THURSDAY, JANUARY 25, 2018
The new estate tax law has some people thinking that estate planning isn’t as important anymore. Prism Insurance Agency might change your mind. Our guest estate planning expert, Bruce Udell, explains why taxes aren’t the only thing you need to consider to make sure your assets go to whom you choose. He discusses wills, trusts, powers of attorney, the new estate tax levels, and why having estate plan is still so important.
TONY: Are you one of the many Americans with no estate plan, or perhaps the dust is thicker than the documents? Well, join us today as we have Bruce Udell, an estate planning expert, author, and speaker with over 35 years of experience, to share with us some of what’s new in the estate planning arena, as well as some considerations to think about when planning your estate. Welcome Bruce.
BRUCE: Thank you. Glad to be on the program. Appreciate you inviting me in to get my views on the things I love to talk about.
TONY: Well, I think it’s a topic that’s near and dear to all of our hearts and now that we’ve had this new, dare I say, permanent tax law affecting estate taxes, we went for many years not knowing what was going to happen and now we finally have some permanency until Congress and the president change it again sometime down the road, but given the new increased estate tax exemptions and the portability, do you feel people still need to do estate planning?
BRUCE: Absolutely I do because they changed the exemptions and because they’ve changed the way you can use the exemptions. It really doesn’t change the fact that people still love their families, right? They still want to leave money to their families when they die and they still want to be able to help their children and help their grandchildren with their college education and all the things they used to do and they also still want to protect those assets, right, from creditors and lawsuits and divorce because really in the United States today, you have a much better chance of one of your heirs getting divorced than you do of paying an estate tax, right? The estate tax rate, last time I checked, is 40%, but when you get divorced (at least in Florida) you lose 50%. A lot of the issues surrounding estate planning aren’t tax related. They’re related to how do I leave my money to my children and how much can I afford to give to my children and when can I afford to give it to my children? By the way, I still like to donate to my charities, can I still do that? There are still an awful lot of reasons for people to do estate planning.
JIM: Versus just leaving it up to the court system or somebody that has no knowledge of what your wishes are so most people who are interested in estate planning really have no idea where to start, so what are the basic questions people need to consider?
BRUCE: Well, here’s the thing – backing up even further than that, most people go in and they start looking at estate planning. Dan Sullivan who works with entrepreneurs has a saying that the problem is not the problem. The problem is that people don’t know how to think about the problem, right? Just going to how do you start, if a person walks into their attorney and their attorney after telling them about their exemptions and exclusions and some things about estate planning eventually says what do you want to do with your estate, he’s asked them an essay question on a subject that he knows nothing about. Usually he’ll get a blank stare and say something like well what do most people do? One of the things I found useful is to convert that essay question into multiple choice questions. What’s most important to you? Is it more important to leave more money to your family? Is it more important to eliminate the tax? Is it more important to leave money to charity? or Is your financial independence the big thing for you? You need to help them with the questions they need to ask, Jim and Tony, with estate planning. What we’ve found is, you’re better off raising questions for them in a multiple choice fashion and give them some options than just asking them essay questions like well what do you want to do? They need to be able to figure out, how much do I want to leave my children? How do I want to leave it to my children? How do I want to divide it up between my children? Do I want to divide it up equally or do some children have special needs? Do I want to protect it from creditors and lawsuits and divorce? Do I want to leave money to my church or other charities that I care about when I die? Those are the things they need to be able to think about and they haven’t thought about them on their own so we’ll need as advisors to help them through those questions and I’ve found the best way to do that is it’s much easier if you ask someone a question on a subject they know nothing about to make it a multiple choice question. Would you rather do A, B, C, or D? I’ll usually give them three or four answers to the question that I would come up with. A lot of times they won’t pick my answer. For example, Warren Buffet said, I want to leave my children enough that they can do anything, but not so much that they can do nothing. How do you feel about that issue? Is there a max amount you can leave your kids? I want to leave my kids everything. I want to leave my kids a certain amount of money. I don’t want to leave my kids anything because it’ll ruin them. I give them three or four answers of my own that they can pick from and a lot of times they’ll form their own because now they know how to think about the issue. They’ll say okay, well I don’t want to do any of those, but now I see what you’re getting at so how about I do this? It’s not just what questions, it’s how you ask the questions that’s really important. You have to help give some context for that person so they know how to answer that questions.
