probably change drastically over the course of your lifetime.
- [12:52]
Ann
And that being said, you know, for our listeners who have clients who are not, you know, millennials or sort of younger and who really should be thinking about doing some sort of planning in the next few years to take advantage of the tax exemption, here are a couple of things that we can take away from Heckerling, I think, and it's important for us to talk about. So this is a client who, yes, they have the kind of, you know, state level or really federal taxable estate. They don't necessarily have the opportunity to wait for decades to find out what the tax code might say at that time. And they're not necessarily anymore in that, like super high growth phase where like any assets in their estate, they can deploy to earn more. Right. And so they're really thinking about transferring wealth down to future generations and trying to avoid that 40% tax from the IRS. And so for those folks, you know, first off, we hear a lot about grantor trust versus non grantor trusts. There's an episode earlier in this podcast that talks about what that is. Grantor trust status is something that's about the income taxes generated by that trust and who ends up paying and reporting the income taxes. You can have either the trust pay its own income taxes, but actually one very often played card is to turn that irrevocable trust into a grantor trust so that your rich client who formed the trust continues to pay those taxes. Those are considered to be completely not a gift to the beneficiaries to be making, you know, gifts in the trust that are net of taxes. And so the things to worry about with the grantor trust status, if you have a client who has real estate, is very real estate rich, but has liquidity issues, be careful when you have a grantor trust because that client still needs to be able to generate enough liquidity to be able to pay the taxes on the real estate that they may have transferred through that irrevocable trust or into that irrevocable trust. So if liquidity is an issue for your client because they're real estate rich. Just be aware of that. You know, sometimes the grantor trust sounds like a great idea, but actually a non grantor trust that's paying its own taxes might be better for that client. The other thing that we're hearing is if there is a partnership in that irrevocable trust, that's a grantor trust and there is debt in excess of the basis for the assets inside of that trust, just be careful because you could actually have recognition of gain which generates a huge income tax bill that is unexpected for that client. And finally, always, always worry about the cash flows as a system. So think about your client and that trust as a system together. And where do those cash flows come from? That is a job that you should be able to handle as a wealth manager.
- [15:56]
Thomas Koppelman
Right?
- [15:56]
Ann
Like it's not just the estate tax attorneys or the CPAs who can cash flow analyses. This is where your superpower comes in. And think of, you know, in that structure you've set up or your client has set up, what is generating enough cash flow to pay for the income taxes if your client is on the hook for them, and if they're not, you may have to turn off that grantor trust status and that itself might generate a one time tax recognition event. And so you need to be able to pay those taxes or rather your client should be able to pay for those taxes. And so the bottom line is grantor trusts sound great, but just be careful and involve the client. Cpa.
- [16:38]
Thomas Koppelman
Super smart. Any, any other points from the conference that you guys feel like people need to hear about?
- [16:45]
Dave
Yeah, so, so I talked earlier about, you know, one of the things is like a lot of the knowledge that you get from all these revenue rulings, a lot of things that people can't keep up with necessarily on a day to day basis. You know, when you know, when you see things and you hear strategies, a lot of times they sound attractive. But knowing the audit risk and knowing how it's going to shake out if the IRS can test it is really important. And so one interesting thing, you know that there was a discussion of is qualified personal residence trusts. That's where you put your residents into a trust and to get depreciation out of your estate. And it's a really great tool for the ultra high net worth who think they're going to have estate tax issue because it's where you can put your house into a trust, you can still live there for a period of years. And so it's kind of business as usual. So it's A great tool to get the appreciation out of the estate. It's called a bet to live strategy, because you want to pick kind of the maximum amount of time that you think you'll definitely live for and survive the term. And then once a term expires, it gets distributed out to, let's say, to your children or to. To irrevocable trust. Depends on the circumstances. Now, what happens a lot of the time is people will tell clients, well, don't worry about if the term expires, you're still going to be able to live there because you just lease it from the kids. And so you can have a formal lease agreement. And the great thing about that is every time you pay that rent, it's going to be getting more assets out of the estate because it's not a gift, it's a contract. Right? And so that sounds really attractive, but that's one of the things that the IRS is looking really closely at. It's. Are the grantors actually living there? You know, what is this arrangement? Is it really arm's length? And so, you know, those are the types of things where it sounds really attractive, but you have to know from someone who actually has the background in the industry to know if, okay, even though this sounds attractive, what's the actual risk and what's the actual end result potentially.
