B (13:08)

Hi Jim, this is Nick from the Midwest. My grandparents have been working with an estate lawyer and they're planning as if the estate tax threshold will be cut in half in 2026, the expiration of the Tax Cuts and Jobs Act. My grandparents wealth is majority in commercial and rental real estate. They donate a large amount and contribute to all of their great grandkids 529s to maximize gifting yearly. They are planning on giving each of their kids and grandkids a property to. At the end of this year I will be receiving a debt free duplex. Most of the properties they own have been purchased long ago and have increased significantly in value. So unfortunately we will not be getting a step up in basis since the properties are being given before their death. My question is, I do not necessarily desire to be a landlord, but I also don't want to pay a huge tax bill on selling the property. The consideration I may inherit more properties in the future. Should I just assume this new side hustle of being a landlord and hire a property manager? Is there anything the estate lawyer should think about when a person's wealth is mostly real estate? Thanks for all you do.

A (14:15)

Well, I mean the right answer when somebody wants to give you a property is thank you very much. Right? I mean this is a true first world problem if ever there was one. Somebody wants to give you cash flowing rental property. This is a wonderful thing, right? You don't want to be a landlord, fine. You can hire out just about everything that has to do with this. It probably already has a property manager in place. Now, if I had the ability to talk the grandparents into maybe holding onto it until they die and then leaving it to you, I might do that. Because the problem with them gifting it to you is you inherit their basis, which has probably already been fully depreciated given their grandparents, you know, and so there's nothing else you can do to depreciate it. You can't cover that income. The income from the property is going to be fully taxable. And if you want to sell it, you're going to have to pay all that depreciation, recapture and the capital gains with it. So that's not awesome either. And even if you exchange it into another property that you do want, it's probably going to be, you know, it's already fully depreciated. That depreciation doesn't get reset somehow when you do that. So it's kind of a bummer there. One option might be, if you don't want to be a landlord, you could do an exchange, a 721 exchange where you're basically exchanging it. It's an upreit exchange. You're exchanging into a REIT for shares of that reit. That would give you a more passive investment than what this is. But I think your main two choices are one, be a landlord and have this be part of your portfolio and fold it in as part of your portfolio, or sell it and eat the taxes. And you don't have to sell it this year. You can wait until the time when maybe it's better for you to sell it. But that's the way it works, unfortunately, when you're being gifted something before they die. So you might try to talk them into waiting until they die to give it to you. I'm not sure what the rush is to give it to you before then. Maybe they're not that old, maybe they still expect to live 20 or 25 more years, I don't know. But it sure would be nice for you to inherit this with a step up in basis. So I would definitely explore that option. But otherwise I just say thank you very much. And either way, you know, even if you got to pay the taxes on it, you're still getting a lot of money being given to you. So it's a, it's a wonderful gift for them to give to you and I think that's great. I don't know that I have any other comments to make on it? I mean, if your grandparents were asking my advice, I'd probably counsel them to consider trusts and things like that in case the inheritors aren't in a position to really manage the money. Well, I would tell them to consider trying to hold onto these properties until they die so the heirs get the step up in basis and they're able to leave them more money. But as far as what you should do with it, I think the answer is give them a very great big thank you note and move on with your financial life. And there's no obligation for you to hold on to the property just because they gave it to you in that format. You can always sell it, you know, and let's say the, you know, it's a $300,000 property and your tax bill on it's going to be $100,000. Well, they just gave you $200,000. Now you got to decide what you want to do with it. And it might be own this property, it might be invested in index funds, and either one of those options is completely reasonable. But you'll have to make that decision of what you want to do for yourself. All right, our quote of the day today is believe that you are worthy of financial freedom. Do something you love, and then all you ever have to do is be yourself to succeed. That's from Jen Sincero. All right, one of our favorite podcast frequent flyers here, Tim from Salt Lake City has an estate planning question.

C (17:57)

Hey, Jim, this is Tim in Salt Lake City. Again, another sort of estate planning question. My family's finances are relatively simple. My wife and I own a house that's in both of our names. We own a taxable brokerage account that's in both of our names. All of our other retirement accounts have beneficiaries listed that is each other and our kids. And we have a will that says if we both die at the same time, then all the assets go into a, you know, a custodial trust or something that will be managed by a family member for our kids. And so I'm wondering beyond that, do we really need much more in terms of estate planning? I know your book talks about domestic asset protection trusts and the idea that trusts can help avoid probate. But with everything in our names and or with beneficiaries listed, it seems like things are mostly set. What's the argument to do more than that? Thanks.

