Dave Alison, CFP®, EA, BPC (00:07):
Hello and welcome to the Complete Wealth Management Podcast. I am your host, Dave Allison. We've got a great episode in store for you today. I've invited a colleague of mine, Benjamin Kelly, on with us. Benjamin is an estate planning attorney and partner at the National Law Firm, Hush Blackwell. Hush Blackwell has over 800 attorneys across the country. Now, Ben's focus and role is advising prominent high net worth individuals and families, entrepreneurs, entertainers and celebrities on wealth preservation, wherewithal transfers, and business succession planning. He's going to be able to share a lot of tips and techniques and strategies with us that the ultra high net worth are using. He also helps focus on maximizing income tax and wealth transfer tax efficiencies by developing creative plans that protect assets for future generations, including real property, financial assets, intellectual property, and business interests. Again, who doesn't want to be able to maximize income tax reduction and saving strategies?
(01:20):
Ben's been involved in advising clients on planning for a liquidity event such as the sale of a company or private equity transaction, as well as providing guidance on charitable giving arrangements through both direct giving as well as the use of trust so as to maximize the income tax and transfer tax benefits of that contribution. Again, Ben and I have been able to collaborate on several of our clients to help put a plan and a strategy in place to maximize that family's goals and objectives. Ultimately, create protection, intergenerational wealth transfer, as well as income tax and transfer tax savings. Now, from a recognition standpoint, Ben has achieved the status or recognition of the best lawyers in America in trust in estates from 2020 through 2023 by BL Rankings, as well as Thompson Reuters had him listed or recognized as one of the Southwest Super lawyers Rising Star from 2014 to 2015.
(02:31):
From an education standpoint, he has a JD from Arizona State Universities, Sandra Day O'Connor College of Law, and an undergraduate degree from Indiana University. We're going to talk about not only the basics of estate planning, things that everybody should be thinking about no matter what their net worth or financial circumstances are. We're going to talk about the basic documents that almost everybody should have as part of a well coordinated plan. Then we're going to dive into some of the fun stuff, the advanced topics and strategies on how to protect, build, grow, distribute your wealth in a meaningful way that can not only save on income tax, but the estate or transfer tax as well. Stay tuned for today's episode. All right, well let's get things kicked off. Welcome, Benjamin. So happy to have you here with us today.
Benjamin J. Kelly (03:37):
Thanks for having me. It's good to be back with you.
Dave Alison, CFP®, EA, BPC (03:40):
Absolutely. Let's get things kicked off. I did a little bit of an intro of what we're going to cover today and in all this confusion and complexity and mystery around estate planning in general. Why don't you break it down for us. What is estate planning?
Benjamin J. Kelly (03:58):
Sure. When people start coming out of estate planning, it can be overwhelming. Wills, trust, taxes, fiduciaries, it can be overwhelming, but at the core of it, for most people, and I would say for everyone who thinks about an estate planner, it's really about answering three basic questions. When you break it down to these three questions, it really starts to not feel so overwhelming. The way I think about estate planning is one, where does your stuff go? Two, who's in charge? Three, what are the rules? If you think about it, at its crux, all estate planning is trying to figure out where my stuff goes when I die. Where does my stuff go when I die, who do I want to be in charge of that stuff, and who's it for the benefit of? Where does my stuff go? Who's in charge? What are the rules? At the highest level, without getting granular, that's really what an estate plan is it. It's really just about planning for when you're gone by answering those three questions.
Dave Alison, CFP®, EA, BPC (05:08):
I think some of the mystique around this that I typically hear from my clients, and I'm sure you've run into this before, is kind of twofold. Number one, they don't know a lot about estate planning in general. They hear the word estate and they might think like, well, I don't have enough money to have this be my problem. I'm not Bill Gates or Mark Zuckerberg. Or the second thing they might hear is that they have saved up substantial assets, but in today's law environment the estate exemption is what, over $24, $25 million. They might be like, "Well that's not my problem because I don't have over $24, $25 million." I guess when you ask those three questions that you just shared earlier, to me it sounds like those are pretty important questions for anybody, not just people with substantial super high nets, net worth. Would you say that's fair to say?
Benjamin J. Kelly (06:14):
I think that's fair. Right. I think about my journey as an estate playing attorney. I started on this process back when I was 24. My wife and I got pregnant, she was 24, she got pregnant, I was just long for the ride. I was a young dumb kid. I was 24, my wife was pregnant with twins while I was working at Schwab. She was a school teacher. We didn't have a lot. We were 24, we'd been married for two years and I started saying to myself, oh my gosh, I have a wife. I'm going to have two kids. I have a responsibility. I need to think through how to provide for them if something goes wrong. I didn't have anything right? I didn't have much I should say. Really the need for an estate plan transcends net worth. It's really anyone who has people they want to take care of, you have a little bit.
