Trusts For Tax Mitigation & Asset Protection

Paul: Okay, we’re live here, I think I got it in all right, welcome everybody it’s just about 9:00 AM California time, what is it today Kraig?

Kraig:  It’s a Thursday.

Paul: Thursday already so, we’re going to jump right into this, this is Wealth Protector TV. This is our channel at Barth Calderon, we’re an Asset Protection, Estate Planning, oh! wait start, let me just start the webinar there I want to make sure I live stream it. So yeah, we’re in asset protection, estate planning, business planning law firm Barth Calderon, welcome! I just had to start the live stream so we’re streaming everywhere on YouTube, Facebook, LinkedIn, Zoom and the technology is always something we got to deal with. But, for those of you that are coming on board right now. welcome, Kraig Strom, is a paralegal at Barth Calderon and we have been around for over 35 years we have 6,000 clients across the country. Harry Barth is our founder. We have top speakers across the country speaking to groups like Vistage International, The Women Presidents Organization, Tiger 21 and many others. We’re out there and we love bringing you education, we’ve got three podcast shows a radio show a blog that goes out to 120,000 people and we’re just always thinking about how we can educate you on tools tips and strategies that can help you both on the personal and business side. What I put up in the chat is inevitably, we get questions on the stuff, we’re talking about here and we have a complimentary planning assessment available to anybody watching our workshops. If you’re on Zoom you look in the chat there, you want to text Guard Assets to that phone number and you can get lined up for a complimentary assessment. Whatever issue you have going on small issues, big issues, everything in between if you’re watching on YouTube or LinkedIn or Facebook you can contact us through the numbers around the video wherever you’re watching it. So, we’re talking about trust today Kraig and we’re going to highlight some key trusts that our firm and you and the attorneys are dealing with. The Charitable Remainder Trust, The Irrevocable Life Insurance Trusts and the Testamentary Trust. Let’s get into this, let’s start with the Charitable Remainder Trust, what’s going on there? 

Kraig: Well, the first thing, Thank You! Paul, for managing all the tech without you, we wouldn’t get this off the ground so, thank you very much and the first thing I want to share when we talk about these trusts, we talk about Charitable Remainder Trusts and so many times I hear people say oh, those are only things for the super-rich. That’s not accurate these are tools that are built into the legal system, the tax code, these can be used by just about anyone if the circumstances are right so don’t feel like this is just the domain of the super-rich, these are strategies that so many people are missing because they have heard that. So, I’m glad that we’re talking about it. 

Paul: Good point so, so what, so why is it used? and let’s get into exactly how it works.

Kraig: Okay! so, what we’re going to talk about in the litany of trusts and custom legal work, that our firm does and that are out there. We want to zero in on a few trusts that work together, they’re very symbiotic, they work together, in this case we’re going to talk about a Charitable Remainder Trust. There’s a variety of different shapes and sizes but, I felt like it would be a good idea just to give you an example of how a Charitable Remainder Trust might come up in a conversation or be used for a family. So, I want to share a story okay so, this is a story of a husband and wife who live right here in southern California and back 20, 25 years ago they actually started buying rental properties near a local university that, at the time was really quite small, the population was small the number of students was small, it wasn’t very well known, they bought some rental properties, 10 of them, when properties were dirt cheap fast forward 25 years or so. 

Paul: And properties were cheap in California at some point? 

Kraig: Oh! There was a time when properties in riverside county California for example were dirt cheap, really cheap and they were smart, they bought up some properties and they have 10 rental properties now around a prominent engineering and medical school in southern California and the value of their properties has quadrupled I mean. 

Paul: These are single-family homes I think. 

Kraig: Single-family rental properties and they, they’re just good basic rental homes around a college and you know what that means Paul?  

Paul: Yeah! 

Kraig: They’re constantly rented they’re good cash flow, but they’re also landlords over 10 different properties and this couple as much as they love, their success here in California, they really want to retire out of California and their children have already left the state for medical career and an engineering career and they’re not coming back to California so mom and dad they want to leave the state but if they sell these homes. The capital gains, the tax that they will pay is tremendous and so it’s kind of kept them anchored into California and they met our firm and they asked, what could we do, that’s where the topic of charitable remainder trust came up so, here’s what happened. 

Paul: Yeah, how does it? has it worked for this?

Kraig: Mom and dad created a charitable remainder trust, it is black letter law, in the tax code, that you can create your own charitable entity and they donated their 10 homes to their Charitable Remainder Trust they get a sizable tax benefit, a deduction for donating to a legitimate charity charitable remainder trust, they donate the houses to the charitable remainder trust, they get that tax deduction and now the charitable remainder trust sells all 10 homes and pays zero tax.

Paul: Wow!

Kraig: Because legitimate charities don’t pay capital gains taxes. 

Paul: Right, right! and then the proceeds in that trust are then invested?

