[00:00:00] Speaker A: You're listening to the Preferred Way, a retirement podcast brought to you by Preferred Trust Company, the preferred custodian for all alternative investments.
[00:00:10] Speaker B: Welcome back to the Preferred Way, where we're talking about family legacy topics.
And this is the second part, so if you missed the first part, click the link below to catch up.
Let's get started.
When, when do you do that to add that layer of protection?
[00:00:27] Speaker C: Well, you really, when you have the income coming in, like, you can cover that, cover that cost on an annual basis.
Because like I said, it's some, like, some are costly. And I see people like, like incorrectly getting to get into irrevocable trust and like, then having to pay like, like, like paying for the connotation to know what you really need and then understand, okay, here's what my ongoing costs are going to be like. Once you have that in place where it's okay, you're not worrying about losing it in two years or not because income dropped.
Whereas. Okay, that's, that's when you really should be looking at it. So it kind of varies on, like where you are.
Income generating mode.
[00:01:10] Speaker B: Okay, so your, your perspective is create it based on when your income can cover all of your costs.
[00:01:18] Speaker C: Yeah.
[00:01:18] Speaker B: Versus having assets that you want to put into the trust.
Right.
[00:01:24] Speaker C: Because you got that if you're in position to cover the cost itself and you haven't already come and some, at some point you already been buying assets. If not, then it's like, well, go ahead and set it up if it's not going to be a huge burden for you from an income perspective and then start to kind of move those assets in the trust.
So, so really kind of like sooner rather than later if it's, if it's, if you're able to at that point, because you can have the assets, but if you don't have the income coming in to actually properly have it structured, then you can lose it as well. So just making sure that you can financially cover it.
[00:02:06] Speaker B: Okay, so let's say we can financially cover it. We're starting to build assets. What mistakes do you see people make as they're building up their assets by not associating it with the trust? Like, why'd you create it in the first place? I always say that to people. Why'd you create the trust if you were never gonna title your assets to the trust to be protected?
[00:02:26] Speaker C: Yeah, I've seen people as well. Yeah, I've seen people like gift their properties to their children. It was like, like, like, no, like. And it's already too Late.
[00:02:35] Speaker B: It's already done. Yeah.
[00:02:37] Speaker C: Like, no, you have the trust not to gift it to them, but to make them beneficiaries, but for the trust to control it.
Or like I said, they're, they're, they're trying to YouTube and, and Google the whole process too, and not really bringing in professionals at that point until they actual cleanup then. Okay. Now it's more costly.
[00:02:58] Speaker B: Yeah.
[00:02:58] Speaker C: As with most things, the cleanup cost more than to have it properly set up the first time around.
Like that. Those are really big. Get into irrevocable trust.
Like, not really understanding because like, people like, hey, I, I personally don't, I don't pay no taxes because I got this irrevocable trust and it's, it's like, like, yes, like you, the individual pay no taxes, but the irrevocable trust has to pay taxes. So unless you're just gonna start like, like distributing the income to everyone that's a beneficiary, you got that 37 you gotta worry about. So how is that trust paying for it? Oh, the money that you have to put into the trust. Okay, that's so, that's like crazy.
[00:03:46] Speaker B: So you are paying for it. Yeah, I've heard that same thing. It's like, oh, but I don't have to pay any taxes. I'm like, really?
You really think that that's just going to be your magic ticket?
[00:03:57] Speaker C: I disagree with them. Like, yeah, you're right.
[00:03:59] Speaker B: Like, you, yeah.
[00:04:00] Speaker C: John Smith, you do not pay taxes. Your trust does. Your trust makes enough money to pay his own taxes. What do you mean your trust doesn't make enough money? Oh, so, so you got to fund the trust to pay the taxes. Okay, thank you, John.
Interesting.
[00:04:16] Speaker B: Yeah. And I'm sure at that point they're like, okay, I got, I got hit by the Mack truck.
Right? I mean, because. What are you saying? It doesn't even make any sense. Okay, so I'm 40 years old.
I have created a trust. I am going to move my assets into the trust. Let's say, I mean, let's say I'm doing quite well for myself. I've paid off my primary residence. I'm going to have that trust put into. Or the property put into the trust, which needs to be retitled, which a lot of people forget about that. They think they can just have an amendment and just write in all the assets that they want. Like, poof. That shit's going to work. And it doesn't work that way, people.
So talk to me through. How do you work with clients to make sure that they are associating the assets with the trust. Because I think sometimes we forget about that a little bit.
Bank accounts, like investment accounts, like what do you put in the trust? What do you leave out of the trust?