TONY: For our listeners you go to your advisor for this stuff. The benefit that we have is that we’ve dealt with, in some cases, maybe hundreds or even thousands of families through a career, you get to hear all the different stories of how people approach things. Where someone doing an estate plan might be dealing with the subject for the very first time or maybe they’ve had two or three examples to pull from in their own family or friends so they really don’t even know what the possibilities are and that’s the advantage of working with a team, working with an attorney, working with an insurance professional. These people have worked with a lot of different situations and help give you examples that help pull from you what’s important to you. Do you find that to be true?
BRUCE: Absolutely. Absolutely, and that’s so important because the one assumption that we tend to make that I think is a bad assumption is, I used to do it myself, to assume that the client knows what he wants to do, right?
BRUCE: They don’t know what they want to do. They don’t even know how to think about the issue, but once you start, like you say, giving them some examples, now they can see what you’re getting at and they can make some valued judgments.
TONY: Another thing, people sometimes make the mistake of thinking that good estate planning is only when you’re gone. There are a lot of issues to be dealing with while you’re living and you don’t have to be a millionaire to want to get these issues down. I mean, people work their whole life. What’s a lot to some people may not be as much to others, but what you’ve worked your whole life to put together, you just don’t want to leave that up to chance.
BRUCE: That’s right. That’s a huge issue what you just brought up. That’s just a huge issue in estate planning for multiple reasons. You know what’s interesting about that, is that that’s not just an issue for a person with a $3 million estate, that’s an issue for a person with a $100 million estate, right?
BRUCE: Their lifestyle is not the same as my lifestyle so we actually developed a piece called Free the Hostages. By hostages I mean that I find that people come in to see me and they answer our questionnaire which as you mentioned earlier asks okay, so what do you want to do? Prioritize these four things as to what you want to do. Leave more money to my family, eliminate tax, leave money to charity, or financial independence? Those are the four things. Well guess what’s always the number one thing – financial independence, whether it’s a $3 million estate or a $100 million estate and what happens is, because of what happened in 2008 and because people are living longer than they used to live and they’re going into nursing home care, people basically hold onto their assets so tight because they’re worried they’re not going to have enough money to support their lifestyle for the rest of their life. Because of that, that one goal, all the other goals are basically held hostage to that one goal, financial independence. Unless you can get them really clear about how much money they need for their own lifestyle, they’re going to have a difficult time accomplishing their other goals. They’re not going to feel comfortable giving money to their kids even if they want to. They’re not going to feel like giving money to charity even if they want to, right?
TONY: We find that to be so true. We’re in a small town and we’re not dealing a lot with millionaires. We’re dealing with people that just are middle class Americans. No matter how much money they have, there is always that great fear, am I going to outlive my money? What about medical bills? All those things, but there are things you can do to set things up so that you can have the confidence that things are in a position that now you can do some meaningful estate planning. You can maybe do some meaningful charitable planning, but a lot of people just end up leaving it to chance because they’re afraid to even start from square one. If you have a process that you can work with your insurance professionals, if you have a process that you can go through to help determine where that money’s going to come from, now you can make some meaningful choices.
BRUCE: Exactly. If you can get them really, really confident about their current cash flow and use some assets for current cash flow and other assets maybe to leave to their kids, then you can free the hostages.
JIM: Say Bruce, we’re going to take a short break and when we come back, let’s talk more about the estate planning considerations. This has been great so far, so please stay tuned.
JIM: Welcome back as we continue our conversation today with Bruce Udell, who is the CEO of Udell Associates and Retirement Wealth Specialists and the founder of the Pendragon Financial Network. We’ve been talking about estate planning considerations and with the new law in place, we’ve been talking about the importance of continuing to focus on estate planning. It’s not a reason to just forget about it. Before the break, we were talking a lot about how much should you leave to your children? Is there an amount that’s too much? What about giving children different amounts? What have you experienced in your career in guiding clients in this area?
