What’s up simple classic cashflow listeners. Now this week, we’re going to be listening to a reporter that I do with Andrew Howell, who puts together a lot of trusts for folks, but not those type of trusts that just nearly gets you around probate. Again, a little PSA for you folks. If you guys have a will, that ain’t gonna work, guys, that’s going to go through the probate process and.
It’s going to take a lot of your money. You need to have a trust. So it skips over that and doesn’t get tied up in the process and all your dirty laundry or how much you have gets up without there in the public domain. So you want to trust, but not any trust, is what we’re going to talk about today.
We want to trust that facilitates the wealth. So it grows creates a structure for the next offspring to come along and not Raleigh, screw it up. No, I have a new child now, and although I’m changing like 13 diapers a day, at some point, I’d like this person to grow up, maybe not easy to grow a multimillion dollar real estate investment company.
I just want them to be good contributors to society or good people and just to be happy. Certainly don’t want them to be a cocaine or heroin. Or like a lot of trust fund kids, they just become lost because , they haven’t had the need to go get a job to create skills that the world uses.
And therefore they haven’t gotten any traction in life.
I think at the very least, want to create a structure to allow. Offspring to take our wealth and to just not mess it up. So how do we do that? So one of the biggest activities I’m doing right now as I’m building up staff and creating that growing company is values.
And I see this no different than creating a family office and a trust, which is just a document that kind of pulls together your family office, going into the field. So going back to the business, right? A lot of the is predicated on your values and some of my values I’ll go through them right here, just listed out.
But in order four of them that I have written down now is honor ownership, accountability, initiative, and Kaizen. So going in more detail on that honor, we say where we’re going to do, we don’t reach straight with our sellers. We honor the commitment to our clients to get their expectations.
And if not, we’ll make it right. So that’s similar to integrity, not chicken shit and no nickel and diming, if something is wrong, call me out. That’s what honor is to me, ownership and accountability. If there’s a failure, there are no excuses. We take ownership and fix the problem too often.
I see people just not take accountability, blame it on other people. The last, the third out of four that I have now is take initiative. This kind of goes hand in hand with accountability, where creates a business or a family where everybody’s empowered to improve the processes and to make decisions.
A lot of people out there floating around, make light. They don’t have the ability to change their life. It’s a value that needs to be instilled. And the last one is. For some strange reason, the way I’m wired up, I always like to be implementing new things and improving the processes, improving myself.
Kaizen is the constant improvement and this kind of goes in with the whole accountability initiative for my staff is I don’t dictate costs as is their means or methods. I don’t like when people do that to me, in fact, it drives me so crazy. That’s been one of the big motivators to leave. An be two job, but I want people to create the processes where it works for them. And I, I want these values to be distilled down to everybody in the organization. And these are the values that I want to create in my family office. But now here’s where the bridge and the difficulty happens.
You may have these values, or you may not have these values created at this point, which you really should sit down with your partner and figure what these things are. But how do you create a document that rewards these types of values such as honor, ? Doing what is right. Making the world better than you found it.
I’m thinking ownership, accountability, maybe the trust creates a certain amount of money, but once you run out of it, you’re done. Or, maybe there’s some kind of, for Kaizen, the value of KZN, maybe the trust creates this program, or you’re able to get essentially unlimited funding, but you need to be constantly improving yourself.
Sure. You might squander it. Maybe go into a bad business deal here. But if you’re continually developing yourself at some point, something’s going to hit and you’re going to get that traction and you’re going to be able to grow the family office even more and, initiative, I’m not, nothing’s coming to mind right now, these are the ideas that are different to everybody.
And obviously my family office is going to be looking different than you are. A lot of us in the family office, a Honda mastermind, which you guys can join it. Civil plastic, hassle.com/journey are going to be having a in-depth discussion about this in the future and more, I think it’s going to be better in person when we do the annual retreat in January of 2022, when everybody comes down to Hawaii, these are the homework that I think people need to do before they start to create that family office style. That document can be changed in the future, but I think the quicker you start to create this value system, I think it starts to give you the structure and the path to create what kind of behaviors you want to motivate .
So I was watching the movie Jiro dreams of sushi. So it’s that Netflix documentary, you wear that thing. Three-step. Michelin star restaurant in Japan where this guy chiro, if you watch him, he’s a G the way he does things is very stoic. And I like that and it’s a lot of the values that I you know, the way I live my life by, but it may not be for you.
And I think that might be a good way to brainstorm or at least get the conversation started with your spouse. Or with your kids, as you’re watching these types of documentaries or movies, even movie stars, right? Why do you like James Bond? Why do you like this certain character?
What are the values that this person or this potential fictitious character represents? What are the values that this person demonstrates and start to list them down and then start to use that as a brainstorming. To start to narrow down your top four to 10 values that you want to use in your trust.
Anyway, that’s just a little bit of my input. If not, you’re just starting out in the dark. No, this is not a sure-fire way to get to your family office trust document. But, it’s just one thing that I was thinking about the other day. I was third to create my business and kind of be tinker by family office document.
And if you guys haven’t yet, please check out the websites and we’ll pass a castle and join our private investor firstname.lastname@example.org slash club. And here’s the show.
Hey, simple, passive cashflow nation. Welcome today. We are going to be talking to Andrew Howe who does a lot of trusts for folks in our group, and we’re not going to really get into, LLCs or all those entities, but , everybody says that you need to have a trust. And most people in our group are like, all right, cool.
A document that kind of avoids probate, but how do you create that document that is the living. Blueprint to pass down your wealth. After all 90% of folks wealth usually goes away in two to three generations. I know very well. I went to private school. I went to school with a lot of rich kids who is second generation, third generation wealth.