[00:05:10] Speaker C: Yeah. It's also understanding that hey they even have like their, their properties in the LLC or they, or they don't. And having to educate like well the trust is more so anonymity that people can't figure out that you own it. But if you just like haphazardly just put everything into the trust, like now you're creating legal liabilities between each of the assets in the trust itself.
So and so you'll, you'll have your llc, you have the membership like the sole member of your LLC change from you to your trust. So your trust is the sole member of your LLC that actually holds wherever number of assets. Yeah, the number of assets per, per llc. That's always a risk tolerance question at that point.
It's like some people find with four, some people find with $4 million in value like it. I've seen everything from one people that do one per prop one, one LLC per problem. I would never understand that.
I think people are fine with putting 10 in one LLC before moving on to the next. But just knowing that you're going to have that piece of it as well, like you're changing that legal ownership of the LLC to the trust so that the trust now oversees, oversees all of that and the property.
So that kind of helps avoid the deed change that you mentioned earlier because it's already deeded to the llc.
Yeah, you just gotta make sure the LLC is owned by the trust. That's right. But back to your point, it still requires an additional step, not just, just some random amendments. You gotta file something to make sure that's all the legalities of it is placed there so that, so that's how we kind of have it structured that way. Even if like I said, they want to have their, their non passive business owned by the trust as well. Like you can do that as well as kind of have everything kind of flow flow in there. You don't have to have multiple trusts. You had to have just the multiple right entity structures within the trust so that you're now like you're not creating legal issues between the different ventures that you're in.
[00:07:17] Speaker B: Yeah. And really it's a roadmap. I mean it's kind of sitting down and having the conversation with you and giving you everything. You can't just, you can't give your CPA bits and pieces.
You can't give your attorney bits and pieces. You can't give your auditors bits and pieces.
I mean, if you really want to create and build a legacy model that can sustain the time that you're willing to put in the effort, at least a couple times a year to update, look at.
You can't just avoid it. You can't just be like, I'll get to that later. You know, yeah, I went and bought that car. But, you know, it's not that big of a deal. It is a big deal when you pass away and it's not in your trust now who owns the damn thing?
You know, and I'm using a car as a. As a topic, but imagine if it was properties. Imagine if it was investment accounts. Imagine all of these things. You know, so many times we see that, you know, a family member is lost, and those of us left picking up the pieces are struggling. We don't even know that pieces exist, let alone, you know, we might find it in a filing cabinet, although everything's electronic now, so good luck with that. You probably don't have their password.
They've hidden the sheet so well of their passwords, you're never going to find it.
So you're left with waiting to see if maybe that company sends you a tax form that year. And that's how you're discovering things.
So, you know, the whole purpose behind, you know, building these legacies or building for your own future, you don't want to have that left to the state. Like, who in their right mind wants that to happen?
And I'm sure you've seen that a lot, Larry, where you're like, oh, my gosh, this person's a mess. Let me, let me get them all, you know, tucked in and figured out and figure out this family legacy. But legacies are not always a gift.
And so talk through that for me for a little bit. You know, let's say that we have, you know, we have a trust that has built up over $10 million in, in assets in, in this trust, and they pass on, and they have one child who ends up with this gift.
What happens? What happens then?
[00:09:35] Speaker C: Yeah, it's really sitting down with the, with the beneficiaries and really understanding. I mean, not just me, but just, like, everyone involved. Okay, like. Like what do they really want to do, like, with the, with the, with all the assets that's in this? Like, are they. Do they just want to sell them off or they going to keep running to keep, keep the ship afloat so forth. And so, so it is really getting a deep understanding of like what how does that family want to move forward? And hopefully like say you already have had those discussions before the person had passed away of like hey, especially people don't want certain amount of money allocated certain kids until they achieve certain tasks like get married or graduate from college, so forth and so forth.
So it's just kind of like okay, are we, are we following what's aligned, what's discussed before? But if not, that's really good understanding of what this, how this plan wants to move forward with, with this gift per se because some just may want to liquidate and it's kind of understanding the tax ramifications of that versus just kind of keep, keep cash flowing from there. If it is cash flowing.
[00:10:45] Speaker B: Yeah. What if, what if the child inherits this $10 million.
[00:10:51] Speaker C: Yeah.
[00:10:52] Speaker B: And the $10 million is in you know, investment accounts. It's in you know, personal property.
Just say that's all it is. And there are a couple bank accounts.
[00:11:03] Speaker C: Yeah.
[00:11:03] Speaker B: So you know.