(07:03):
People forget when their kids turn 18, they need to do estate planning. I think that's a common misconception. Their kids running off the college, well, kids drink and make mistakes, people get sick. Having a healthcare proxy, and we'll get into some of the documents for your 18 year old versus being an 80 year old. Everyone needs estate planning. The complexity of what that estate plan looks like, the number of moving parts within that estate plan will change based on your fact pattern. Everyone needs an estate plan. The complexity of that estate plan will be dictated by your personal fact pattern.
(07:40):
There's not a single person I can think of over the age of 18 who doesn't need some form of estate planning. That misconception of, well the exemption's really high, the federal transfer tax exemption's really high. I don't need to do one or I don't have anything, I don't need to do anything. It's the wrong question. You have stuff, you could be in an accident, you need someone to help make decisions for you. That's everyone. That's who needs an estate plan is everyone it just who's going to help you and what it looks like will change based on your case.
Dave Alison, CFP®, EA, BPC (08:16):
Yeah, I remember mean even being in this industry and advising clients, my journey with the estate plan started similar to yours when I had my oldest daughter now Everly, who's six, and I remember it, she was born at the end of September, and then in December we were in the estate planning attorney's office getting the documents drafted. I remember talking to my wife about this process and it was similar, well, do we really have enough to warrant even a trust at the time? I remember sharing with my wife, we have the ability to create assets, I don't want to say out of thin air, but by leveraging our money through something as simple as term life insurance. For me it was like, okay, there's two big things I need to do when I have a child. I need to load up on a bunch more term life insurance because at the time I bought my first $2 million of term life insurance, it cost me like $800.
(09:16):
Then I needed to have a trust set up so that if I were to pass away and my wife were to pass away, that life insurance would go into the trust with some of the things that we'll talk about that a basic trust has to be able to help support the health, education, maintenance, and welfare of my children. It was overnight for a fraction of the money we can create this multimillion dollar benefit for the benefit of ultimately my kids. Every time we've had more kids, we've had to buy more life insurance that ultimately goes to fund that trust to be able to take care of them.
Benjamin J. Kelly (09:53):
That's my exact story. I mean that is exactly what happened to me. USAA 20 year term at 24 years old. That's all I had. I needed something to control it. I mean I did the exact same thing 20 some odd years ago is I bought life insurance, which again, didn't pay anything until I was dead. That's the whole plan. That was the whole shooting match was if I got hit by the proverbial bus, I had the peace of mind knowing that I had done what I could to provide financially and to provide the team around my kids, whether it's the people who were going to physically raise my children, the guardians to the trustees the people that are going to manage the money for my children. I had that proverbial peace of mind. If I got hit by the bus, I was okay and so much you, that's exactly how I started.
(10:49):
It's so often you hear that same story. We just had our first kid, oh we've been mean to do this. We had kids 10 years ago. Okay, great. Again, you don't have to be a parent to do the planning, you don't have to be a parent. I think it's what motivates a lot of us to start this planning conversation. You can have just a partner, you can have a spouse, you can have siblings, you got parents that you're responsible for. It's much broader than having people below you or next to you that you need to take care of. It's just you want to take care of yourself, you become disabled. Often you hear about a tragic accident, someone was in a car accident or they had a stroke in their thirties and they have no documents, they have no planning in place and they end up in court fighting with family members about what they intended. You don't have to be that way. There's easy ways to get there. Estate planning transcends, again, net worth, transcends marital status, relationship status, parental status. Just everyone at some level needs some type of plan.
Dave Alison, CFP®, EA, BPC (11:59):
Absolutely. I want to touch on that court thing in a minute, but the one thing I also want to add and I share with a lot of our clients, some of the estate planning decisions we've had to make and they evolve over the years. When Everly was born, we bought the first life insurance policy, then Avery, we bought another life insurance policy, then Kinsley who just turned a year, we bought another policy and all those fund the trust. I think something really important I've tried to share with my clients too, is there's a difference in estate planning between fair and equal. For example, maybe you have your own family business and you have three children and one of the three children wants to take over the business, but the other two want nothing to do with it. There's ways through estate planning to equalize that or something that my wife and I deal with that was enormously concerning for us is when our oldest daughter, Everly was four, she was diagnosed with type one diabetes and my wife has been incredibly concerned about her lifetime healthcare expenses.
(13:00):
Again, when I talk about fair but not equal, we were able to buy even more life insurance on my life with Everly as a greater beneficiary than the other two children who don't have to deal with that health burden so that we knew there'd be medical expenses set aside for her in the event maybe she wasn't able to find a job that had great health insurance and could subsidize the cost to give her the best chance at having a normalized productive life. When I think of estate planning, it goes so far beyond just here's some documents and what do you want to do? It's such a personal decision between a family.
Benjamin J. Kelly (13:44):
Well yeah. I think oftentimes people think about estate planning as a destination. I got the plan done, but it's actually a journey. What I mean by that is as your life evolves, your estate plan could evolve. It's constantly evolving with you. Who I wanted to raise my children when I had two and I was 26 versus who I want to raise my children when I'm 45 and my youngest is now 14, I have four kids, my youngest is now 14. It's a completely different scenario and where you're at and who your relationships are evolve just like your needs evolve. We're almost kindred spirits here. My son's a type one diabetic as well and it keeps me up. I don't spend my HSA.