BRUCE: Most clients, at least initially, are uncomfortable giving children different amounts unless there’s an overriding reason like a disability or something like that. They’re just uncomfortable. Even if one of their children happens to do much better than the other children, they’re generally uncomfortable with that. You kind of have to walk them through some examples to get them comfortable, that there’s a reason that fair and equal are two different words. I had a client come in, if I can give an example? He had a business that he was doing with his son and he had a bunch of other liquid assets. The business produced a tremendous amount of income and he felt like he had to give part of the business to his other kids who weren’t involved in the business as well. I said well, that may be, but let me help you think about that. I said if you have a million dollar business and you have a million dollar CD, are those equal? If you left a million dollar business to your son, what would he have to do to make that business worth a million dollars? He’d have to use all of his time and all of his talent running that business or it’s not worth a million dollars, it’s worth zero, right? He said right. I said how about the million dollar CD. If you leave that to your other children, what do they have to do in order to make that CD productive? Almost nothing. They get the income from the CD and they can use all of their time and all of their talent doing something else. Fair and equal are not always the same thing. When I use that example with people, I feel like it really enlightens them. It really kind of opens their mind to okay, maybe I don’t have to be real equal. Let me look at my kids differently and that really involves having a conversation now with your children. Don’t surprise them with it. Have the conversation now. Very often kids are very understanding about that, that they wouldn’t necessarily get the assets equally, especially if there are really good reasons for it.
TONY: We see that all the time in our area. We have a lot of farmers and typically there’s one kid that stays on the farm and the rest of them go their separate ways. A lot of times in a business as you’re growing the business, there’s not that revenue to spin off and a lot of times those kids that stay in the family business may not be receiving the same competitive wages, but there’s kind of that underlying understanding, oh yeah, I’m going to be taken care of. One of the mistakes that sometimes we see people make is when they do include all the kids, that can be unfair on both ends. One is if you’ve got one kid in control, they can control the income and maybe there’s nothing left over for the other kids to share and they’re kind of stuck in that position. On the other hand, if one’s doing all the work and the other ones just sit back and collect the checks, that’s also not fair so a lot of times you want to have a discussion when there’s a family business, do you want outsiders inside the business disrupting the decision making power of taking that business forward? At the same time, do you want to have family members stuck in a business where they can’t control what’s happening and they can’t get the economic benefit from it because it’s stuck in the business. Those are all considerations people really should be looking at.
BRUCE: In fact, you really can’t do a very good estate plan with a business owner unless you also do business succession plan, right?
BRUCE: You really can’t do a very good business succession plan unless you also do an estate plan so they’re so intertwined. To answer the question, no I don’t think you necessarily leave the same to all kids, but I think most people start out that way so you have to be able to do what we just did and give them some perspective around that issue.
TONY: One other aspect when dealing with a family business is valuations and whether or not there’s going to be an estate tax issue. Maybe cover for our audience, where are we at with the estate taxes? At what point do we have to be concerned about that?
BRUCE: There’s an exemption now of $5,250,000 each which is believe is going up to $5,340,000 each next year if I’m not mistaken and since you do have portability now, really estate taxes aren’t coming into play for a married couple until you get about a $10.5 million estate. As you said, you have valuation issues there, too, so what comprises the $10.5 million estate is not exactly carved in stone. Some assets are hard to value so you’re kind of guessing. Really, so you get about a $10.5 million estate. The estate tax planning doesn’t become a big issue. Let me just say this if I could. You do have to be concerned with the growth on the estate, right? If they’re not spending the assets, you do want to project that out so you might still want to do some estate tax planning for people in that if they have enough income you might want to use some strategies to get the growth out of the estate so that they don’t’ wind up in estate tax position later on and that their estate’s growing faster than the exemptions are growing. Those exemptions are indexed for inflation also, but inflation’s not very strong right now based on, for example, what a family business would grow at.
JIM: Besides the legacy aspect, are there any additional benefits of creating an estate plan that involves making a charitable donation for example?
BRUCE: Absolutely there is. For example, let’s assume someone wants to make a charitable bequest in their will. Let’s assume just for the sake of discussion that that person doesn’t have a taxable estate, so it’s not an estate tax issue, but they’re going to make a charitable bequest and one of the things that I’ll say to someone, I’ll say well that’s interesting. Why are you doing it through your will instead of giving it to the charity now? The answer I get is well because I want to use the income now. I’m saying well that’s great that you’re making the charitable bequest, but why are you leaving all the income tax benefits on the table? They’ll go, what do you mean? I’ll say well you know if you took that asset that you were leaving in a bequest and you put it into a charitable remainder trust, you would still effectively keep the income from that during your lifetime, but you might get a charitable income tax deduction of let’s say 30% of the value of the property. If it’s $100,000, you can get a $30,000 income tax deduction and what did you really give up?
