ATHLLC9828355911

00:00:00.000 | A quick word from our sponsor today.

00:00:01.700 | I love helping you answer all the toughest questions about life, money, and so much

00:00:08.040 | more, but sometimes it's helpful to talk to other people in your situation, which

00:00:12.880 | actually gets harder as you build your wealth.

00:00:14.940 | So I want to introduce you to today's sponsor, Longangle.

00:00:18.200 | Longangle is a community of high net worth individuals with backgrounds in

00:00:22.240 | everything from technology, finance, medicine, to real estate, law,

00:00:26.060 | manufacturing, and more.

00:00:27.620 | I'm a member of Longangle.

00:00:29.480 | I've loved being a part of the community, and I've even had one of the founders,

00:00:33.040 | Tad Fallows, join me on all the hacks in episode 87 to talk about alternative

00:00:37.200 | investments.

00:00:37.940 | Now, the majority of Longangle members are first generation wealth, young, highly

00:00:42.660 | successful individuals who join the community to share knowledge and learn

00:00:46.400 | from each other in a confidential, unbiased setting.

00:00:49.600 | On top of that, members also get access to some unique private market investment

00:00:54.400 | opportunities.

00:00:55.200 | Like I said, I'm a member and I've gotten so much value from the community

00:00:59.120 | because you're getting advice and feedback from people in a similar

00:01:02.320 | situation to you on everything from your investment portfolio, to your

00:01:06.280 | children's education, to finding a concierge doctor.

00:01:09.240 | So many of these conversations aren't happening anywhere else online.

00:01:13.160 | So if you have more than 2.2 million in investable assets, which is their

00:01:17.440 | minimum for membership, I encourage you to check out Longangle and it's totally

00:01:22.000 | free to join.

00:01:22.800 | Just go to longangle.com to learn more.

00:01:26.400 | And if you choose to apply, be sure to let them know you heard about it here.

00:01:29.960 | Again, that's longangle.com.

00:01:34.640 | Hello, and welcome to another episode of All The Hacks, a show about upgrading

00:01:42.000 | your life, money, and travel.

00:01:43.880 | I'm your host, Chris Hutchins, and I'm excited to have my first two interview

00:01:48.040 | episode today.

00:01:48.920 | We'll first talk about estate planning with Patrick Hicks, a lawyer who recently

00:01:53.760 | became the general counsel for Trust & Will.

00:01:56.280 | Now, if you're not familiar with estate planning, think of it a little bit like

00:01:59.640 | risk management for your family.

00:02:01.280 | It's a way to protect and guide your loved ones should you die or become

00:02:05.280 | incapacitated.

00:02:06.200 | Now, I know that's not the most exciting topic for a dinner conversation, but I

00:02:10.480 | promise it's an important one and we'll get into some really tactical advice.

00:02:14.560 | After that, we'll talk to Mani Mahadevan, who runs a company called Valor, which

00:02:18.760 | is really democratizing access to the kinds of trusts that wealthy people use

00:02:22.960 | to limit the taxes they pay.

00:02:24.840 | It was so fascinating to hear about some of the crazy ways that people avoid

00:02:28.800 | giving the IRS more money.

00:02:30.200 | I know this is a longer episode, but both of these conversations were on similar

00:02:34.520 | topics and were so interesting that I thought it would be worth combining them

00:02:38.200 | into one.

00:02:38.880 | So let's jump right in.

00:02:40.400 | Patrick, thank you for being here.

00:02:43.640 | Happy to be here and speak with you.

00:02:45.200 | I just spent some time talking about some of the aspects of how people and their

00:02:50.080 | families can start to protect themselves, their documents, and I didn't spend as

00:02:54.520 | much time on the legal side of things.

00:02:57.280 | So I think most people have heard of the term "will" and I've written about it a

00:03:01.280 | bit and we've mentioned it in the past.

00:03:02.880 | Maybe we could just start at the basics about what is a will and who needs one.

00:03:08.360 | Yeah, that's a great question.

00:03:09.600 | So a will is a fundamental estate planning document.

00:03:12.960 | And once you have all of your decisions made and your intentions and your

00:03:16.680 | preferences, it's these legal documents that actually make them legally binding,

00:03:20.320 | enforceable, and valid.