(14:32):
We had an open and frank conversation with his sisters, "Hey this pool of money is just for him. It's his insulin money long term." And everyone understands it. Even my 14 year old to my 20 year olds. It's an open and frank conversation, which not everyone wants to do, but it's trying to set up that scenario where fair and equal aren't synonyms. They're confused as synonyms but they aren't synonyms. That journey and destination concept gets confused. That fair and equal get confused. That you can sit static or it's only for wealthy people, it's only for people with kids gets confused. It's really an evolution conversation about really thinking what's going on in your world and just giving you that, again, peace of mind that I mentioned earlier.
Dave Alison, CFP®, EA, BPC (15:19):
Absolutely. We've been throwing around some industry lingo, things like wills and trusts and power of attorneys. Benjamin, can you kind of break down what are the core documents? Somebody who maybe doesn't have an incredibly complex situation and towards the middle part of this podcast when we're going to get into some of the stuff that you and I salivate over, the fun stuff, the complicated stuff, the stuff that can save clients enormous amounts of lifetime taxes. The core documents, what's the bread and butter of a competent well defined estate plan?
Benjamin J. Kelly (15:56):
For me, core estate planning documents really consist of four documents and that's a revocable trust, a will, a financial power of attorney and a healthcare directive. A revocable living trust, a will, a financial power of attorney, and a healthcare directive. Much like you, I've had those since I was 24. Again, I didn't have probably enough money in my bank account at that time to justify a revocable trust but I did have money in that life insurance that I owned to provide for my wife and provide my children to justify it. If we probably went out in the street and surveyed a hundred people, 99% of them would say a will says where your stuff goes and a will can and does say where your stuff goes when you die. I like to take it a step farther and use a revocable living trust. Think about a revocable living trust really is a will substitute.
(16:55):
Both documents do the same thing. They say where your stuff goes when you die. They both contain a recipe that says when Ben dies, when Dave dies, when Jenny dies, here's where our stuff goes. I tend to use a revocable trust because I want to avoid court process called probate. If you die with just a will, typically you have to go through a process called probate. Probate is simply, it's Latin for to prove where stuff goes. While laws have made probate simpler and make it informal where you're usually just sending in documents to court, you don't really have to go to court very often. You still usually have to hire lawyers. You typically have to publish a newspaper. There's usually a four to six months delay if you're in a state that's reasonable. If you're in a state like California, it can take 8 to 12 months before you can even get the first court hearing.
(17:56):
I mean it is a process that although has been streamlined, can still be confusing and can still be cumbersome and it's very public. Everyone in your neighborhood could come down and see what Dave owned if Dave dies with a will. We typically like to use that revocable trust to create privacy. You get to the same place, you get to the same place. You just simply avoid owning things when you die. Ben and Jenny have had the Kelly Living Trust dated December 12th, 2002 for 20 years almost right? Ben and Jenny have owned four houses but never owned a house. We've always owned it as Ben and Jenny as a trustee of our trust. Fortunately, we like ourselves so we've allowed ourselves to live in our trust. We use this revocable trust as the main repository of our assets to avoid this core process called probate.
(18:49):
I don't care that it's in a trust or in my individual name because every trust has three parties. The grantor, the person that creates the trust, the trustee, the person in charge of the trust, and the beneficiary, the person who benefits from the trust. On a revocable trust I'm the grantor, I'm the trustee, and the beneficiary. If the beneficiary has to ask the trustee for money, Ben has to ask Ben for money. Ben has to use the trust money for Ben. I'm okay, I don't have any inner conflicts that I know about. I don't care that it's in my trust or it's in my individual name because I have control. What I do have, again, I hate to sound like a broken record, is this piece of mind that if something happens to Jenny, she can easily step in and work with the team that I've assembled around us, that we as a team have assembled around us to easily transition, not deal with courts, not deal with lawyers right away.
(19:48):
I mean it's bad enough she had to deal with me during her marriage as a lawyer. I don't want her having to deal with them and feeling this pressure to deal with them when I pass away. We use this revocable trust that simply says the exact same thing a will would say, she just has a streamlined process. We can get a little more into how structure or revocable trust you have a pour over will. Because I'm a lawyer, I'm always worried we create this trust, put everything in it. Some people will let me help them, some people won't. What if you, Dave, have five shares of Disney stock and a paper certificate because your grandfather gave it to you when you were born in your desk drawer, but you never tell me. It's sentimental, you don't really have it because it's a financial asset that changes your life. But you have something sentimental of value.
(20:38):
I'm always worried that I'm going to miss something as a lawyer so I have an insurance policy in what's called a pour over will, which simply takes your stuff and pours it into your trust when you die. Again, keeping the dispositive provisions of your assets private, they simply say, "Hey Judge, Dave forgot to give me this five shares of Disney. Just put it in his trust for me when he dies." And it's easy. More important, you have a will because that's where you name the guardians for your kids. The single hardest decision for husbands and wives typically or husbands and husbands, wives and wives to really make about their children is who's going to physically raise the children if something happens to the two of them. The will is where those are named. The guardians of the children are named in that document.