And I can see the wealth just squandered away. Not many of us are simple passive cashflow listeners who are first-generation wealth, creating their wealth and want to be good stewards of it and want to see it go somewhere, maybe something even bigger and better. But a welcome Andrew. Yeah let’s dive into the topic here.
Yeah, it was a huge topic before we started recording and we talked that this is going to be a big topic to discuss, and let’s try to find a starting point. I want to just make it clear. I think the only time you don’t need an estate plan a will trust. There’s a lot of things that go on of that is where you really just don’t care.
What happens with your assets when you die. And of course, there’s. A lot more going on with that. If you have minor children, you need to think about guardianship and all of those things that go along with it. So foundational estate planning is a must in my, but that’s, coming from an estate lawyer, what I want to concentrate on more is.
Is what I would bet and lean a lot of your viewers and listeners and so forth are thinking about, which is what our generation is thinking about. More and more this idea that , we want to do things for our children that give them a good start in life, give them educational opportunities, given up entrepreneurial log activity or onto potential things that they could do there.
But what we don’t want to do is just dump on top of a bunch of cash and these trust fund babies, right? You mentioned three shirtsleeves to shirtsleeves in three generations. It’s a common theme. In fact, I just had been. Pass this quote from the founder of Dubai. I’m not going to even try to say his name because I’ll butcher it, but he says hard times create strong men create easy times create weak men, weak time, create difficult times many will not understand it, but you have to raise warriors, not parasite.
This is a worldwide issue. It’s not United States. Everybody gets this idea that if they don’t create some sort of main motivational aspect within their planning, they really do , run the risk of creating a situation where kids as Warren buffet would say, have so much that they can do nothing.
You want to give them so much, they can do anything, but not so much that they can do nothing. So how do you do this and how I typically see most estate plans is work the way they did a hundred years ago where mom and dad pass away. The assets then get divided into as many shares as there are children.
And then that share of the estate gets dumped on that child. Maybe not immediately, but when they’re 25 or 30 or 35, and the asset now goes to that child. And again, this is all planning. That is the same. It was a hundred years ago because of how that generation viewed wealth. Our grandparents great-grandparents depending upon the age of the audience the greatest generation who unfortunately is leaving us too quickly, they viewed wealth completely differently.
There was a true economic hardship that they lived through. They, weren’t eating and standing in lines to get soup. In our generation, we’ve lived through some interesting times, great recession. We fell unhappy. COVID certainly been unhappy, but we’re still eating. There’s that hierarchy of priorities based upon safety. Human beings are always searching out safety. And my grandpa, he had the same that I always loved, which was money. Isn’t everything. But it sure. Quiets the nerves. And the idea being that if you can’t, or you don’t know where your next meal is coming from, how you’re going to feed your family.
As they were coming out of the great depression and that was no longer an issue that was, creating safety and that way they said, okay, what we want our estate planning to do is solely concentrate on the financial wealth and how we get the most financial wealth to that next generation.
But without any real thought about the consequences of the impact that wealth might make. What we try to do in our trust just to to draft them in a different way is number one, they should be personalized. You really shouldn’t have a trust that is cookie cutter, and this is just opening Pandora’s box or I guess it’s the man behind the curtains in my industry.
Most estate planning lawyers have a software program that create your estate planning documents. They punch your name into it. And it pumps out a document that looks like the one, they did five minutes. There’s nothing wrong with that. There are some clients that want to put some effort into it, just doing the basics and maybe their children are just amazing stewards over their assets, otherwise different reasons not leave it to a kid ever.
But they’re much more pragmatic reasons that we can talk about. The point being is that ought to be personalized. I had to be able to read your trust and, or read my trust. And you ought to learn more about who the hollow family is instead of just my name and my kids’ birthdays.
And there is very little personalization that goes on within a state planning these days. We call it trust mill. You run people in, they go through this very set process. You pump out documents that look the same as everybody else’s and you sign them. So personalization is a big thing for me and we’ll get into this and how it weaves into some of the.
Yeah, no books we’ve written and so forth and our thought process on that. But really what we’re trying to deal with are these three erosive effects that we see with wealth transfer. And this is how we do planning a little bit differently than I think other planners do. The first erosive effect is the division of an estate,
if mom and dad have a $10 million estate and they pass away , they have four children. Each of those kids are getting two and a half million bucks. If you’re looking at the standard estate plan and the power of 10 million. Is not the same as the power of 2.5 million, right?
You can get into deals and real estate projects and all of these different kinds of things at a $10 million investment level, then you can at 2.5 and it has more power, you can get better terms, better interest rates, you have power, the golden rule. He who has the gold rules. It’s one of those ways of maintaining the family financial power.
So how do you do that? We think of it as the mineshaft approach. You keep things together is the family as a whole, instead of the shotgun approach, which is at death, we’re just going to spray it out to the kids and in proportionate shares or disproportionate shares, whatever. So we’re preserving the power of the family wealth by holding it all together.
The second thing that people need to be concerned about, especially as high net worth individuals and in high-income earners. Is which are, exclusively my clients, they are going to exceedingly be looked at in the future to pay the tax bill. It’s already the case and it’s going to get worse.
I don’t really care about what your political preference is. I don’t care who you voted for, but from a tax perspective for high net worth individuals and high income earners. What happened on November 3rd it’s not good. We’re going to be some experiencing some significant tax hikes. And one of those is related to this success tax that people have to pay,
when you two successful the federal government and some state governments, depending upon where you live, one another crack at your assets, they want to come in and. Tax you at the federal level is 40% and States are usually lower than that. And usually on a grinding sliding scale. But what we’re hearing now out of Washington is there could be a big push to go back to the 2009 level under current law before that 40% tax kicks in.