[00:11:04] Speaker C: Yeah. The aspect of inheriting the money, like I said, you talk about this kind of just, just, just actual cash that they're, they're receiving from the accounts and all of that. Like I said, like I said, it just really becomes a gift at that point that they're not really, we have to kind of really assess the, the whole value of the account and see if they, if they exceeded the, the state tax limitations there. But like I said, if it's just 10 million then we're below it.
At, at that point just wanted to cross T's and dot I's just to be sure, to be sure there. But if there's like actual tangible assets involved and okay what like getting the fair market value of those at the time of the, of the, of the, of them hearing it. So like hey, here's what your, here's what this value is on your books. Now this could have been just a, a hundred thousand dollar property at the time of acquisition, but it's, but they now valued a million dollars. Or you now have this million dollar asset on your books.
What do you want to do with it?
[00:12:09] Speaker B: Yeah.
[00:12:09] Speaker C: From there because let's say I tell people that that's where your cost basis is and you now been from the step up basis. So you can sell it for a million and not pay any capital gains tax because of, that's where the valuation is.
If you want to keep renting out, then we gotta reset the whole depreciation schedule. And how, how report that or how you're going to operate that going forward.
[00:12:31] Speaker B: Yeah.
[00:12:31] Speaker C: So it's, it's just kind of understand, okay, what, like what's coming in, let's say cash, just this kind of gift. But we're talking about assets. We got, we got some, some, some detailed analysis that we got to do before they make a decision of how much they want to try and sell any assets for.
[00:12:47] Speaker B: Yeah, absolutely. It's not just a snap your fingers and there you go, you're off on your own, have a good time.
It's not that at all. And I think, I think, you know, when we have revocable living trusts, when you pass, they're no longer living trusts.
[00:13:05] Speaker C: Right.
[00:13:05] Speaker B: So talk, talk us through that for just a second. Where now the trust becomes a taxable entity.
[00:13:13] Speaker C: Yeah. So now is, now he's looking at a.
Converting it from revocable to irrevocable after everything's kind of passed on, passed off per the wishes of the will itself.
So if there still are assets or businesses occurring within this now irrevocable trust is now restricted to however the money is generated, how it's supposed to be passed on to the beneficiaries at that point. Anything left outstanding, like if it's all, if it's all sold within that year and they're all allocated out, so the beneficiaries get their own separate statement from, from that final filing of hey, here's everything that's been, that's been cashed out at that point. If something, if there's anything else still in there when it's all said and done, then you have this whole, I mean it's still going to be a last tax filing.
1041 with, with, with the revocable trust. It's just what's in there left to be taxed and the goal is to kind of get it, get it allocated out before then.
[00:14:22] Speaker B: Absolutely. It sounds like to me legacies evolve. You know, building the legacy can evolve, whether it's a family owned business, which, boy, that can be, that can be quite complicated as well. You know, making sure that you're engaging in the success of the family. If it is going to be a family business, you know, you may have some family members that want to participate and some that don't and some that feel like they should get a beneficial benefit from it upon your passing, even if they don't contribute. There's so many things that tie into building this family legacy. But one of the things that I have found in working with clients being a trustee is that having those conversations prior to the passing is so incredibly important.
And one thing that I think is missed, 9 times out of 10, the trust is typically discovered after the passing of the last parent or spouse or whatever the case may be. And then it's kind of like what. What do you mean they have this in a trust? Like what do you mean I'm not going to get 100%? What do you mean? You know, all of these things that. Conversations that aren't being had by, by families.
I don't know if you've ever been involved in those before where there's just pure panic, shock, frustration, fear, sadness. All of this stuff is going on and they never knew that these were the directives that they were going to be, you know, left with. Have you ever found yourself in a situation where you're like oh my, my. Because upon a passing, you know, the first week, two weeks, months, whatever it is, we all go through a process, whatever, whatever that process is. But at some point we have to deal with the reality of what we've been left to do and to tend to and deal with and assets to sell and whatever the case may be. And you know, setting up the trust, setting up the will, setting up the directive of, of how you want your legacy to be passed on is incredibly important. And I've seen some really great documents and I've seen some really poorly written documents with zero direction where you're left with trying to just figure it out.
What, what have you experienced when it comes to that?
[00:16:44] Speaker C: I Quite a bit of all of it and everything in between. Like especially aspect of the unknown trust, unknown will that's in place and actually has seen it get real bad and ugly where you see like families break up because one person thought that they were supposed to be receiving something and they didn't get anything or didn't get as much as they thought. And that created a lot of resentment.
I seen, I've seen where people that. That nothing was put in place and the. The family lost the. Their. Their fam. The. The. All the properties to.