(21:31):
You have to have a will at a minimum if you have children because that's where you name your guardians. Final two pieces of the core document packages typically a financial power of attorney and a healthcare directive. Again, I view these as kind of backup documents to the trust, especially the financial power of attorney. Because Dave, you and I have worked with our families and our clients and we've properly funded their trust that financial power of attorney shouldn't have much to do and for some reason banks hate them. I don't know in your experience, banks hate financial power of attorneys, even though the state's legislature gives us the ability to create them, they tell us exactly how to write them. Every bank lawyer I've ever come across is like, "Your power of attorney is no good." But there's certain things I can't get in a trust, like a credit card bill, a mortgage, a 401k, an IRA.
(22:23):
There's just some things that I can't put in a trust. We have those financial power of attorneys again as a back stop for those things that we can't put in but trust in. I think more importantly is that healthcare directive or living will. Right? This goes back to, there's something, I date myself that Terry Shivo case out of Florida where that woman sadly had a brain aneurysm or stroke. I was a little young to remember the exact details, but her soon to be ex-husband, they were in the middle of a divorce and her parents who were devout Catholics, I'm not saying that anything against Catholics, but they were in a real moral debate over what she wanted, be kept alive on life support because she ended up living for 10 years on life support or remove her from life support. It was a news drama that played out in real time over a 10 year period where the parents and the soon to be ex-husband were fighting over what she wanted.
(23:23):
We all learned like, no, no, no, that's the worst to be lingering. Let's sign a piece of paper that says exactly who makes the decision and what that decision is. What does my end of life care? This is not a DNR, this is not a do not resuscitate, which you often see in older patients or terminal patients. This is simply who has the power to make the decision and what your end of life care is. If you're in an irreversible coma, vegetative state, brain dead, what do you want to have to have happen? It's not a DNR. Those are kind of your four basic courts that revocable trust the core over will the financial power attorney and the healthcare director.
Dave Alison, CFP®, EA, BPC (24:06):
Gotcha. I want to dive a little bit more into what I would call the cast of characters in a little bit and some options. You mentioned probate and probate costs or probate court, the whole process. Do you have any kind of ballpark of what the estimated expenses associated with probate are? Because I mean it seems if you do the right planning, probate is optional as long as you make sure your beneficiary designation forms are updated and then you utilize a tool like a trust, you could essentially avoid probate altogether.
Benjamin J. Kelly (24:42):
I think that's a great way to think about it. Probate is optional, right? If you do your homework. Beneficiary designations on life insurance and retirement accounts. Even your checking account can have a beneficiary designation at some institutions, a brokerage account, sometimes some states, Arizona where I'm sitting, allows you to put a beneficiary deed on your house, Ohio, where my grandmother lived, allows you to do a beneficiary deed on your house that says, "Hey, when I die, give my house to these people." If you use that trust and you use those beneficiary designations, probate is essentially optional. Now, probate costs, probate time, it's such a widespread Dave. I've seen where I can do a probate $5,000 to $10,000 because it's one asset or I've seen it cost hundreds if not millions, right? Because once lawyers are involved, once people die, once free money is involved, the process seems to get dragged out.
(25:42):
I had a gentleman pass away in California, I thought I did all my homework, had all the accounts in the trust. Son calls me after dad dies and goes, "Oh by the way there's a $750,000 account in dad's name." I said, "Say what?" And he was survived by his widow. They'd been married 60 years. Took me nine months to get her appointed so she could just get to the money that was going to go to her anyway. Right? Nine months and probably $50,000 in delay after delay by the court. The court would just say, "We don't want to hear this this month, we're going to kick it down six, don't want to hear it." Some states on the East Coast have statutory fees where it's a percentage of the assets that go through probate. It's a percentage, it can be a couple percentage points and then it's a percentage on income and a percentage of assets distributed.
(26:37):
You could see probate widely swinging from $5,000, $10,000 to $100,000 in a heartbeat. You can see it take 6 months to 18 months. You can see in Florida where they won't let you close the estate until you get your closing letter from the IRS, which is a letter the IRS sends you, if you're in a taxable estate, you have to file a federal state tax return. I mean you could be open for 51 months at the worst. It can be a really cumbersome process with lawyers, with state filings, with publishing a newspaper. It's really hard to tell you there's an easy answer of what probate looks like. You don't know. You just don't know. I was just having lunch with a gentleman in New York last week and he works on Long Island. I think it's Kings County. Probates can to take three months, it could take eight months.
(27:34):
He doesn't know until he shows up to court which judge he gets, which commissioner and how long it's going to take. It's really a cumbersome, expensive, headache of a process and why go through it? Because you don't want to retitle a bank account in your lifetime into your trust. You don't want to put it in a deed, a house into a trust because when you refinance you have to file out a certificate of trust. It just not worth it. Widows and widowers, children shouldn't have to deal with that when someone passes away, they should be able to focus on grieving. I don't know if that answered your question.