Every us citizen can give away 11.7 million entirely estate tax free at their death. So as a married couple that’s $23.4 million, it’s a heck of a lot of money. And most people are in debt when it gets down to it, let alone having positive net worth in excess of 23.4 million. But what we’re hearing out of Congress right now, Or I shouldn’t say Congress, I watched Washington let’s say is that there’s going to be a push to lower that from 11 seven to three and a half.
That’s what you can give away. A state tax raise 7 million as a married couple with a potential 55% tax on a meeting over and above it. And essence, this is the Bernie Sanders plan. This is what he proposed through the campaign. Now keep in mind, the state tax is just like any other tax law change is political and there’ll be the whole political process that goes along with that, not just what the public sees, but the back office, you scratch my back.
I’ll scratch yours. And I think that it, as the negotiations on this estate tax goes down, it’s ultimately going to come out to be somewhere close to where we were under Obama. Where you could get five to 6 million as an individual, 10 to 12 million as a married couple, and then a 35, 40% tax on anything over and above.
I think that’s where it’s going to wind up. I, of course don’t have any clue for sure, but I don’t think anybody really does, but that does mean that 10 million or 7 million. It’s a lot of money. But it’s nowhere close to 23. Many more people are going to be affected. And then another really bad part of the estate tax lien is that first of all the IRS demands payment of the estate tax within nine months, following your data, Beth and the taxes have to be paid in cash. So let’s say your group has a lot of real estate. It’s not a very liquid asset, right? And if your death, you have a real estate holding of $15 million and all you can pass is $10 million away.
The other 5 million being subject to a 50% tax. Two and a half million dollar tax bill owed nine months in cash. So where are you going to get that liquidity to pay that maybe you’ve got to sell real estate and sell it quickly. So you’re not necessarily getting the best price for it. So a state tax planning is a really important thing.
It’s much more of the pragmatic tax stuff that, you do want to get attorneys and accountants and so forth, involved in. But I also do believe that the estate tax is a negligence tax and the only people who pay it are those who fell the plan. So planning around the estate tax is an important thing for clients that are at that level.
And I think if there are clients that expect to have a $10 million estate or in excess, that you really do need to look at doing some greater estate tax planning, I just don’t see the government needing less money in the future. Yeah. So few points here. I wanted to bring up, I think a lot of people are listening $10 million.
They’re thinking that’s a lot of money that ain’t that much money. Just in the last couple of years, you’ve had a lot of people come into my group that are $10 million or more. And I’ve got to assume that there’s a lot more out there that we just don’t know about that are hiding. I bet you three or four times a day, I tell people that they are multi-millionaires and they don’t feel that way because, cashflow or whatever, I’m still living paycheck to paycheck.
Maybe not that bad but you also have. An IRA, a 401k, you have equity in your home. You have a second home, you have life insurance that has a death benefit. Maybe that’s really high. You have equity in all these rental properties and maybe you have a privately owned company, right? You’re an entrepreneur in some way.
And one of the other issues with with clients that have privately owned companies, you don’t know what that company’s worth, it’s worth what somebody is willing to come in and pay you for it. And the problem is that at your death, the IRS is going to try to determine a value and they are going to try to determine it’s worth as much as they possibly can.
So some of state tax planning involves you coming in and taking control of, what you think your estate is worth at this time. Reporting all that to the IRS and then hoping they don’t challenge you on it. But if they do no big deal no planning should be done in a way that is.
We had this saying, which is in tax planning, pigs, get fat hogs, get slaughtered. You don’t do what you can, but don’t do too much. But it, you also just want to stay on top of it. And even though you may not have, people that you work with that are at that level yet. Chances are they’re going to get at that level.
And in less, maybe Baron Von Trump gets elected president and eight years or something where the estate tax might go back up to a hundred million dollar credit that you could give away a state debt free. I just don’t see that happening for some reason in this world, there has been this villainization of success, and I have no idea where it came from.
I can remember walking down the street. With my grandpa, who I worked at his office as a kid and he worked in downtown salt Lake and I love cars. I’ve always loved cars. I’ve always been into it and even was back then. And I can remember still to this day, this Lamborghini which was my.
Absolute dream car, right? The old school learns from the eighties drives by and I was just drooling. And my grandpa looks at me. He didn’t say, that’s an evil guy. He screwed somebody over to get that. It was look, you work hard. You create value for people. You make money, you can get one yourself, it wasn’t looked at as a negative thing. It was looked at. This is something that you might want to strive for. Again, anyway, I probably went off topic there, but yeah, no, I agree. Most people are a bunch of haters, and that’s what kind of limits some people behind anything. Money is easy.
It’s a V it’s a victim mentality. And if you don’t have what I have, it’s because you’re a victim. That’s the mentality and it drives me crazy, but we’re probably kindred spirits on that. Okay. So again, that kind of a state tax planning is an important thing. And, I talked to clients that have worked with other lawyers may have even heard of this estate tax because of that feeling.
It doesn’t affect most people. I just think that it will. As most recently as January 1st of 2013, the estate tax exemption, what you could give away a state tax-free was only $1 million. With a 55% tax on anything over and above that, that’s eight years ago now they fixed it the next day with the American taxpayer relief act.
But we fell off the fiscal cliff and we were that, that we went back to the 2001 level. We have no idea where it’s going to be, and that’s a lottery system, you’re playing the lottery about when you’re going to die and how big your estate is going to be. What we do have right now, though.