TONY: Yeah, you preserve the economic benefit and if you’re charitably inclined anyway, it’s an awesome tool that people could be looking at. Not to mention if they’ve got an asset they want to sell, you also get the benefit of having that asset sold with no capital gains. Right now, I know a lot of people aren’t aware of this until it hits them, people get out of a business or they sell some land or whatever, they don’t realize that all of a sudden maybe they have a piece of property, they have a $450,000 gain and they don’t think about what the impact is and all of a sudden they’re hitting the top Federal tax brackets, the top capital gain rates, the Obamacare tax. There are situations like what we run into, if someone is on a farm and they sell equipment that’s been fully depreciated, that’s taxed at ordinary income and they actually – you start stacking up all those taxes, it gets to be greater than 50% with our state income tax so you really want to make sure you understand what those opportunities are to do some planning. Like you said, if you have charitable intent anyway, this could be a valuable planning tool.
BRUCE: Right. Even if you don’t have a taxable estate, a lot of people do leave bequests through their will and I’ve always said, why do it that way? You’re just leaving the income tax benefits on the table.
JIM: Let me ask you, from your prospective, let’s say a listener already has a will or a trust set up. What else should they be doing outside of that?
BRUCE: Well, of course, wills and trusts are great, but they need to look at long term care insurance in case they wind up in a nursing home. They need to have a power of attorney drafted so that if they become incapacitated, someone else can make financial decisions for them. They need to have a health care surrogate to decide about who’s going to control their health care if they’re not able to. A living will so they know frankly whether or not to pull the plug. Those are all documents that typically come with a will and trust today. Most attorneys have a package that will include those, but it is very, very important to have that stuff. In addition to that, how about the beneficiaries on your IRAs? Are they in concert with what the rest of your estate plan is doing and are you maximizing the deferral benefits of your IRAs, 401(k)s, and what have you? That’s also very important and of course life insurance which hopefully will be passing outside your will because you didn’t name your estate as the beneficiary. Those also have to be in concert with everything else you’re trying to accomplish with your estate plan so you really need to look at all of your assets. Both assets that pass through your will which are your probate assets that you own and also assets that pass outside of your will. Also, if you have a revocable trust, but you haven’t funded it, you really haven’t accomplished anything with your revocable trust so you have to make sure that the appropriate assets are transferred to that revocable trust so that you take advantage of the fact that the assets won’t go through probate and they’ll be private, but you won’t get any of those benefits if you don’t actually transfer the assets to the trust. I have an awful lot of people and you probably have too, who come to my office and bring their wills and trusts, but their trusts aren’t funded.
TONY: Correct. Yep, pretty common.
BRUCE: Very common. That’s really important. That’s really important.
JIM: Those are all great points. Let’s sum up for people what they should do to get started and the importance of working with a team.
BRUCE: The best way to get started is to find someone you have confidence in who can help you as we discussed earlier work through the questions that give context to the issues for you so it makes making decisions easy. They need to find a good advisor and then you need to actually have a team where the attorney, the CPA, anybody who’s going to be involved with your estate plan needs to communicate with each other. The reason that’s really important is if you go to your attorney and they tell you one thing and you go to your CPA and they tell you another thing and you go to your life insurance person and they tell you another thing and you go to your stock broker and he tells you something else, what are you going to do? Nothing, right, because you don’t know who to believe. You’re much better off if you can get a team that works together where everybody, your advisors all decide together what’s the best way to diagnose your issues and what’s the best way to solve your issues and you only hear one solution, the same, from all your advisors. Isn’t that easier?
JIM: No doubt.
BRUCE: That’s why it’s so important to have a team and all of your advisors, nobody has a monopoly on good ideas. If you have a team of advisors, they’re all going to bring a wealth of different experience to the table and they all will speak a common language so they can talk to each other, come up with good appropriate solutions for you as a team that they wouldn’t have come up on their own.
JIM: Makes total sense. I think that’s a great way to sum up. Bruce, it’s been a very helpful conversation today and hopefully it inspires our listeners today to take some action in getting their estate planning done. Just because the law has changed and has risen those exemptions to higher amounts of $10 million plus, doesn’t mean that you’re still accomplishing your objectives. It’s not just tax issues; it’s what do you want with your legacy? What do you want to go to your kids, to charities, and others? Thanks for sharing your time and expertise today.
BRUCE: You’re welcome, guys. I appreciate you having me. Thanks for thinking of me and have a great day Jim and Tony.
TONY: Thanks for joining us this week. Tune in again next week as we explore another phase of the Real Wealth process. Remember, if anything you heard in today’s show you’d like to get more information about, contact your Real Wealth advisor. Also, if you feel that any of this information would be helpful to a friend of family member, just click the forward to a friend button.