Dave Alison, CFP®, EA, BPC (28:09):
No, it does. I'm sure some of our listeners have had to deal with that horrible process and to the point it's all optional.
Benjamin J. Kelly (28:16):
You know who probate's easy for? Lawyers. Lawyers are always the one saying, "Probate's easy. We don't need a trust." Well that's inventory, right? That's inventory for that lawyer who says probate's easy. It's never easy for the family that's left behind after someone dies.
Dave Alison, CFP®, EA, BPC (28:32):
Absolutely. Absolutely. Let's go back and talk about the cast of characters and some of these documents before. Just kind of go back to my own situation. We obviously have appointed guardianship for our children. If Alana and I were to pass away, who's going to take over raising them? And then we also have established trustees in our trust. To your point, Benjamin and Alana and I trust her and I are both trustees. It essentially works like a joint bank account. We both have the access to the money. It's not like one's hidden from the other one. Of course, if you do manage separate finances, you could have your own individual trust. Then we have what's called a successor trustee in our trust as well. In which case for us, we appointed my older brother because again, he's very financially responsible. Benjamin, can you kind of walk us through who some of these people are and the importance of thinking through who these people might be for our clients as they're kind of thinking about their overall estate plan.
Benjamin J. Kelly (29:41):
Sure. The two most important, I guess there's three most important roles that we'll break it down. One you've identified, which is the guardian. Who physically raises the kids? Who's the stand in parent if you and your spouse are unable to raise your children? They don't have to be the same person in the second role, who manages the money. Oftentimes they are. Sometimes they are. Sometimes they aren't. The third role is the healthcare decision maker for you and/or your spouse. I think the first one, who do you think around you in your sphere will raise your children with the love and dedication that you and your spouse have or you have if you're a single parent. People always default to family and it's not always the right answer. I think early as an early parent it is.
(30:36):
As you evolve, so for me it started with my uncle, he lived right around the corner from us. Then it evolved to my wife's sister, then it evolved to my sister when the kids got a little older and had a vote. Now it's evolved literally to my legal partner and his wife, he sits on the other side of this wall. I've been working with him for 16 years because I can't think of anyone. For us the diabetes is a big deal and my kids are 14 and 16 and the youngest two. Picking them up in the middle of high school and moving them back to the Midwest, that doesn't make any sense. We've talked to everyone so that guardian, that parent stand in can evolve and it shouldn't be static. You have to think about where your kids are. That's number one.
(31:21):
Number two is who's going to manage the money? We've been talking about the trustee, whether it's the trustee or the personal representative under the will or the financial power of attorney. I think about this financial decision maker, and I'm going to talk of it in the form of trustee of as someone who wears three hats. They wear three hats. As you think about who should fill that rule, you have to think about the three different hats of trustee wears. One is just purely administrative. Who can work with the lawyers, the CPAs, the financial advisors, whoever's on the team and really handle the administrative, gathering the assets, building a balance sheet, working with a financial advisor to build a financial plan, paying the taxes, tracking everything, filing the tax returns. That's administrative, unsexy, boring stuff but it has to happen just like when you and I are alive. We have to manage our taxes, we have to manage our checking account. We have to manage making money and getting it in and tracking how we're allocating it, how we're saving for retirement. That administrative role.
(32:30):
Next is that, I just started to get to it, is that investment role. How do I work with a Dave to invest my money and grow my money if that's my goal? If I'm taking over for a beneficiary who's two versus a beneficiary for 18, my investment decisions are different but I have to have that financial wherewithal. Not to make the investment decision but to understand how to work with a financial advisor, work with a financial professional to build an investment plan for my beneficiary. Because my task is to manage and preserve that money and whether it's to grow it, keep it, use it will be dictated by the rules of the trust.
(33:12):
Then that final decision when you're wearing a trustee hat is how do I spend the money? How do I help that child decide if they can afford a Corolla at 16 or get a Lamborghini Countach, which I'm probably dating myself by using that as the model I'm referencing. Do you go to private school? Do you go to public school? Can you afford a four year private education? Can you afford a four year public education? Should you go get an associate's degree? That decision on how to consume the money that's been left for the beneficiary is that third half. I think what people just, again, default to is, and I did I do this as well as family, family, family. That's who you trust implicitly. Death and money change everyone. Relationships change when death and money evolve. If you've bought a ton of life insurance in your life and now your kids have more money than, I'm going to pick on you for a second, your older brother, does a jealousy sneak in?
(34:13):
Even though he is an uncle, even though he probably loves your children and will take care of him. You have to think about that dynamic which is often overlooked. Even though he may be able to do the admin and do the money management and do the decision making, you have to think about that balance, right? As I think through trustees and I talk to families, it's really who in your sphere, who around you do you, one, trust. I mean I don't mean to be flippant, I know the name trustee has the word trust in it. Who do you trust and who has the skillset to wear all three hats? Again, that's going to evolve. People always think about these documents of who's going to be there 70 years when I die down the road, 50 years when I die down the road, I think of things in three to five year tranches.