To the spouse and. But it was not. Not known that that was supposed to happen from that standpoint there because it was. People just assumed that things just, just passed down to the next.
[00:17:34] Speaker B: Yeah.
[00:17:34] Speaker C: Next oldest child or whatever or be split amongst the children evenly. And it's like it's not, it's not that direct. So it gets. I think I seen a very ugly side of it multiple times to just kind of have people that's just at least have that discussion of Kind of know what your potential plans are so that you're not blindsided.
[00:17:55] Speaker B: And it's on both sides. Yeah, the responsibility is not just on the, the older person, the responsibilities on the younger folk to ask those questions as well. It's not a one sided situation. I'll tell you. I've, you know, recently had an experience with my parents and you know, they reached out for kind of a second opinion on a, on a financial topic. And I said to them, where did you hear that from? And they told me. And I said, well, that's not true.
And I think the opening of that conversation was really a moment in time for us to go, okay, let's, let's, let's see where we're at. And as I saw where they were at, it became more and more concerning to me.
But they were a little hesitant to have that conversation.
And I think, you know, we spend so much time building our, our, our wealth for the future, for us to be able to live comfortably in retirement.
And every generation's a little bit different. And you know, I come from a generation where, you know, your parents just don't share their financial information with you and sometimes it's too late by the time they do.
And so, you know, have these conversations. They're tough conversations, but have the conversations. You may not like it, but, but wouldn't you want to know now versus finding out in the future?
Because hopefully many of us will have the opportunity to leave a legacy to our children, whatever it is, even if it's, even if it's, you know, equity left in a home that you haven't paid off there. There is legacy there to be left. It could be small increments, it could be large increments. It doesn't matter what it is, we want to protect it. And I think everybody needs to at least be considering that if you work with a cpa, they should be asking those questions. I can guarantee you Larry's probably asking those questions of where are we at? Because you have an opportunity, Larry, when you're filing taxes, to see everything, like really.
And it's a great opportunity for CPAs to, you know, rear their head and say, hey, I see this is here and this is here and this is here, but why isn't this over here?
Help me understand that for just a second.
And you need people like that on your team, you know, to help you through that process.
Anything else from a, from a family legacy building perspective that you think is really important and very much missed a lot of times?
[00:20:35] Speaker C: I think the main Thing and you, you nailed. This is just the open communications. I think the, the younger, the younger side could be hesitant to speak up because they may be seen as only one with the money in the back end. But it's. Is, is. But like, how do you find that common ground for both, both sides that kind of feel comfortable at the dinner table discussing it and knowing like, this is what we're trying to leave and, and that's where like getting, getting the family involved with the bins and investments early kind of helps set that up instead of just random conversations at Thanksgiving. Like I said, they don't have to be actively involved all the time. But like, hey, this is, this is what's been like, like that's why I said kind of like even having family members as like part of like your board, like, so they're just kind of in the know and having your board meetings monthly or quarterly so that, so that like, hey, they're, they're informed of what's going on and what's in place for each. Everybody involved. So yeah, I think it's just creating that comfort to have that open discussion and not feel like someone's just trying to get something out of it.
[00:21:53] Speaker B: Yeah, I like that idea. Family board meeting.
I can tell you I can't do it monthly, but that would be brutal. But you know, biannually, I could see that a couple times a year. It's healthy. It's very healthy for figuring out what that legacy looks like for everybody. And it could not. It's not just about you, it's about everybody. How does it affect the entire family?
You know, it was very eye openening for me to figure out, like, how my parents really felt about what they were leaving into whom.
That was very eye openening to me. I thought, wow, okay, well, you're right. I don't need it, I don't want it.
But I am your child.
You know, you have that moment where you're like, why am I feeling like this? Why do I think like this? Oh, you want to leave this to the five year old? Okay, well, how responsible is this going to be? And you know me as the trustee, do I want to be handling a trust for the next, you know, 20 years until you have a willingness to give it to them? Like, you really have to think about these things because 20 years of managing your trust for you to give to, you know, a removed family member may not be comfortable for me.
[00:23:09] Speaker C: Right.
[00:23:10] Speaker B: And so, you know, when you have those conversations, it goes way beyond Larry's laughing. But it's it's true.
[00:23:17] Speaker C: Deep. That's deep.
[00:23:19] Speaker B: Those are the types of things where these, you know, a couple times a year having those conversations could be really eye opening. You know, it may lead you down a path where you're like, you know what? I don't want to be a trustee. I don't want to be responsible for that because somebody has to be responsible. So if you had six kids, can you imagine picking one?