00:03:22.000 | So that's the difference between I have a desire and now I actually have an

00:03:25.440 | enforceable legal decision.

00:03:27.160 | That's the estate planning documents and the will is the cornerstone,

00:03:30.760 | fundamental estate planning document.

00:03:32.880 | It's incredibly old.

00:03:34.400 | It's been around the concept of a will since ancient Greece, but the will as we

00:03:38.720 | know it today, even that the origins trace back to the 16th century.

00:03:42.880 | I mean, Henry VIII was the king when they passed the statute of wills act that set

00:03:47.320 | a lot of the requirements that we're still working with today.

00:03:49.960 | So that's how long a will has been part of estate planning in modern society.

00:03:53.920 | If you can really call the 16th century modern society, we're still using the

00:03:57.360 | same rules.

00:03:57.880 | So I guess I got to give them a little bit of credit.

00:03:59.280 | Wow.

00:04:00.040 | I didn't know the history.

00:04:01.120 | What are the main components of it?

00:04:02.800 | The decisions that you want to think about before creating one?

00:04:06.120 | Yeah, absolutely.

00:04:07.560 | So a will, because it is a very fundamental document, it handles

00:04:10.320 | fundamental needs.

00:04:11.280 | And there's three primary needs that every will will handle.

00:04:14.640 | And the first is we'll dispose of your assets and we'll say where your things

00:04:18.360 | go, who gets what after your death and a will only applies at death.

00:04:22.760 | But that's what it does is it transfers your assets after death.

00:04:25.960 | The second thing after disposing of your assets is it will choose

00:04:29.320 | who will care for your children.

00:04:31.240 | Now, your children are not assets.

00:04:33.040 | You don't dispose of them in quite the same way.

00:04:34.880 | But it will allows you to nominate someone who can care for your children

00:04:37.880 | to serve as their guardian.

00:04:39.840 | And the last thing that a will does is allows you to specify

00:04:42.280 | your own final arrangements, your burial preferences.

00:04:44.840 | Do you want to be cremated, buried at sea, blasted to the moon,

00:04:48.000 | whatever it is that you want to do?

00:04:49.840 | A will lets you select those three things.

00:04:51.840 | Dispose of your assets, someone to care for your children

00:04:54.720 | and your final arrangements.

00:04:56.200 | Those are the core functions of a will.

00:04:58.400 | Would it be fair to say anyone who has assets, children or preferences

00:05:03.680 | on what happens to them should probably have a will?

00:05:06.360 | Or what would happen if I wrote a document?

00:05:09.440 | It wasn't fancy.

00:05:10.600 | And I emailed it to like 3 friends that just said, "Here's what I want to do."

00:05:15.000 | Does that work in place of a will?

00:05:16.760 | Or what's necessary for this to all play out how you want it?

00:05:20.360 | Yeah, that's a great question.

00:05:21.920 | So the first one is every adult does need a will.

00:05:24.920 | You should have a will on your 18th birthday.

00:05:26.920 | Are you going to?

00:05:27.600 | Is that what you're going to be?

00:05:28.240 | First thing in line, Monday morning, your 18th birthday?

00:05:30.520 | No, let's be realistic.

00:05:31.520 | But every adult should have a will.

00:05:32.800 | There's no minimum asset thresholds.

00:05:34.920 | And like you said, even if you don't have this huge amount of assets,

00:05:37.640 | you don't have children, you still have final arrangements

00:05:40.600 | and you still have some property that you will dispose of,

00:05:43.320 | whether it's high value or sentimental property, you need a will.

00:05:46.680 | Every adult needs a will.

00:05:48.520 | But if you don't have a will or if you're looking to kind of create

00:05:51.480 | your intentions without a will, it starts to get a little dicey

00:05:54.280 | because you can send that email or even draft a letter to your friends

00:05:57.680 | to say, "In the event of my death, I want this to happen."

00:06:00.000 | And the question is, is that legally valid and enforceable?

00:06:04.480 | Is that enough for your preferences

00:06:07.880 | to be given actual weight in the eyes of the law?

00:06:10.840 | And in many times, unfortunately, the answer is no.

00:06:13.440 | And so when you have that result, you may think you have a plan,

00:06:16.560 | but the law disregards your plan and you wind up dying with no estate plan at all.

00:06:21.080 | And so let's take an example.