And this is important for your listeners and your participants to understand. Is that at least right now, the law says not just death. Can you give away 11.7? You could do it during your lifetime. The way that this works is, as soon as the IRS told wealthy people that if they were too wealthy, they had too many assets in their estate at death.
They were going to get taxed again. It’s okay. We’ll just give it away during our lifetime. IRA said, no, you can’t do that. Whatever you give away during your life will count against what you can give away at death. And we call that the gift tax. Now, as I mentioned earlier, we’re hearing, they’re wanting to reduce it down to three and a half million on the death estate tax side, but on the gift tax, what you can give away during your lifetime, they’re talking about reducing it back to a millionaire.
In essence 10.7 million that you could get away could go away, but at least right now you have that 11.7 and I’ve been doing a lot of work with clients that have been leveraging and using their gifting power that they have right now, because we don’t know when it’s going to be lost, but they have it right now to move assets out of their estate in a very strategic way.
And there is a short window to do that because. We don’t really know when the tax laws are going to change. I think most people are betting next year, 2022, but there was again, another whole rumor out of Washington that they were going to try to push things through labor push things through by labor day.
I don’t think there’ll be able to do that. That’s pushing it pretty hard, but I do think before the end of the year, we’re going to know what’s going to happen next year. That’s like the concept of people watch football. That’s the Wildcat offense, right? We don’t know what’s going to happen in the future.
It’s very much an art form, but right now you have that opportunity to pitch it out to the running back and get it out. Now, before you take a chance what we are forced to do in the future and also in the future might be good potentially. When was it? George Steinbrenner died? It was a hundred million dollar the, 2010.
He died three and a half, $350 million a state that 2010 was the throw momma from the train year. Cause if they died that year, there was no estate tax Steinbrenner was mentioned in the news. But the biggest one was this guy down in Texas. He was an oil guy and I think at the time he was the 14th wealthiest man in the world.
Again, this is 2010 and I believe it was a $19 billion estate that he had. His family said 10 billion, $8 billion. That’s with a B in taxes, just because he died that year. Now, one of the other things though, that happened in 2010. Is that stepped up basis went away, right? When you receive an asset at death you get it with a clean tax base.
You could say sell it the next day and not have any capital gains tax to pay. But in 2010, when they said you can pass everything, a state tax free, if you took that option, it had carry over basis. You had to take an essence what your parents, his basis was in it. But look, if I can save a 50% a state tax and paid 25% capital gains tax or whatever it was back then, you’re certainly going to take the second option.
There’s give and take. But why that’s important now is this is all cyclical and we’re seeing this stuff come back, right? They’re wanting to get rid of stepped up basis at death there. They’re talking about this right at death, whatever your basis in and your assets are as you pass them to your kids.
They pass to the kids. And so they’re going to pay capital gains tax. It’s so important on all of those assets. Now, I think that’s going to be a tougher tax law to pass because everybody has to deal with that. The average inheritance is 177,000 and most of it, consents of primary real estate or primary residences.
And there’s no child that’s going to want to inherit mom and dad’s house without the ability to sell it the next day. Tax-free the estate tax. It again, it doesn’t affect most people, even if it goes back to three and a half million, most people don’t have $7 million net worth, but you have to also consider, like I said earlier, all of the assets I glossed over this, but I want to touch on it pretty quickly.
Life insurance. Prior to going into law school in 99, I was a life insurance agent right in the three most hated professions in the world are attorneys, life insurance agents and use car salesman. And my best, friend’s a used car salesman. So I hit all three in some way, one of the selling points of life insurance is that It’s not subject to tax.
I have a $5 million life insurance policy on my life and my wife’s the beneficiary and I die. She gets $5 million, completely income tax rate. The only reason for that really is because the insurance companies have this really strong lobby in Congress, and they’ve been able to carve out the definition of income to include.
Life insurance, death benefit. That’s it. So the reason the issue though, is that my wife would now have $5 million of cash as part of her estate. And now is there an estate tax problem? How to plan for that life insurance death benefit becomes a big one. Anyway, I don’t want to, that’s a much more kind of static.
Tax issue, and it’s definitely something that can be dealt with, but there is a small Wipro window of opportunity that can be going away. To close that portion out, right? I think it’s important for folks to be aware of this stuff and understand it because things are going to change.
And in the very end, you may just be stuck, it just may be how the times are, but there may be opportunities to. Do that wild cat off the, to the right. We’re all stuck, right? It’s the way the times are. And we’re just going to have to live through it now, again, I’m not coming from any kind of political side on this.
I just, as a tax attorney, I hate. Paying taxes. I pay my fair share and all of those kinds of things, but and by the way, if you’ve ever worked with a tax attorney that likes taxes, you’re working with the wrong attorney. But the point is that there really are planning techniques that can.
Put you in control and you in power of what happens with your legacy at your death, do you want to leave it to your kids in the most tax efficient manner or maybe you don’t right. You could have, and I have clients that are this way that say, yeah, I want to give my kids some, but I really want to benefit charities in some way.
Charities don’t pay taxes, including the estate tax. So you have a hundred million dollar estate and 80 million of it is going to go to charity. We don’t have an estate tax problem anyway, but it’s how do we leverage and use that financial wealth to accomplish what this next issue deals with?
. Just to refresh your memory. Cause we’ve talked about so much the erosive effects, number one, the division of the estate, spreading it out at death means that everybody gets less assets and we lose power. Second issue the estate tax, because if it ever, the regeneration of family is having to pay 50% of the tax to the government, that’s going to weed down a family’s financial wealth over time.