Kraig: They can invest inside the trust and that’s exactly what they did so, now instead of the value of the homes being diminished by the taxes the entire amount of the sale of the homes is in the Charitable Remainder Trust and guess who is the income beneficiary of that charitable remainder trust, mom and dad. 

Paul: Mom and dad okay. 

Kraig: And mom and dad can receive that income for the rest of their lives wherever they live in the world and that’s what they plan to do, is move out of California they’re no longer landlords, they have the entire amount of their real estate portfolio generating income for them that they can then benefit from through their retirement years.

Paul: And they can tailor that investment allocation in that CRT? I mean you could have tax-free bonds in there whatever right so?

Kraig: Absolutely, there’s so many different ways that the actual trust itself can be customized and set up, for income really very specific details that can be customized, it’s amazing what you can do but the key piece there is the entirety of their real estate portfolio is now working for them and the income they receive is substantially higher than when they were rental properties, because they don’t have taxes toilets trash and tenants and repairs now they just receive pure income from that asset.

Paul: But, what about the kids? Kraig aren’t the kids bummed out because now the parents gave away all these assets. What about the legacy to the kids? How do your account for that?

Kraig: That’s an excellent question, that’s where I want to go next because we’re going to connect the dots here, that yes in the charitable remainder trust, and I emphasize that the remainder of whatever is in the trust when mom and dad leave this world the remainder goes to the charity that they name in their charitable remainder trust they can name one charity, they can name five, 50 charities they can, also depending on the size of the trust, they can name their own family foundation that comes to life when they pass away so they can name multiple charities and even name their own family foundation, who might run a family foundation the two kids the kids. 

Paul: Yeah!

Kraig: So, that’s one way. 

Paul: Yeah!

Kraig: It could be done the other way that this family actually really decided to go, because the kids were off on very successful career paths, and really they didn’t need this Charitable Remainder Trust assets, they didn’t need the real estate assets, mom and dad had given them a great start and they’re doing awesome but mom and dad did not want to disinherit the kids completely so, what they did, you might remember the income that they received from the charitable remainder trust, is substantially more than they were getting from the real estate by itself. 

Paul: Right!

Kraig: They use some of that additional income and they Created an irrevocable life insurance trust in the industry, in legal industry it’s also called a Wealth Replacement Trust, a legacy trust, a dynasty trust in reality. It is a life insurance trust, that owns life insurance on mom and dad and when mom and dad take that little bit of extra income, that they get from the charitable trust, they put it into that life insurance trust, the life insurance inside that trust goes to their children’s benefit not a charity goes to their children’s benefit in a completely asset protected environment with no estate taxes no additional entanglements when it’s all set up correctly it’s tremendous. 

Paul: Nice!

Kraig: It really is, it’s a tremendous way to replace those assets or a specific amount of those assets to the children in an extremely tax favored way without putting it in an asset risk situation so, the kids still maintain a very protected position on their inheritance. 

Paul: Yeah, that’s a wonderful strategy and the assets you can put into the CRT, the highly appreciated assets you use real estate, it can be stocks as well, right you have highly appreciated stocks yes for years true. 

Kraig: Yes, there’s different ways to fund charitable trusts and charitable arrangements, some folks will transfer systematically retirement accounts 401ks, IRAs, stocks. Bonds business assets real estate, there’s a variety of things that can be used to be part of that planning 

Paul: Nice! so, talked about the CRT that’s a great example, and then the Irrevocable Life Insurance Trust and whether you use that ILIT with a CRT or not, if you have life insurance just as a stand-alone trust, I’ve heard you and our attorneys talk about that of get the ILIT in place, around the life insurance, because what people don’t realize is that, the proceeds from a life insurance policy are part of your taxable estate right so, yeah. 

Kraig: Absolutely! yeah, I’m really glad you mentioned that Paul I’ve got to touch on this, it happened just last week some folks that had been introduced to our firm through one of our partners, they had been extremely proactive and had a great life insurance portfolio they had five billion dollars of life insurance that will be there for their children, the tough part was that all of it was exposed to creditor attack and potentially estate taxes in the future, because it was not wrapped in an asset protected life insurance trust, very good point you bring up Paul. 

Paul: All right so, as a standalone that trust works too, all right that’s the CRT that’s the ILIT let’s get into the Testamentary Trust yeah.

Kraig: This is a good one, Testamentary Trust, what the heck is that? well, testamentary is, if you think about it, testamentary means at your death this is what you want to happen and if you build your estate plan with testamentary provisions. It might be, I want my favorite piano to go to my niece right, that’s a testamentary gift, it happens at death well you can also build your estate plan with Testamentary Trusts that are created for the benefit of your children, a big focus of our firm really, a primary focus of our firm is asset protection. And so, many estate plans just simply gift assets to children, they just gift the assets directly to the children and now they may have a substantial amount of money that is at risk, from creditor attack on the other side when mom and dad are gone right, if those assets are gifted through a testamentary trust that comes into life when you leave, this mortal coil, that testamentary trust, is created, your children’s assets, their inheritance, go into the asset protection protected testamentary trust they still have now received, the beneficiary gift however, it is in a protected environment, very difficult for any creditor anyone to attack, and it stays protected and they have access to it, for their benefit over their lifetime without it being at risk. 