A (18:54)

Well, some people set up a revocable trust to keep assets out of probate. Right. So if your taxable investing account was in the name of a revocable trust, then that money could go to the heirs a little bit faster, a little bit less expense. It's a little more hassle during your life to manage that. So a lot of people don't put it in place until later in life. My recollection is you're relatively young still, and so maybe it's not time to do that yet. Obviously, you never know how long you're going to live, but that's one way to do it. Now, if you have an estate planning problem, you know, an estate tax issue, right. Then you often want to do some other things. Set up some trusts and things like that to get appreciating assets out of your estate, you know, relatively early on. But if you're not anywhere near the estate tax limits, which, although they're scheduled to be cut in half at the end of this year, I'm skeptical that's going to happen, given who controls the White House, the Senate, and Congress. I think that's probably going to be extended moving forward. You know, then you might want to do more planning if. If that were the case or if you have additional asset protection concerns. You're in Salt Lake City. Utah is a domestic asset protection trust state. It doesn't give much protection to your home equity other than that it's like $80,000 or $90,000 of your home equity protected. Beyond that, it's accessible to your creditors. So it's not unreasonable to put your home into a domestic asset protection trust here in Utah. But I wouldn't say that's a mandatory step. I mean, it's very rare for doctors to lose assets, personal assets, you know, almost always any sort of judgment that gets against them for malpractice or whatever is reduced to policy limits, if not initially, then on appeal. But if you wanted to put those sorts of things in place, you could do that as well. But that's more of an asset protection move than it is an estate planning move. The most important thing for estate planning is get the beneficiaries listed right. Make sure you have a will so that your minor children are taken care of. Those are the big steps, and you've done those, so very well done. All right, our next question comes by email. They said, can you provide a definition and example of a grantor Retained Annuity Trust? Okay, so a grantor Retained Annuity Trust, or a grat. What is that? Well, that's an estate planning tool that's used to minimize taxes and large financial gifts made to family members. Okay. The goal with it is to try to use as little bit of the lifetime gift and tax exclusion as you can. And so you're basically creating an irrevocable trust for a certain period and put assets into it. And then the trust pays an annuity to you, the grantor, each year. And then when the trust expires, the beneficiary receives the assets. And the idea is that they'll pay less or no gift taxes on it because a lot of the value was used up by the grantor when the trust expires and that last annuity payment is made. That's kind of the theory behind a grant or retained annuity trust. But I told the emailer that these always seem like a solution looking for a problem to me. So I asked them, what problem do you see a grant solving for you, and how unique is it? And if you have enough money that a grant is useful, you probably have enough that you can just do something a lot simpler and solve the estate tax issue with less hassle. For example, a better option, I think, for a lot of people is what Katie and I do, which is a type of intentionally defective grantor trust called the spousal Lifetime Access Trust. And that's where you have one spouse be the grantor and one spouse be the beneficiary. And it's a type of asset protection trust. It's intentionally defective, meaning that we personally pay all the taxes on the trust. So taxes don't deplete the assets of the trust. But the idea is you put highly appreciating assets into it, using up some of your exemption or in exchange for a promissory note, and then that appreciation is now out of your estate. So whether that's your brokerage account or whether that's a rental property empire, or whether that's a small business like your practice or, you know, white coat investor or whatever that appreciated an asset is outside of the estate. So any further appreciation on it is not going to go toward your estate and won't count against any exemption you have left. So if you expect to have an estate tax problem, what you need to do is meet with an estate planning attorney in your state. That's well worth it, right? I mean, you're talking about having more than $26 million if you're married when you die, $27 million, I think it is now you've got enough money that you can pay an estate tax planning attorney, you know, a few thousand dollars and you're still going to come out ahead and you can talk about Grats. You can talk about slats and you can talk about cruts and all kinds of fun stuff in those meetings and figure out what's best for your situation because there are downsides to all of these trusts and methods to minimize income, inheritance and estate taxes and meet your financial goals. But you need to really figure out what your situation is, what your goals are, and then pick the right tool to meet those goals rather than hearing about something cool like a, you know, grat and saying, I want a grat. You know, you really need to do a comprehensive planning process. Just like you do comprehensive financial planning before you start selecting investments. You want to do comprehensive estate planning before selecting trusts. Same basic process, though. All right, thank you to all of you out there for what you do. A lot of you don't hear this very often. Maybe you're on your way home from a bad shift or a bad day in clinic or bad day at the office or whatever and you're feeling very unappreciated. Let me tell you, there are people out there that appreciate you and sometimes they don't always tell you. So if no one's told you today, thank you for what you're doing, there's a reason you're a high income professional. There's a reason you spent all that time in school or in training and learning your craft. And it is important and you are making an important contribution to the world. I know more than many people after given this last year and how much interaction I've had with the medical industry. But it is very much appreciated what you did to achieve your expertise. All right, our next question