Darol Tuttle discusses the difference between estate planning and asset protection, while Fluent Financial’s Mitch Kramer ponders the FED’s Jerome Powell’s next move.

Episode Transcript

Intro:

Welcome to the Practical Tax podcast, with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz, LLP, a tax law firm.

Disclaimer:

The information contained in this podcast is based upon information available as of date of recording and will not be updated for changes in law regulation. Any information is not to be considered tax advice or legal advice and does not form an attorney/client relationship. Further, this podcast may be construed as attorney advertising. You should see professional consultation for your individual tax and legal situation.

Chip Franklin:

Welcome to another edition of Practical Tax with tax attorney, Steve Moskowitz. How often do you have clients that are looking 10, 15, 20 years down the road?

Steve Moskowitz:

If they're not, part of our job is to do that because life and business isn't just about today. If you want to be successful today, you have to say, "Well, what am I going to do in 5, 10, 20 years or more? What's beyond that? What's the plan?" And that's so vitally important, and we do that in a variety of ways. For example, with a pension plan... And I use the term pension and retirement accounts interchangeably, although there's some small technical differences. But for example, when somebody walks in the door I say, "Well, look, what about your retirement?" "Well, I just started the business today." "Okay," I have a tough question to ask, "Would you prefer to, A, pay more taxes or, B, pay less taxes?" and they say, "Well, I'm going to go with B." I say, "Good move." And then I say, "Well, okay, let's plan for your retirement. You can literally pay less to the IRS by taking care of yourself with a pension plan down the road."

And why would the government be so generous? Because they're concerned about social security and paying for people, and they want people to be able to be self sufficient. Because let's face it, in our country, if people can't take care of themselves, what do they do? They go to the government and they say, "Take care of me," and the government does.

Chip Franklin:

Sometimes.

Steve Moskowitz:

Who pays for that? It comes from the people that are working and paying taxes.

Chip Franklin:

Well, let's jump in with our first guest then. Darol Tuttle is an asset protection attorney, been doing this for more than a quarter of a century. Darol, thanks for being with us today. Let me just ask you straight up, what is the biggest difference between estate planning and asset protection for you?

Darol Tuttle:

Yeah, estate planning is only about estate transfer. It really has no value proposition for the living client. They come in, they hire me, and they pay me a bunch of money. And I set up a living trust or will and then I say, "Okay, go off and die," because really, all we're doing is we're saying, we want to make it easy to retitle the assets after you're dead. Now, so the value proposition is really just peace of mind. Whereas asset protection, the way I define it, there are three threats to wealth in America today. Number one, unreimbursed medical expenses. Number two, unnecessary taxation. Number three, family and financial mismanagement. Now, some asset protection attorneys throw in protection against lawsuits and judgments, offshore trust. I don't practice in that area of law.

And so to me, asset protection has a higher value proposition because we are transferring assets, creating trusts, proving legal strategies that are authorized sometimes by the federal statutes to make those assets unavailable to creditors to include the Medicaid agency and sometimes the tax agency after the first death. Like a credit shelter trust would be an example in the state tax arena of asset protection, you're reaching out and you're seizing the credit. Now, I practice in Washington state, which has the highest estate tax rate of any state in the union as high as 20%. And so, then financial mismanagement sometimes can be brutal as well. I've seen trust set up for kids in which the older brother trustee was stealing from the trust. A great way to prevent that is just trust protector language reporting requirements in the trust.

Chip Franklin:

Let me ask you.

Darol Tuttle:

And so, that's how I define it.

Chip Franklin:

Both of you guys is when you set up a trust, is it important that the whoever's setting up the trust is not the same age as you? I mean, right.