(35:00):
Who's the right answer for the next three to five years? Who's in my sphere? Because if we try to start going, all the people I want to pick are my peers, they're my contemporaries. You'll never make a decision because you're like, well they'll be dead when I'm dead. Right? I mean I'm sure you've seen that in the conversation in the room, which is who do I pick? We have to have that balance of who wears the three hats. Who do we trust? Who do we think in the next three to five years? Not being afraid to change that, making sure you're thinking through who manages money might be very different than person who raises the kids. As your net worth creeps you have to think through, should family be involved? Should you have a professional fiduciary?
(35:45):
That's something I've evolved into during my practice, which I was never professional fiduciaries, corporate trustees when I was younger, but as I've seen families try to manage it doesn't always go so well, right? Because that death and money dynamic does change people. Do you want a big bank corporate trustee? Do you want a non-money manager corporate trustee? That's kind of how we work through that decision tree. It's so unique, just like all the families we work with. There's no boiler plate answer. That's how you think about trustees.
(36:18):
The other thing you have to think about is you think about through your trusteeship is when should the kids be in charge of their money? This gets back to what are the rules. People think, oh, money and trust. My kids could never spend it. No. The trustee is going to pay for soccer clubs and pay for lacrosse and pay for the math tutor and buy the ballet lessons. Whatever it is, they will use the money for that child benefit. The next question will become at what age should children get access to wealth? What should they be thinking about of hey, here's the people I want to help my children until they get to a certain age. I'll just use my own family.
(36:56):
Put the training wheels on at 30, you're going to work with Uncle Rob until you're 30. At 30, he's going to have you sit at the table with Dave. You'll get to hear how Dave built an asset allocation model. He'll figure out how to set a budget, he'll help you teach you how to make decisions with the money. At 40 Uncle Rob, if he says you're mature and responsible, take the training wheels off, take the training wheels off Uncle Rob, let Gracie, Slater, Finny, Molly on their own at 40 if they've proven they're responsible and are ready to manage somebody. I really like that older age myself. Because it allows the kids to get out of their way.
(37:37):
Think about yourself at 25 Dave. Well I'll use myself. I've been 25, I've been 45. 25. I had two kids. I was in law school, I had a house, I had a washer and dryer. Thought I was on top of the world. But 45 year old Ben just goes, I was a young dumb kid. I know so much more than I did back then. That's kind of how I approach the trustee idea, which is what's a trustee do? They wear three hats. Who do I want? Someone I trust and it's going to evolve over time for me and I want them there mostly to guide my kids so my kids can be in charge later in life.
Dave Alison, CFP®, EA, BPC (38:11):
Benjamin, the biggest thing out of all of that is as long as you are alive and you're the trustee. In my case, as long as Alana and I are alive, either one of us, we could change it. Just like you said that I find many times clients evolve and outgrow, just to your point, of who their initial trustee was. I have a lot of the clients that I work with in Silicon Valley who have amassed this massive amount of wealth and they've named maybe their mother or father as their trustee. If their mother or father really knew how much money they actually had, they would probably fall to the ground and pass out. The mother or the father might not be the most prudent person to manage an estate of that size. We've talked about, and you actually are a professional trustee for some of my clients, you can find professional trustees like that.
(39:13):
Or to your point, you have to find somebody that you trust implicitly that isn't going to have shell shock of the amount of money that you potentially have. Even if you're not at those astronomical values, I can't tell you how many times I've seen and met with clients that are retired or getting ready to retire. They have $4, $5, $6 million of assets, maybe a really nice nest egg that they've built up and now their kids are 21. If they were to pass away, their trust gives them everything outright at age 21. You mentioned 25. I don't know if somebody would've given me a lump sum of that type of money, even $500,000 at age 25. It probably would not exist today by 38. Right?
Benjamin J. Kelly (40:01):
No.
Dave Alison, CFP®, EA, BPC (40:02):
That's the control you can have. My first trust when I had set it up had three tranches. It was like the kids get 30% at age 25 and another 30% age 30, and then the remaining 40% at age 35. That might work for some people. We've even evolved our situation where why distribute the money out of the trust? Why not keep it in the trust but make the kids the future trustees to control so that Everly can go to the trust and say, "Hey, Everly's, the trustee. Everly wants some money. She gets it out." At the time that, let's take Alana and I's situation with our trust, Benjamin. At the time we pass away with our living revocable trust, that trust now goes to an irrevocable trust. Right? Can you talk about just at the high level, because I want to save some time for some of these advanced estate strategies, but this is kind of a good parlay into what happens with the money and the funds at the time Alana and I pass away and it becomes an irrevocable trust?