comes from David. Off to speak Pipe. Let's take a listen. Hey, Dr. Dali, thank you for all you do. I'm a new attending and working on saving my emergency fund of four to six months of expenses. I was curious on what you thought, the average physician, how long that should take them to save up an adequate emergency fund. That's an interesting question. I'm not sure anybody's ever asked me that. I like the way you said four to six month emergency fund. Classically, people describe it as a three to six month emergency fund, but four might be a better idea. And the reason why is because disability insurance, your long term disability insurance, starts paying out after three months of disability, but it's paid out in arrears, so it's paid out at the end of that next month. So it's really four months before you'll receive a payment from your disability insurance. So maybe four months is the right period. Of time for doctors to have as an emergency fund. And classically an emergency fund is what you spend each month times four to six months in cash and something safe. It's okay for it to earn interest, put it in a money market fund or a high yield savings account or whatever. But you don't want to invest it in a real estate property or even an index fund. Right? The point of this money is to have the return of your principal, not to get a great return on your principal. But how long should that take? Well, let's do the math, right? This is your expenses. So how much are you spending? Well, if you're spending, let's say you're spending 50% of your income of your gross income, right? And that might be you might be paying 30% in taxes and saving 20% of it, right. Then that would suggest that it's going to take a little bit of time to save up four months worth, right. 50% of a month's income times four is essentially two months income. And if you're saving 20% a month for that, well, how long is that going to take? Well, that's going to take about 10 months to save up that emergency fund. Now of course, the more you save and the less you spend, the faster you'll have that emergency fund. Certainly I think it ought to take less than a year. It'd be great if you can save it up in less than six months. But that requires a pretty high savings rate, right? We're talking you're getting your savings rate up to 30, 40, 50% in order to do that. And hopefully that is what it is early on when we're talking about this live like a resident period where you come out of residency and you have a relatively small emergency fund and you want to beef it up. Hopefully you can get that done in just a few months. But. But it's not going to be instantaneous, right? It's a significant sum of money. So I would say this ought to take somewhere between three months and a year to get an adequate emergency fund. Hopefully you already have something when you come out of, you know, and you come out of training, you're just adding to it. Maybe you've already got a month's or even two months worth of your attending size emergency fund saved up and you just need to build it up a little bit. But this is one of those things that, you know, when you come out of residency, when you come out of fellowship, you have all these great uses for money, right? You want to do Roth conversions of any Tax deferred money you have, you want to save up a down payment for your dream home. You know, you want to, you know, pay off some credit card debt that you happen to still have hanging around. You want to max out some retirement funds. You know, you want to start an HSA or 529S for your kids or whatever. Well, guess what? You don't have enough money to do all this stuff. So you've got to prioritize, make a list of what's most important, and the emergency fund ought to be pretty darn high on that list of what's most important to you and start ticking it off. And as long as the money lasts, you work your way down the list. When you run out of money, that's as far as you get. And you go onto it next month. But if you're doing this right, I promise you, if you're doing this right, you get richer every month, every month of your life. Essentially, you become more wealthy. And that's the way it's been for Katie and I in our lives. Yeah, there's a few bear markets where maybe we became a little less wealthy over a year or two, or maybe WCI made less money, so the value of WCI was less one year than it was the year before. Situations like that. Sometimes we became less wealthy than we were the month before or the year before. But as a general rule, we're in a better financial position every month since we got out of residency than we were the month before. And that's the way it should be if you're doing this right. And so you start ticking off these goals, and when you come out of residency, you got a dozen of them that you're working on, right? Well, after 10 or 15 or 20 years, you've only got like one or two you're still working on. You ticked off all the other ones as you went along. And that tells you that you're doing things right, that you're having success, and that you're winning this game. So don't worry about it too much. If it takes you, you know, you want to have all these goals ticked off right in the beginning. And the only way to do that, of course, is to live like a resident for two to five years after you come out of residency. But have a little bit of patience, give yourself a little bit of grace. You're going to get there, stay focused, have reasonable goals, work toward them, use that discipline you've developed over the years, and you too will achieve financial success like so many other white coat investors have Just like you in the past. As the new year begins, it's crucial to take a proactive approach to tax planning and leverage every money saving opportunity. Over the past decade, clients of Cerebral Tax Advisors have seen an average return of 453% on their investment in Cerebral's tax planning services as a white coat investor recommended firm trusted by physicians nationwide. Cerebral uses court tested IRS approved strategies to reduce personal and business taxes. Cerebral founder Alexis Galati comes from a family of positions, brings over 20 years of expertise in tax strategy and multi state tax preparation. Schedule your free discovery session today@cerebral taxadvisors.com don't forget our buy one get one free sale ends January 6th. 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It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your your situation.