But then the biggest issue that bleeds into this. Shirtsleeves to shirtsleeves in three generation phenomenon. It is fact it happens. It’s not just this idea. It is fact is the third party attacks to the wealth. Meaning you leave an asset to a child and they go through a divorce or they get sued or they start a business and it fails and they have to declare bankruptcy.
And what mom and dad gave him gets taken by those creditors and then, and mismanagement, right? You give the assets to the kids and they go just. By Ferrari’s and I’m thinking against Ferrari’s beautiful cars. I like cars, but I expect my kids to make the money themselves to buy their own damn Ferrari.
They’re not using the money that I left in to buy the Ferrari. What I had, what I think is the worst one is like the parents give a $1.5 million state the kids go and break it down and go build a $3 million house with her $80,000 a year salary and get a new mortgage on that. That’s the account as a third party attack themselves, it counts as mismanagement.
And that brings into exactly this discussion of how do you deal with each of those issues? First of all, third-party attacks are pretty easy to deal with. One of the things that I see in a lot of people’s planning lane is that at their death again, They might leave it in trust for the benefit of their kids for awhile.
Understanding that an 18 year old is probably not well equipped to handle a lot of assets. You probably were at 18. I was not but Hey, we’re going to hang on to it for a little while longer. We’re going to put a trustee in charge of it. Who’s more responsible, but then when the kids reach 25, 30, 35, these are very common ages.
We’re start doling the money out to them. Literally requiring the trustee to give one third. Of the assets outright to the child. And to me, that’s a huge, no-no what I do. Like in my planning for my kids. In fact, I’ve done this in the planning for my mom, keep mentioning my grandpa just as a really big person in my life, but he’d done very well in life and he passed away in 2006.
My mom’s an only child. And she’d be game a pretty wealthy woman. And I’m a mama’s boy through and through. I talked to her every morning on the way to work, and I don’t want this lovely woman going anywhere. But when she does launch off, I want the last check she writes, but to bounce, but I don’t need her money just fine.
But when it comes to me, it’s coming to me in a trust. And then my sister had a trust that will exist for our entire lifetime. And the reason for that is number one, we deal with that erosive effect. We just talked about this, a state tax issue. Look, I’m going to do what I can to have an estate tax problem.
It’s not the only thing I’m striving for in life, but if my wife and I have a mast in the state of $20 million, let’s say I don’t need my mom dumping on top of me, half of her estate, because now my net worth increases. When I die, those same assets are subject to an additional state tax. I want to enjoy those assets, right?
I’m not completely altruistic by her leaving it in a trust that exists for my entire lifetime. It never becomes part of my estate when I die, if I’m worth $50 million and there’s $5 million in that trust that my mom left me. That’s not part of my estate. It generationally skips the estate tax and go on.
It goes on to my children, her grandchildren, a state tax-free. That’s a benefit of that lifetime trust. But then in terms of third-party attacks, if my wife decides that she’s tired of my horrible sense of humor and she runs off to The Bahamas with the pool boy The assets. My mom leaves me in that trust are for my benefit.
Nobody else. My wife is not a beneficiary of that. Trust a divorcing or a bankruptcy trustee. I literally could go through an entire bankruptcy, come out. The other side of that bankruptcy with the assets. My mom left me entirely intact. Now the downside of that of course, is this term lifetime. And does this mean that my mom has, in my case chosen some third-party trustee.
At her death to be in charge of what she leaves me and my sister. Thankfully she has this idea that I know how to run a trust. At her death, I get to be in control of what she leaves me as my own trustee. It’s not part of my estate and not available to creditors, even though I’m entirely in control.
That’s a big thing that your client or your associates should think about doing within their planning, leaving it in a trust. But not a trust that will ever make or be required to make outright distributions to that band fishing. Okay. Now, one potential issue with that, that I’m seeing as your sister, your sibling now she’s at the mercy of you, the trustee, right?
Nope. She gets to be her own trustee over her share. Okay. Everything stays together. But there’s individual trustees for their portion. Yeah. We have a family partnership that my mom and my sister and myself own and that’s where we concentrate the wealth. We hold it all together. So it’s not.
Split apart. And then ultimately what will happen at my mom’s passing is all own half of that partnership in this trust that I mentioned, and my sister will own half of the partnership in the trust, as I mentioned, and yet we need to work together on running the partnership, but we run our trusts.
However we want. I’m very handsy when I talk happens, if like your sister’s a drug addict or just not just doesn’t care. So now you bring up a funny story. I got to tell another story about my grandpa. He had this fabulous sense of humor up until the last breath that he took. And it sounds a little bit morbid, but we have this small, strange little family and we are around his house talking to him about his burial instructions.
And we always thought he wanted to be buried next to grandma on the family plot. And he said, no I’ve changed my mind. And I want to be cremated. I said, okay, where do you want them? What do you want your ashes spread? And he said, okay, Andrew we have a small ranch up in Montana. And he said he loved it.
One of his favorite places on earth. He said, take a box of ashes and spread it up at the ranch. And my dad said, okay, no problem. He, this river in Idaho that he loved and there was this one spot on the stretch of the river. He would always stop and have lunch when we were fishing. And I probably stopped there a hundred times over the years with him.
He said, I want a box of ashes spread on the bank of that river, and I’m not going to tell you where, so you can’t turn me into the APA, but he said, okay, what do you want done with this third box of ashes and the whole family’s waiting on bated breath. And he says, Andrew, I want you to take that third box of ashes to Nordstrom’s.