00:06:23.000 | Somebody has $50,000, one child

00:06:26.400 | and a strong desire to be cremated, but no will, no email sent to anyone.

00:06:32.080 | Maybe they've told their spouse what they want, or maybe we can go through

00:06:35.360 | whether they do or don't have a spouse.

00:06:37.320 | But what would happen to that $50,000 without a will?

00:06:40.480 | What would happen to their child?

00:06:41.800 | Who makes the decision on what happens to their remains?

00:06:44.120 | Yeah. So if you die without a will, that's known as dying intestate

00:06:48.360 | or intestacy is the process that you go through.

00:06:51.000 | And that simply means that you have no will at death.

00:06:53.920 | And every state has a set of laws that will apply that says,

00:06:57.720 | if there is no will, here are the default laws.

00:07:01.040 | And those default laws attempt to fill in all those holes.

00:07:03.680 | So it will say who's responsible for making decisions or where assets might go

00:07:07.960 | or who might have priority to care for children.

00:07:10.160 | So it's an attempt to fill in those gaps.

00:07:12.960 | But it's not a perfect solution by any stretch in your situation.

00:07:17.040 | That $50,000 would most likely be split between the surviving spouse

00:07:22.000 | and their surviving child.

00:07:23.280 | So $25,000 to to each of them.

00:07:25.640 | And that's just that default law.

00:07:27.800 | Now, that spouse might be the person who has the presumed authority

00:07:31.280 | to make decisions, who could say, hey, I happen to know

00:07:34.240 | that this person wanted to be cremated, so we're going to choose cremation.

00:07:37.880 | But if they don't know that or if they disagree with that,

00:07:40.640 | if you've never expressed that preference at all,

00:07:42.640 | that spouse may have the legal right to act,

00:07:44.960 | but they don't have the knowledge of what your preferences are.

00:07:48.120 | So you have to have both sides.

00:07:49.520 | You have to have clear intentions and you have to have legal authority.

00:07:53.280 | And without a will, you're really running a risk that you don't have either of those.

00:07:56.680 | And if you didn't have a spouse, what happens to children or assets?

00:08:01.280 | Or if you don't have children, what happens to assets?

00:08:03.560 | Yeah, so if you don't have a spouse, you don't have children.

00:08:06.640 | Most of these state laws, what they have is essentially an if then statement.

00:08:10.160 | So if you have a spouse, everything goes to your spouse.

00:08:12.560 | And if you have a spouse and one child, it's divided equally.

00:08:15.280 | Spouse and two children.

00:08:16.680 | It's just cascading set of decisions.

00:08:18.880 | But if you really boil it down, all of these laws basically say

00:08:22.000 | assets pass to your closest living relatives.

00:08:25.600 | So if you have a spouse, maybe your spouse or your kids,

00:08:28.040 | and if you don't have one, it might be your parents or your siblings.

00:08:30.480 | Maybe you can go out to your grandparents and your cousins.

00:08:32.520 | So if you're really isolated and don't have close family,

00:08:35.320 | it might still pass to your cousins.

00:08:37.200 | The problem is getting that process completed,

00:08:40.600 | getting to that finish line could be a difficult step.

00:08:43.800 | By the time the assets get to that cousin,

00:08:46.200 | the assets might even be depleted by fees and expenses.

00:08:48.800 | And so you're really starting to eat into the beneficiary's

00:08:51.440 | actual receipt of funds from your state.

00:08:54.120 | And I assume if you had neighbors who were unofficial

00:08:57.720 | godparents to your children and your desire was,

00:09:00.360 | I wish they could take our kids and you didn't have a will to state that,

00:09:03.360 | I imagine that would probably be a difficult thing because neighbors

00:09:07.120 | and friends probably aren't in the statutes of if then statements.

00:09:10.400 | Right. Absolutely.

00:09:12.040 | You have assets you want to leave to your neighbors or your close friends.

00:09:15.160 | The law just it doesn't look at that at all.

00:09:17.520 | If it's you, you're a family member or you're not.

00:09:19.480 | So if you have something like that,

00:09:21.080 | you really critically need a state plan in place.

00:09:24.120 | But with children, it's even trickier because ultimately the court

00:09:27.280 | is compelled to do what is best for the child.