Darol Tuttle:

I'm not really in favor. I've been a lawyer since 1996, back in the days, I used to have hair when I was a lawyer and I didn't have to use these reading glasses. And so, I've been at it at a long time and as a young lawyer, Steve, you're probably the same way. You just kind of do what everybody does and it's appoint the kid to be a trustee. Well, the problem is with that, you just changed the relationship, didn't you? Because now, you got to go to your brother to ask him for money from mom's trust. Second thing is they don't necessarily have the skill set and I don't see a lot of folks pointing friends to be trustees their own age, it's usually their kids. And so, now, I've been spending more and more time trying to find professional trustees to handle it. Of course, you got to pay them fees and that's a problem. But trusts are important because trust hold personal assets, LLCs, S corporations, partnerships, hold business assets. And so, you got to get that team put together the right way.

Chip Franklin:

Steve, do you have clients that decide on distributing the funds before death as slowly as a...?

Steve Moskowitz:

Oh, absolutely. And it also depends on the size of the estate, because some people want to have what's known as a program of lifetime giving to get appreciating assets out of the estate. Suppose for example, you have a building and you bought it for low amount of money and you think it's going to go up and up, you can get it out of the estate. However, you have to balance that with giving up the stepped up basis if you held it. So one of the balancing actually say, "Well, wait a minute, what are we talking about here? How much is involved?" And let's face it, if mom and dad own this property, we have a huge exemption amount that covers most Americans. Most people listening to this show are not going to pay estate taxes because they're way under the exemption amount. So you say, "Well, wait a minute, it's not like the old days where there was a very low amount in the old days" as low as you remember the 600,000.

Darol Tuttle:

Yeah, 6/25. That's what it was when I came into practice.

Steve Moskowitz:

That you say, "Well, okay," and there's all types of things we did to say, "Well, let's work on that valuation," like putting two people on the title and saying, "Well, what's the fair market value of that?" But now with the exemption amount being so high, you want to have the step up in basis. And what step up in basis is, suppose grandpa bought a building for $10,000 when he was a young man. And if he gives it to granddaughter while he's alive, she essentially takes his basis, he sells it the next day he got a 990 capital gain and pays tax on that. If grandpa left that in his will or his trust, granddaughter would get a stepped up basis. So now, she sells it the next day for a million bucks. But her adjusted basis is not 10,000, it's now a million fair market value date of death of decedent. And now, it's a million minus a million zero capital gain, zero tax.

So again, you have to weigh, yes, there can be advantages and there's all kinds of things. For example, one of the things you probably are familiar with, CRTs, a charitable remainder trust where somebody says, let's say of this situation, husband and wife don't have anybody they want to leave the house to. And they say, "We want to live here the rest of our lives, but when the second spouse passes, we want this house to go to the charity of our choice." The actuary comes in, makes an actuarial evaluation dependent on the ages. And then, they get a huge tax deduction right now while they're living, they pay less income taxes. And you say, "Well, gee, the deduction is so large that we don't have enough income to offset." That's okay, you can carry it forward.

So there's just an endless array of what do people want to do? But the first thing we do before we do a plan is say, what are your wants and desires? Because we could have twin siblings alike in all respects financially. And one says, "Everything for the kids." And the other one says, "I believe in the Warren Buffett method, you leave something to the kids that ruins them. I want to reduce my income taxes." We have very different plans.

Chip Franklin:

I wish somebody had ruined me when I was young. Let me ask you about the threats to this, because there's two that I want to get to and we don't have a ton of time. But the first was financial mismanagement. Do most people see they're doing it while they're doing it and just choose to ignore it? Or is it something that creeps up on them? And the second question, again, this goes to both you, is about the medical because obviously the increases in that and people that are approaching Medicare and the supplemental stuff. Do they adequately anticipate these are incredibly big costs? So first one first is the financial mismanagement. Is that stuff that would fall into your bailiwick, Steve? Where they get behind in taxes and the government comes in? What do you think?

Steve Moskowitz:

That happens. So what we have to do is see what's going on and there's all kinds of differences here. And not only do we want to take care of the taxes, but we want to preserve the asset as much as possible too. And in asset protection,