And I want you to sprinkle my ashes and every planet at Nordstrom’s that you can find. Cause that’s going to give me the best possible chance that my sister. Or that your daughter, your sister will actually come and visit me after my death. She has a quadruple black belt in shopping. I love her to death, but she doesn’t really have a good sense of finances.
She hasn’t wanted to learn about it. Big heart. Amazing person, but just not really the most financial savvy. You have to deal with that. And when I mentioned more cavalierly just a moment ago that she would be her own trustee, to an extent we have some safe cards in there just to protect their financial Ms decisions.
But in terms of drug dependency and it doesn’t have to be drug, it could be any substance abuse illegal or legal, right. You can have prescription. Drug abuse, anything that is causing an impact to that beneficiary you’ve got to deal with because money’s not good or bad, it just is. But what it has a tendency to do is enhance a good or a bad characteristic, right?
You have a child with a drug problem and they get a bunch more money. It’s going to increase that drug problem. It’s not going to solve it. So you absolutely need to have in your trust a way to deal with that. We probably have two or three pages alone on the ability for say a trustee that is managing a beneficiary’s trust, who hasn’t yet been put in charge of their trust.
Like my mom would put me in charge of, but like my kids, no way they will never, they will be in charge of their own trust until their behavior changes a lot. You put in some of those safeguards where the trustee of the trust can suspend making distributions to that beneficiary in the event, the trustee knows it’s going to be used for an inappropriate purpose.
Doesn’t mean that the beneficiary can’t still benefit from the trust. For example, you’re worried about giving that beneficiary money. Cause he’s, he or she you’re going to take it and go buy. Drugs, alcohol, whatever. And they’ve got the problem. The trustee can pay the person’s mortgage directly.
They can make sure that the mortgage payment is going to get paid. So you have to have some of those. And then we even put in ours The ability to, obviously drug testing gets involved, but also we get counseling and have that counseling paid for they get a second chance, right?
Although you gotta be really careful about that. Drug has a huge recidivism, right? Those are some of the hard things that you have to craft around and identifying those is a really big part of it. In fact, that’s where we always start out with saying is that people that successfully navigate this, idea of transferring wealth with more purpose and also I think preserving family harmony they routinely spend time knowing who they are and families don’t really do that very often any longer. How often do you sit down and say, okay, who are we as a family? What makes us unique?
What are our core values? And that’s the other aspect to what this lifetime trust provides. It’s a way for you to pass on that personalization that I mentioned earlier, that I’d come back to this. This is where you, as a family could come in and say, these are the five core values or. I don’t want however many values you want to put in there that we really want our trust to be driven by.
If you were to look at my trust document, you would see that there’s 35 pages, just giving directions to my trustees about the type of things that I would want to do, because I want to incentive my C incentivize my kids and much more. Then the static way that a trust is written, where it says the assets in that trust for the beneficiary are to be used for their health education, maintenance support.
That’s not where I want it to end. I want my kids to be able to use it for entrepreneurial activities. I want to use it while they’re alive to help teach them some of these financial literacy ideas. Right? Financial literacy is an extremely important thing for a parent to teach to a child because they don’t learn it anywhere else.
They don’t learn it in school. You wouldn’t want them learning financial literacy in school. Last thing you want to do is take financial advice from a teacher joking, but the point being is that you as the parent, whatever, however you define that really does have that responsibility for taking on that financial education to your kids.
How are you going to do that? Incentivizing them is just incredibly powerful. You’ll see things in people’s trusts where they will, provide for the family to be really thought of as a bank. And if a child wants something from the family bank, they don’t just get it given to them.
They have to apply for a loan. And if it’s for business, I don’t care if it’s a lemonade stand or like I have this fam actually my son is 15. Now he wants to start buying cars and reselling them and fixing them up or whatever, not in my experience, a real lucrative process, but he needs to learn his lessons and I’ll help him, and I say, okay, look, I’ll loan you the money to help buy your first car, but I’ll tell you what, you’re going to come to the whole family. Your brother, your sister and us, your mom and your dad, because you’re taking the family’s money and you are going to deliver us a business purpose. And I’ll help you write it.
I am teaching them how to write a business plan and I want to understand what you plan on doing. You’ve done all the due diligence on costs, startups and all of these different kinds of things. I want him to start learning those things, even if he blows the thousand dollars or whatever that I might lend him.
He’s had a learning experience. Now, if he has an outstanding loan, he’s got to regularly come back and deliver. State of the business address, if you will, to the family, cause that’s creating accountability, but it’s also teaching each other. There’s no better way to learn a topic or a subject than to have to teach it.
And my kids now are teaching each other about what they’re doing right. And what they’re doing wrong. In all these activities, because I know my kids are going to make mistakes. You learn from your mistakes, but I’ll be really pissed off. If all of my kids make the exact same mistake. And if they can learn from each other, this is what I did, this is what I did wrong. You’re creating family togetherness. You’re hopefully creating synergy for the kids working together. My kids are going to have to work together and how my plan is set up. Something happens to me. Nothing. No, it doesn’t go a third. Like I said, it all stays together and they’re going to have to work together on managing it under the principles that we’ve all laid out.
And I think the beauty of that is it’s kinda like when you go for a job interview, if you’ve never been on the interviewee panel, you don’t have that empathy. You don’t have that insight. But your kids kind of evaluating their siblings plans for the money. They gain that empathy and they realize how next time they come up for the proposal, next time they’re in the hot seat, how to, how it comes across and presents it.
And then ultimately they grow. It’s whimsical when they’re young, but it gets more serious, bigger dollars in the future. And all this, the foundation was set. That’s the point. And I literally did this with a lemonade stand where, we priced out the lemonade or the lemons priced out the sugar, priced out the water, all this kind of stuff had them do a whole progression on it.