00:09:30.360 | So even if as a parent, I say, I want my neighbor to care for my child

00:09:33.960 | and the court will look at that and it's very unlikely.

00:09:36.760 | But if the court says, hey, this is a really bad decision

00:09:39.760 | for some unknown scenario,

00:09:40.880 | maybe the neighbors have developed a drug habit or something like that

00:09:43.360 | that is unknown to me.

00:09:44.800 | The court can actually step in and say, we're going to overrule this decision

00:09:48.240 | and we're going to pass the children to someone else.

00:09:50.760 | It kind of leaves the court with almost too many options.

00:09:53.640 | Should we give it to a family member?

00:09:54.720 | Should we give it to close friends?

00:09:56.640 | Or does the child fall into the foster care for the state?

00:10:00.400 | It's almost too open ended and it leaves your children with no certainty.

00:10:04.280 | And what's already, if you think about a tragic time, the loss of a parent,

00:10:07.400 | it's a lot for a child to be expected to bear.

00:10:09.520 | Wow. OK, so it's pretty clear that everyone probably needs a will.

00:10:13.760 | What would actually happen?

00:10:15.400 | I'm just curious if you were in debt.

00:10:17.680 | Let's say someone actually had the opposite of as they just had liabilities.

00:10:21.160 | Is that a rare circumstance where if you had no kids, no spouse,

00:10:24.560 | no desires for your remains, it might be better to not specify

00:10:28.200 | who takes on those liabilities or what happens when you die

00:10:31.240 | with credit card debt or a mortgage that you don't have enough assets to cover?

00:10:34.480 | Yeah, that's a great question.

00:10:36.240 | So there's two types of debt.

00:10:37.320 | The first type is known as recourse debt, and that's something that might be

00:10:40.680 | like your mortgage in your house.

00:10:41.800 | It's actually tied to a specific property.

00:10:43.800 | And so that debt is associated with that property.

00:10:46.600 | If you want to leave someone that property, they take it with that debt.

00:10:50.040 | The other type is something like maybe your credit card bills.

00:10:52.480 | And that's just a personal promise to repay that debt.

00:10:55.520 | The benefit of that second type, your credit cards,

00:10:57.920 | any sort of normal outstanding loans, they don't evaporate at death.

00:11:02.520 | They can be paid off from any assets in your estate.

00:11:05.360 | But if there are not enough assets to pay down those debts,

00:11:08.720 | those debts just go away.

00:11:10.200 | They don't get passed on to your heirs as a general rule.

00:11:13.240 | There's some weird exceptions that might pop up here and there.

00:11:15.800 | So it's not always a black and white scenario.

00:11:17.600 | But generally, you don't have to pass on liabilities to your children.

00:11:22.320 | But you still need to account for that plan,

00:11:24.680 | because if you don't have that accounted for as part of your estate plan,

00:11:28.320 | you can actually have a creditor who will come in and say,

00:11:30.760 | we're going to open up the probate proceeding, for example,

00:11:33.280 | and we're going to call the shots and we're going to run this show.

00:11:35.440 | So it may still not be in your best interest.

00:11:37.600 | Even if you don't have significant assets,

00:11:39.120 | everyone has something of sentimental value, whether it's a photo album

00:11:42.440 | or old furniture in your house is an antique.

00:11:44.720 | And it's something been in the family a long time that a creditor is going to say,

00:11:48.440 | well, that's 50 bucks at a consignment shop.

00:11:50.720 | And they're going to look at it as dollar amounts.

00:11:52.280 | And it's going to deplete

00:11:53.120 | what could be a sentimental inheritance to your children, for example.

00:11:56.800 | So I think that makes a lot of sense.

00:11:59.080 | Will seems to be something that everyone listening should have at least over 18.

00:12:03.720 | What about all of these other documents?

00:12:05.760 | So I've written in the past about the full estate plan.

00:12:08.840 | And I know in California, that's sometimes something

00:12:12.000 | that has to do with avoiding probate.

00:12:14.080 | I don't generally know across the country what all the rules are.

00:12:17.600 | But what would you say is the core difference between an estate plan

00:12:21.440 | and a will and who needs to make the upgrade?

00:12:24.240 | Yeah, so I think the best way to think about it is an estate plan

00:12:28.240 | is a set of documents.