Benjamin J. Kelly (41:06):
Yeah. Great commentary. One, it is revocable while you're live. All that means is you can change it every single day until the day you take your last breath. You're not locked in. When you die, what happens are irrevocable trusts are created both for Alana and then ultimately for your children. We like irrevocable trusts as planners because irrevocable trust gives our loved ones things we can't provide for ourselves. What do I mean by that? You die and leave everything in a trust for your wife, an irrevocable trust for Alana. Again, three roles, grantor, trustee, beneficiary. Alana is the trustee. Alana's the beneficiary. Alana has money from Alana. She should be okay. By putting it in an irrevocable trust, you're the grantor. You're the person who set it up. If Alana gets sued because she runs over a young estate playing attorney who's not so young and they say, "What do you own?"
(42:06):
She doesn't own what's in the trust you created. Why? It's an irrevocable trust that you created for her benefit, she has to use money for her own benefit. She's limited to a standard. Right? It's called health, education, maintenance, support. You've created creditor protection. In a fit of heartbreak after you die, she gets remarried without a prenup, and then subsequently divorced because you know the milk delivery man isn't really a good guy. Okay? Or you marry a black widow, if you flip the script, what's in the trust isn't hers. She doesn't lose it in a divorce or shouldn't unless you're in Connecticut. Then if we do our job when it goes to the kids, it's estate tax free. Same exact benefits for the kids. I love my children. Gracey is a great kid. Slater's a great kid. Finny is a great kid.
(42:57):
I want to protect the money I create during my lifetime for them. Not for someone who's going to sue them, not for an ex in-law. If I'm fortunate enough to have money where it's taxable when they die, I don't want to pay taxes. I can create trust that, again, benefit them their entire lifetime. Their entire lifetime. It'll pay for them to go to college, it'll buy their first car, it'll help them supplement their income. It'll make sure there's a roof over the head and food on the table. Beneficiaries spend all the time trying to get money out of trust. I spend all my time trying to get money in a trust. There's this disconnect and what we try to do is teach beneficiaries of, hey, you want to start a business, you want to buy an asset, you want to invest? Do it inside the trust.
(43:47):
You can run the business, you can benefit from it. You can live in the house. You want to buy groceries, take money out. You want to take your family on vacation, you want to trustee, I want you to have a family or treat once a year and send my kids to Kenny Bankport, take the money out and buy them a plane ticket. You want to buy the place in Kenny Bankport for my kids to come visit? Do it inside the trust. This revocable trust while you're live, you can change the rules, you can change who's in charge once you die, it becomes irrevocable. It becomes irrevocable to give that credit protection, that divorce protection, and if we do our job right, estate tax protection throughout the generations. Let's spend our last few minutes talking about this whole bigger estate tax thing.
Dave Alison, CFP®, EA, BPC (44:31):
I remember about four or five years ago, I was meeting with one of my clients who had amassed a large amount of money. It was to the tune of about $50 million and they were in their mid forties. I had asked them, "Have you ever heard of the estate tax or this transfer tax?" They had no idea what it was. When I explained to them if they had passed away in a car crash, unfortunately that day, how much of their net worth they were going to lose, their eyes were just wide open. Benjamin, talk a little bit about what this estate or transfer tax is, how much it is, who it impacts, and some legislation that's on the horizon here plus some common solutions that you implement with your higher net worth clients. Again, we're not going to be able to teach all of them here. Might make for another episode later on, but give us a rundown of what this is.
Benjamin J. Kelly (45:22):
Sure. If we step back and go, what do our three questions we started with, where's our stuff go? Who's in charge? Where are the rules? There's only three places your stuff goes when you die. Family, charity, and the IRS. That's about it. Don't care if you're worth a dollar, you're worth a billion at the end of the day there's really three places your stuff goes, family, charity, and the IRS. Why is the IRS involved? You've alluded to we have this transfer tax, this excise tax. They tax you on the privilege of passing wealth to your loved ones when you die. Everyone's familiar with the income tax, everyone's familiar with the capital gains tax, everyone's familiar with sales tax, but they never realize that, hey, when I earn it, I pay an income tax, when I grow it, I pay a capital gains tax, and when I die I got to pay an estate tax or a death tax to leave the same dollar that I just spent money twice over to leave it to my loved ones.
(46:14):
This is a little bit of a moving target and that's constantly changing. Historically, rates have been as high as 55%. Now they're 40%. Anything above a certain threshold, you have to pay 40% to leave your loved ones. That number right now is 12,060,000. Scheduled to go up to 12,920,000 on January 1st it's actually 10 million, but it's indexed to inflation from 2010. They adjust it every single year. Right now it's 12 million and this is per person. If you're married couple, you get $24,120,000 million, next year it'll be 25 and change. Right? That's great. It means less than about 5,000 to 6,000 families will file an estate tax return each year. The number is staggeringly low.