- [18:54]
Thomas Koppelman
Yeah, really good points. It is a good strategy, and I'm. It'll be interesting to see if it does get changed in the. The future. It's one that a lot of my clients that think about with their parents, right? I mean, whether it's, hey, they have a lake house or they have different things, it's something that is thought about. But anything else you guys feel like we need to hit on in that, or should we kind of go into, like, talking about, you know, value of conferences to wrap up. So let's do it. I think, you know, I think with you guys at conferences, I think it is important to think about, like, our conferences still valuable today. And I know advisors think about this all the time because there are the advisors that are like the conference hoppers, right? You see them at every conference they go to. And I think there's a little bit of like, hey, I'm just, you know, this is an excuse to kind of get away and have some fun. But I think in general, conferences are more valuable today than they were before in the new world we live in, right? A lot of people are fully virtual. A lot of advisors are fully virtual. And I know for me, I get tons of Advisors per week asking for time to meet and chat. And I've basically set it to like, I don't do that anymore. I just don't have the free time. There's too many asks. But conferences create this environment where those one on ones do get to happen. And like, perfect example is, I think, future proof. Last year I spent like two and a half hours with Brendan Fraser and Michael Kitces. It just randomly happened. We were all together. We ended up just sitting down and having this really awesome conversation where, you know, if you hit up Michael Kitsis, you're never going to get a yes for like a hey, let's let me pick your brain. So I think conferences right now are just super valuable in the way that you get to connect with the people who probably are going to say no to connecting with you via Zoom. Because it's just like that's another meeting on the calendar. You know, we all have the fatigue on that. And the other one is like, you know, there are some conferences that are actually very educational. I'll say most of the ones I go to are not. They're more so like networking and marketing and some of the things that I feel really good about. But there are some other really good ones that are like, you know, if you really want to go learn tax planning or you really want to go learn investment management or new tools to use in your business, there are a lot of really good conferences out there where it does create this time to work in and on your business. Right. I feel, I feel like as an advisor, it's so easy to spend time with clients and do that, but it's hard to actually figure out like, how do we get better, how do we improve our process, how do we improve our knowledge? Because we're just living our day to day. And I think that's where conferences kind of can help solve some of those issues.
- [21:10]
Dave
Yeah, yeah. They're just. There's so many people that you wouldn't be able to have such an intimate connection with, you know, virtually. It's great. And you know, even walking around, there's so many people that either I grab or they grab me because we see each other on LinkedIn. And you know, it's tough because, you know, it's virtual. You're not really meeting over Zoom. It's just comments and, you know, maybe direct messages and having that personal connection. I think more gets done, you know, at conferences like this than, you know, virtually over a long period of time when we're just talking about, you know, commenting on things because like you said, you know, you're typically not going to be catching up with other people who are in your industry can be very valuable with you over zoom. It's usually going to be messages and things of that nature. So I just think it carries so much value to be able to come to these conferences and soak in as much as possible.
- [22:06]
Thomas Koppelman
Totally.
- [22:07]
Ann
And for me, you know, I will say this Heckerling is basically the pinnacle in terms of conference quality in the. For estate planners, it's, bar none, the. The best conference. You walk around and, you know, I've had the opportunity to catch up with my. My mentors from McDermott, Will and Emory, former colleagues, people have joined law firms that I've worked for. Just the other day yesterday, I had breakfast with Carlyn McCaffrey, who is absolutely, you know, a luminary in this space, just to show her, you know, what I've been working on and see if there is a way for software to, you know, make her life easier. And Carlin has been practicing for, what, 50 years? I want to say she's seen it all. She was telling me that, you know, they used to do things with carbon copy and, like, typewriters back when she started practicing. And look at where, you know, estate planning does feel antiquated, but it could. When she started, it was like the Middle Ages, right? Like, it was like carbon paper to keep a copy of your client's trust. So, you know, when you think of how far this field has come, it really is at conferences like this that you get the latest and greatest of what people are thinking. And the last thing that I'll say is if you're an employer, if you run your business and you have people who want to go to conferences, you know, make them justify why they want to go to that particular conference, what they hope to get out of it, but especially in this virtual world, you know, encourage them to want to develop themselves and, and train. So for those of us listeners who, you know, you'd, like, you struggle with, you know, finding good talent, young talent, people to take your, you know, take on your business. If you need a succession plan, right, Think of conferences as that, that training ground for them and, and see what they make of it.
- [24:05]
Thomas Koppelman
Totally. Totally. Whatever. I mean, yes. Thanks for joining us on this. I know you're at a conference. Great to carve out time. Sounds like it's a good one. You're learning a ton. But I think that's everything that we wanted to go through today. So, everybody, we appreciate you tuning in and listening again, please do not forget to rate and subscribe. We love doing this and we want to keep putting out more episodes that are helpful for you guys. As you know, you continue to work with more clients. So see you back next week, everybody.