It's awful. I mean it's an awful. Think about it. It's an absolutely awful experience. But sitting down collectively with the family and talking about that and maybe the reasons why is is wise, maybe co trustees are important, you know, to have, you know, a two, two headed sword there could be very important for the other four siblings that are involved in that. So it's crazy. Family building a family legacy is rewarding.
It is, you know, it's a very proud moment, I'm sure for many.
But if you're not having those conversations during the time you're alive, know that when you're gone, either you're doing this out of pure humor to just screw with your family or you know, you have yourself set up well so that you know, you could live another life in peace.
[00:24:38] Speaker C: Right.
[00:24:39] Speaker B: Knowing that everything has been accounted for prior to that. So just think about those things. Let's talk about family legacies. Really quick last topic where we do have very large amounts that need to be considered. What, what happens in those types of situations where you know, you could be stepping into a, how do I say this? A a taxable event that you may not have been expecting.
[00:25:10] Speaker C: Yeah. And I can't always remember the exact amount. So like I said, but I guess for the sake of conversation. So if you're looking at assets of state of over, over $12 million and I said, I know think of the exact number. So yeah, that's okay. That excess will be, will be, could be set to state taxes from there. So you really have to be mindful of like okay, how is this stuff going to be allocated out to potentially get that, get that value down or everything has to be reassessed.
So it doesn't say that is that excess amount, but you're looking at some pretty significant taxes if you're talking about anything in excess of that $12 million. So definitely want to like once again having those conversations early before the pathway so that hey, we can start to plan and prepare how to mitigate that going forward.
[00:26:09] Speaker B: Yeah, I will say, you know, I own a couple of properties and one of them I would love to have seen in the family for generations and generations to come. That's how I feel on this earth.
But when I leave this earth, I have had to settle with the fact that that may not be the next person's desires.
And so you, you have to prepare for that too. And you have to prepare for the potential tax consequences to the heirs that you're leaving these fortunes to.
And so for me, this is going to sound awful. Larry, you're going to laugh when you hear this. I'm like, okay, so how do I make sure that this home stays in the family for at least a decade?
So I thought, all right, Carrie, the only way you're going to have some reassurance of guarantee while you're here on this earth is to put 10 years of those expenses to run that establishment because. Right. The person who inherits this may not want to pay for it. And you have to prepare yourself for that.
[00:27:18] Speaker C: Yeah.
[00:27:19] Speaker B: And so you, if that's what you want living here on this earth, then you have to prepare them for all of the costs that are associated with it. Because it's great to have those beautiful properties, but running those beautiful properties, paying the taxes on those beautiful properties may not be what that next person wants to do.
So I have set aside the 10 years worth allocated to a specific account for, for that that obviously will generate more income. So hopefully with inflation and tax increase, everything else, it'll account for it over that period of time. But I had to intentionally do that while I'm here on this earth.
[00:28:00] Speaker C: Yeah.
[00:28:01] Speaker B: Because you can't expect that all of your wishes are going to be able to be fulfilled.
So keep that in mind, especially family businesses.
I know it's fun while all the family is here and head of households are running it, but when they're not here and if we haven't adequately prepared the family to run it, you know, that could also be a huge detriment to the family upon your passing. So really think about giving them the option for the outs too.
Sometimes we write things that are so intentional without really thinking them through. When you're not here to run the ship. Right. And so these trustees that are left, these co trustees that are left dealing with this, it can be quite complicated. So just keep that in mind. As, you know, all of us are preparing for, you know, legacy and, and, you know, paying homage to our, you know, family businesses that we've built and all of these things. Just, just know that not everybody may feel the same way you do and, and give, give them options, give give them options.
All right, Larry, is there anything else?
[00:29:18] Speaker C: No. Big. Big.
[00:29:19] Speaker B: We got covered it covered.
Always enjoyable. I'm pretty sure we might be able to make a couple podcasts out of this. So that's exciting, too.
Just gives you a little bit more coverage out there. We really enjoy having you on. We're going to do it again. I'm gonna keep having you on.
Everybody's gonna know. Everybody's gonna know Larry's name here pretty soon if you don't.
And by the way, the Big Mac. I'm expecting the Big Mac.
You better send me a picture of that Big Mac and you're gonna see it on social media. It's gonna make you laugh. But I. I'm pretty sure that's going to be your new name, Big Mac.
That I. It might stick, Larry, but I want to thank you so much for joining me today. And we'll see you next time on the Preferred Way.
[00:30:09] Speaker A: Thanks for joining us for another episode where retirement savers meet alternative investments. Can't wait for the next episode. To learn more, visit our
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