Paul: That’s great! and I know a recent scenario, the team was talking about where parents have uh, you know, multiple children and in the trust they set up, the provision was there, for an asset protection trust instead of just giving the kids property and cash, it went into this asset protection trust and I think in this case, one of a brother was the trustee for another brother who’s a beneficiary so, you know it protects that brother who’s a beneficiary from creditors you know an ex-spouse, maybe they’re in a high-risk profession doctor you know lawyers you know whatever the case is so,  it’s just a smart way to do it, and it doesn’t mean losing control as I’ve heard you and others say at the firm, you still get access to everything, so that’s the asset protection trust that you create, in your own living trust that kicks in when you pass away for your kids.

Kraig:  Yes, absolutely there’s so many different things that can be done on a testamentary basis, that are built into a really solid estate plan. There’re many different things that can be done and it should be really noted here, that we have just scratched the surface and you mentioned in the beginning that complementary assessment starts with a conversation and then continues with a deeper conversation and there’s so many different pieces of this that can be expanded upon. 

Paul: Yeah, and I just want to mention that Fred who joined late is asking, if there will be a recording, the answer is yes uh, if you give us about 24 hours for all those who registered, we’re going to send out the recording afterwards and I’ll also encourage you we’ll send that out and you’ll get access to our video library as well so, you’ll be able to subscribe to that and, also for those who showed up late in the chat there, I put, if you have any questions about your own scenario, whatever it is, estate planning, asset protection. Text guard assets to that phone number and you’ll be able to get connected to us for a complimentary assessment. Someone’s asking what about estate taxes at time of death, when real estate left in the testamentary trust.

Kraig: Yeah, it’s a good question,  and thank you for the question there, I think that, who the who was that from, was that Maria? yeah, thank you for the question and this is going to be a very important phrase for you to learn when you get it deeper into the assessment, it depends it depends, on how that testamentary trust arrangement is set up it, is it a charitable testamentary trust, is it a non-charitable testamentary trust was it done correctly coordinated with an estate plan to make sure that estate taxes were mitigated so the answer is we like to mitigate the estate taxes out of the picture altogether that’s our goal if it’s not done correctly estate taxes could still be an issue so, really an important conversation to have on a deeper level but great question, it’s just not a silver bullet with one answer. 

Paul: Okay, and I did put the number up, again in the chat if you text to that number what happens is, it’ll send you a calendar link and you can pick a time to get one-on-one with us for the assessment so, that’s how that works, is find a time that works for you and, we’ll do a phone call or zoom and, as always we do this every Thursday, at nine a.m one last a couple last questions. 

Kraig: A little bit more on the ILIT, yeah on the ILIT the benefit when it’s passed on to kids property given to CRT, gotcha so, the islet itself irrevocable life insurance trust, first and foremost it’s important to remember what Paul said earlier that life insurance death benefits let’s say for example the family that I referenced had five million dollars of death benefit well, if it is not managed properly in a life insurance trust, that five million dollar death benefit is added to the total value of mom and dad’s estate, which could then be subject to estate taxes, so first and foremost the life insurance trust the wealth replacement trust, when done correctly those assets are now outside of the taxable estate, tax taxable estate and so we’ve basically saved estate taxes on that five million dollar death benefit okay.

Paul: And the estate tax exclusions, are yeah, we’re really thinking that they’re going to continue to come down in the coming years. You know, the new administration is putting forth new laws and regulations so, yeah. 

Kraig: Yeah! 

Paul: We’re looking to see those come down the exclusions 

Kraig: Yeah, that’s a whole deeper, deeper topic on whether the estate taxes will come down but, if you ask the question to anybody, I’ve never had a different answer when I ask has the government really ever done anything that’s been great for us tax wise.

Paul: Right, hey Kraig question, can real estate remain in the CRT or does it need to be sold in the CRT?

Paul: Again good question thank you, it depends and most of the time the CRT will sell that real estate or that asset and reinvest because we’re now managing the investment for income to the benefit, to the income beneficiary, the income beneficiary is the donor and it’s a different management style, plus charities have different rules in regards to running a business and a rental property is a business and charities do have different rules, that gets too deep for our conversation today, but I’ll answer it by saying that most of the time, those properties are sold and then they are managed specifically for income and long-term planning to the income beneficiaries.

Paul: Great! excellent, thank you everybody for being here, Kraig, great information and stay tuned for further emails, announcing our Thursday shows every Thursday 9 a.m California time and uh Kraig we’ll see you again here next time.

Kraig: Take care!

Paul:  All right, bye everybody!