(47:11):
However, in 2026, January 1st, 2026, the way the 17 tax cuts were written, that number draws back to 5 million indexed to inflation, 12 million today, 5 million indexed to inflation called six, six and a half. That change alone can cost a family two and a half million per parent. What do I mean by that? 12 to 6, that's a $6 million delta at 40%. That's 2.4 million. Simply by living a few years, your family could pay two and a half to $5 million more in tax simply because you lived 36 months. This thing is constantly moving. We're constantly watching for those who happen to have a little more than those that happen to have a little less, this tax bill can be an unwelcome surprise when someone dies. That estate tax is due in nine months in cash after the second death for simplistic conversation. Right?
(48:16):
Nine months in cash. They don't really take IOUs. If you're a family owned business, a really good income producing family owned business, but it's in hard assets and you're a construction company and maybe you have a bunch of equipment or you manufacture biscoti, right? You don't always have cash laying around because you've deployed it into the business to keep growing it. To come up with that kind of cash within nine months can really shatter businesses that lifetimes have been spent being built. You asked about legislation. Bernie Sanders wanted to take that number, again, that's not a political comment, this is his bill, from 12 million to 3 million. It's been argued to take it down to a million. Think about that. A million dollars, which while it is a lot of money, isn't a lot of money. The number of families at a million dollar exemption or a 3 million exempt impact. It's infinite, right? Compared to the 5,000, 6,000 families that 12 million plus impact each year.
(49:20):
This is a silent thing that people aren't aware of. If you're not paying attention, oh I'm fine, I'm fine, I'm fine and then until you're not. What we often will do with families is there are ways, there are techniques, I'm afraid we're going to run out of time today to talk about them in depth is you can create those irrevocable trusts I was talking about earlier. You know how I said when you die, Alana gets an irrevocable trust? My children get an irrevocable trust when we both die. There are ways to create those irrevocable trusts today and move those assets today at today's value. So as they continue to grow from 12 million to 15 million or 2 million to 4 million to 8 million, right? What's money double every 14 years at 5%, roughly right?
(50:11):
As that money grows over my lifetime that I don't have to pay state tax on it when I die. Those are the things we have to get into when we look at that family, charity, and the IRS. While today's numbers are usually interesting, they're not as interesting. If you live 30 years, which I think most of our clients are going to live 30, 40, 50 years, if you're in your forties or fifties, you should make into your late eighties, early nineties in this day and age, especially if you have higher net worth, you can afford better medical care.
(50:46):
Your life expectancy is going to be longer, your rates of return are going to be higher. We have to start looking for ways to move money off the balance sheet because the estate taxes imposed on the fair market value of what you own. Just don't own stuff. I didn't tell you give it to your kids. I didn't say write a big check to your kids. I said, create a trust. Create a trust for your spouse, create a trust for your kids. There are ways to have bells and whistles with that where you can give it away but still benefit from it.
Dave Alison, CFP®, EA, BPC (51:15):
Benjamin, some of the terminology just as we kind of land the airplane here, because I know you have a hard stop is as you think about the terminology in the estate planning world right now, you have things that are very popular like SLATs, right? Spousal lifetime access trust. Can you name a couple of the other just kind of acronyms and tools you mentioned the slat would be like me setting up an irrevocable trust for Alana. Vice versa. Alana could set up an irrevocable trust for me. Again, don't try to do those on your own. You need to work with an incredibly competent attorney and an advisor to do that. There's more complication than just that. What are some of these other kind of high level strategies that you're seeing or are the most efficient in today's world?
Benjamin J. Kelly (52:00):
Yeah, just off the top of my head, it's the SLATs, which again, there's some nuances that some really technical nuances that have to be discussed. There's intentionally defective irrevocable trust, IDITs, which is an irrevocable trust you either set up for your spouse, your children, family members, where you continue to pay the income tax. That IDIT is an idea. Some attorneys like GRATs or grant retained annuity trust, I'm not a big fan of them, which we can get into the pros and cons of those compared to an IDIT in a different conversation. BIDITs, or beneficiary trust, sometimes called 678 trust, where the beneficiary actually pays the income tax for the trust, not the person who sets it up. QPRTs, qualified personal residents trust, CLATs, charitable lead annuity trust, right? We as lawyers like to keep everyone confused and come up with all these acronyms or these different types of trust, but each family, depending on their needs, will probably have one, two, or three of these. Right?
(52:59):
It's do you want a one bedroom house, a two bedroom house, a three bedroom house? You really have to customize the solution, the type of trust based on how you want to answer those three questions. Whereas your stuff go, who's in charge? What are the rules? Once you've really identified that and the family, charity, IRS, you start building those types of I trusts around the plan that allows the family to have flexibility, consistency, and really achieve those where's your stuff go? Who's in charge? What are the rules? Consistent with what they want their wealth to do.
Dave Alison, CFP®, EA, BPC (53:35):
That's great. Well, Benjamin Kelly's contact information will be in the show details here. Please feel free to reach out to him if you have any questions over some of the concepts, reach out to myself as well. Benjamin, thanks so much for sharing some time with us today. I think we thank you delivered some great content that hopefully continues to help protect people, their families, and their money.
Benjamin J. Kelly (53:56):
I look forward to many more of the same.
Speaker 3 (53:58):
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