And it was for my daughter. And then she had to come back and say, of course the 500 bucks was gone, but she, as you were definitely in the hole on that deal, But she had to explain that and she was doing that at nine years old. Now I’m not saying that’s what everybody needs to do or should be doing, but there’s all of these different ways that you can do it.
What you don’t want to do is just throw money at somebody with no accountability, because somebody else’s money never means as much as your own money means to you. We have this. This parable that we tell in our book, this gentleman has created these wonderful businesses and he has this, Arab parent, this son that he wants to leave all of these businesses too.
But the kids a spendthrift right, the standard go out and spend everything, and he wants this kid to get serious. So he tells the kid, look, you go and make $10,000 and you bring it back to me. And we’ll talk about me handing over your business. So the kid says, ah, I can, it’s 10,000. That’s not that much.
I can get that easy. It goes out, yeah. He talks to one of his buddies and he says, Hey look yeah, Gimme 10,000 bucks. And when my dad makes me in charge of the businesses, I’ll pay you back 20 and his friend says, no problem. Here you go. Here’s $10,000. So the kid comes marching into the dad’s office, hands in the $10,000 in cash.
The dad stands up, walks across the office to the fireplace. That’s burning throws, the $10,000 into the fireplace, burns it up completely. And he looks at his son and he says, I know you didn’t earn that money. You go out, make $10,000, bring it back to me and we’ll talk. So the guy’s going, Oh my Lord. How did dad know that?
I’ve got to talk to somebody that’s smarter. So he actually calls one of his dad’s advisors thinking that he can get his dad’s advisor in on the scheme. And he knows what his dad is worth. So we talked to the advisor and he says, Hey, look, you lend me , $10,000. And I’ll give you a percentage of dad’s businesses when he turns it over to me.
No problem. Here’s 10,000 bucks, right? It comes marching into dad’s office, hands in the $10,000. Dad stands up, walks across the room, throws it in the fire, burns it up. I know you didn’t make that money. Go out and make $10,000. This is your last chance. Now the kid by this point is really gone. Look, dad’s buddies are going to sell out on me.
That’s the only way he could have found out. What am I going to do? I better go out and this money. So he does right. Most lawns does all the standard stuff makes $10,000. Comes into his dad’s office, hands in the $10,000. Dad proceeds to get up, walk across the room, throw the money in the fire. The kid jumps up and grabs the money out of the fire.
Dad says, I know you earned that money. It means more to you when you do it yourself. We always say, people need to put in sort of three things when they’re doing philanthropy or when a lot of our clients that are into generosity or want to include charitable organizations.
It’s easy to give away somebody else’s money, but you’ve got to put in your own time, treasure. And or talent into whatever you’re doing. So this idea of accountability creates the scenario where I am earning it, or I am losing it. And if I lose it, I need to explain why now they pay the loan back.
They get a higher credit rating and I’ll loan them more. Again, it’s one of those things where I’m not trying to be dictatorial with my kids. You have to be really careful about that. You don’t want to create a structure. That’s not going to work 50 years from now. But you want to try to create a situation.
Where kids are held accountable in some way, and not just accountable in terms of what we’ve been talking about so far, but also accountable in terms of what’s expected of them. And families just don’t have these conversations. So we have a whole process within trusted for families to go through and have this discussion where at the end of the day, every family member is very clear.
With their five core values and the family then creates a sort of a family crest motto, whatever, but of their five core values. And what’s interesting about the core values is are completely developed based upon your life experience. Let’s just say, for example, one of my core values is honesty which sounds strange coming from a lawyer.
But what that means to me is any meaningful relationship in my life, beyond the friend that you see every year at the Christmas party and say hi to, but everybody, that’s in my life that I have a meaningful connection to, there has to be this element of honesty. If not, it just won’t work.
I know myself and that comes from the fact that early on in my life, there was somebody in our family that was really dishonest with us and it really shaped my life and a lot of the decisions that I made in life that were turned out to be good. If I’m now having a discussion with my family about why honesty is one of my core values.
What I’m doing is telling my history, , my failures, , my successes. I’m not being preachy. I’m not sitting down and telling my son, Thomas who’s my oldest. Hey, look, Paul, you were really dishonest last week when you did this, but I’m not scolding him. It’s not in a bad light, pessimistic, light.
Honesty is important to me. This is why, so this is why I think it should be important to everybody, but then not, everybody’s going to have the same core values. In fact, if you take the 44 values that we concentrate on you would have a 15 million different renditions as those 44 values were condensed into five for each person, and then you can play it in the reverse as well.
I can play it with my wife and I can say, Hey, look, these are the five core values I see in you. And that’s a powerful conversation because you’re validating that other person. And again it’s a transformative way to start that discussion. It’s very similar to people read the book out there, EOS traction, they tell you to find these values, and it’s seems a little bit around about way to get there, but it’s really the only sustainable way of governing this money. That’s always, the first question is these are all great ideas, but how do I do it? How do I start the discussion? And that’s where we’re unique.
I think in terms of the other books that are out there and there’s a lot of books that are out there talking about this stuff. I don’t mean to name them, but they’re good books and there’s nothing wrong with them. But when the rubber meets the road and you say, okay, how do I do it? How do I bend this to begin these discussions with our, with my family?
That’s where the process we developed, I think is extremely helpful. , we basically tell a family that we need about six hours of their time to really get in there and understand the dynamics that are going on. And a lot of times you’ll find roadblocks families. A lot of families have communication problems.
Whether it be, they’re not communicating at all, when they do communicate, it’s not productive. I have members of my family that I can’t have a conversation with without it turning into an argument. There’s and so if you can’t communicate on this as a family, that’s something that needs to be overcome and, Through this, I think we’ve taken about 300 plus families through this process now.
And we’ve developed a lot of the outlets to that, right? A family has a connection problem or a communication problem, or like you were mentioning lane. If they have a substance abuse issue, look, you have a child out there with a substance abuse issue. The last thing you potentially think, or the last thing you’re thinking about is meeting with a bloodsucking vampire lawyer about death and taxes and doing your trust, right?
Your family is in crisis and you’re dealing with a member of that family. Now we’ve got to deal with that situation in some way, whether it’s we get help for that person or that person’s not willing to get help and you decide, okay, Then you’re not going to be part of the family legacy that we’re building.
, we can’t afford all of the damages is taking place to the rest of the family because you are choosing not to participate because you can’t. And I’ve had, those families that have made that hard choice, not cutting a member of the family out at all, but saying, we like this. It’s just that we have this thorn in our side with this person that can’t get their life together.
And it shouldn’t punish those who do have their life together any more than it already has throughout their life. What are some of those common safeguards for maybe not drugs in particular? Cause I think we’ve beat that one up, but other. Issues under the surface with when these, in these consults with families and how do you protect against how do you write it into a trust?
The biggest, again, communication is by far the biggest one and I’ll, but I want to hit that from a different angle, that I answer your question , in not a different way, but from another issue we wrote an article David York, and I he’s a coauthor on our books, but for, it was for trusts and estates magazine in 2017 and trusted in the States magazine and our.
Nerd world is, are our peer reviewed periodical, and you got to do annotations and case studies and it’s, I’ll never write one of these damn things again, but we call it Gratz versus gratitude. That was the title of the article. Now a graph in our world is a strategy for transferring wealth from one generation to the next extensor, grantor retained annuity trust.
But the point of the title was, are you trying to pass on it again, written to our colleagues, other attorneys in the state world. Are you trying to help your clients pass on wealth or gratitude? Okay. And. We took a look at all of our families that again, have done this very well. And one of the things that we found was the biggest deciding factor about whether or not a family stays in harmony, meaning that a year after mom and dad dies, they’re still having Thanksgiving dinner together.
Or we have this saying in the estate planning world that you never truly know a person until you share an inheritance with them. Because the best families, the claws will come out and people will Five-O fight over mom’s engagement ring. I don’t think it doesn’t say anything bad to the person.
It doesn’t necessarily mean that you’re greedy. Although I’ve seen a lot of greed in these scenarios, but you lose a loved one and you go through that emotional toil. And then you hang on to a personal item. I remember when I went. Duck hunting with my dad for the first time.
And he gave me a shotgun and to use, and I want that, whatever it is, it has this emotional attachment that because of the emotional turmoil you’re going through with that last one you latch onto that and I will see people fight over, tooth and nail over that. So the point of this is the biggest deciding factor is openness.
Being open with your family and having the open dialogue. And that’s a really counter-intuitive thing, not so much for our generations. Our generations are getting a little bit more comfortable with it, but you have the silent generation. There was a reason they were called the silent generation.
They did not want to talk about money. They did not want to talk about finances, include the family. David , one of my partners, he has this great story about this family. He was talking to this with, and the mom and dad looked at him and say, can we try to instill our kids, all these, financial ideas and how lucky they are all the time.
And we did that recently on a trip because we sat in first class and we made them sit and coach. You’re going, no, you don’t get it pal. Your kids still get it. Your kids still get that. They’re flying to Maui that you’re sitting in first class, that there are assets. There don’t act like they’re stupid.
People include them. Let them know though what they’re going to expect. Even if that they expect nothing, because then the aid, if you will, isn’t directed to you or isn’t directed to their siblings. It’s directed at you. Who’s six feet under and they can jump on your grave all you want. So the point being opened, the books is a really big thing that I encourage people to do.
And we really feel the kids can start getting involved in some of these discussions in age appropriate ways. But as early as five years old, Or just lie to them, tell them what your grandparents trust and it’s not yours. No, that’s a joke. Don’t do that. No because again, that’s our second principal with, first principle of them trusted families as they, like I said, they know who they are and they know who they believe.
But the second principle is that entrusted families prepare the next generation for the wealth, rather than concentrating on preparing the wealth for the next generation. And that’s all a state planning is doing right now is concentrating on preparing the wealth without again, the consequences it has on that next iteration.
Without question, including kids into meetings, I was in meetings with family. Advisors, financial advisors, accountants. I was told to sit in the corner, shut up and suck my thumb. But I was also told to listen. And if I had a question, I could ask it and so forth, but it was a way for you to start speaking that language, there’s a whole nother financial language that’s out there and you’ve gotta be able to speak it. Points that I know you got to get run into here. Andrew, I’m wanting. And once you got to get your information out there and be in case people want to get ahold of you folks use some of your guys’ content.
Yeah. Holding me is it’s corny and it’s, but it’s through email team email@example.com. That’s T E a M a N D R E firstname.lastname@example.org. That’ll go to my two paralegals and my three assistants and me that way I never listed him. He never missed an email. Yeah. Welcome to reach out to me. I’d love to help anybody in my office can coordinate a time for us to talk.
All right. Thanks for listening folks again, if you want or looking for a peer network of independent office on a mastermind, the form, what we call it? Check it out. Simple. Passive cashflow.com/journey. It’s not fair professionals and good luck on your own. We’ll see you guys next time.