00:12:30.440 | And then a state plan can contain a variety of documents

00:12:33.320 | depending on your particular situation.

00:12:35.440 | Most typically, an estate plan will have at least a will

00:12:38.600 | and a set of health care documents, maybe a power of attorney or a living will

00:12:42.480 | or advanced health care directive, something like that.

00:12:44.600 | So that set is really the fundamental building block of an estate plan.

00:12:48.240 | You can also add additional documents.

00:12:50.720 | So a living trust, for example, is a very common additional document

00:12:54.880 | to be included in an estate plan.

00:12:56.840 | And if you start getting in more complex situations,

00:12:59.000 | you might have other types of trust, maybe asset protection trusts

00:13:02.360 | or charitable giving trust and things like that are really specific tools

00:13:05.360 | for specific use cases.

00:13:07.440 | Not everyone's going to have those as part of their estate plan.

00:13:09.560 | But if you have that need, it is a great fit for your situation.

00:13:14.080 | So fortunately, we're going to have money from Valor on the show in a little bit.

00:13:16.880 | So we don't have to get into a lot of those complex things.

00:13:19.920 | But I do think it would be good to walk through the basic documents.

00:13:23.680 | Even I originally got confused when I was like, OK, so there's a will

00:13:27.560 | and then there's a living will.

00:13:28.640 | And it turns out the living will is not the same thing as what you think of as a will.

00:13:32.080 | So maybe we could just step through the common components of a state plan

00:13:36.120 | and talk about what they are and who might need them.

00:13:38.800 | Yeah. You have the will, the fundamental document, dispose of your assets at death,

00:13:42.840 | nominate guardians for children, final arrangements.

00:13:44.800 | A will only applies at death.

00:13:47.240 | It has no impact on you during your lifetime.

00:13:49.840 | Where you fill that out or compliment a will is with something

00:13:52.920 | known as health care documents.

00:13:54.400 | And this might be this group of documents

00:13:56.040 | is sometimes known as health care documents or disability documents,

00:13:59.120 | incapacity documents, a variety of names that might apply here.

00:14:02.400 | And within that group of documents, you typically see something

00:14:05.920 | called a power of attorney.

00:14:07.360 | And then you see a health care directive or a living will medical directive.

00:14:11.160 | Again, there's a lot of interchangeable terms here.

00:14:13.360 | But the basic concept is these health care documents apply during your lifetime.

00:14:17.800 | So a will applies after death.

00:14:19.640 | But health care documents apply during your lifetime

00:14:21.720 | and allow you to make decisions for what should happen

00:14:24.200 | if you are alive but unable to speak for yourself.

00:14:27.200 | So maybe you've had a medical emergency, you're incapacitated,

00:14:30.320 | you stepped off the curb and got hit by that proverbial bus.

00:14:32.560 | Whatever it is that you're unable to make a decision for yourself at that time,

00:14:36.320 | these documents can step in and fill in that gap and either speak for you

00:14:41.000 | or nominate someone else to make decisions on your behalf.

00:14:43.720 | OK. And what kinds of decisions can you make in advance?

00:14:47.680 | What do you need to specify?

00:14:48.720 | What goes into the nuance of creating them?

00:14:50.720 | So each document does one thing a little bit different than each other document.

00:14:54.120 | So that's why they're typically coupled together as a set.

00:14:56.640 | The power of attorney handles your financial affairs.

00:14:59.680 | And essentially, it's everything that's not medical.

00:15:01.920 | So it ranges from banking and taxes to real estate.

00:15:04.760 | Anything that you need to do as a transactional matter

00:15:07.280 | other than dealing with health care, that's where the power of attorney will fill in.

00:15:11.040 | And this essentially allows you to designate someone else

00:15:13.640 | to step into your shoes and make decisions on your behalf.

00:15:16.520 | That's great to cover a wide range of really common needs.

00:15:21.040 | The health care side, you have a set of documents known as either a living

00:15:25.480 | will, an advanced directive, a medical directive.

00:15:27.600 | Again, a lot of different terms can be used interchangeably.

00:15:30.160 | And these do two things.

00:15:31.480 | One, they specify your medical preferences.

00:15:34.800 | So what type of care do you want to receive or not want to receive?

00:15:38.120 | You can make choices for yourself.

00:15:40.480 | But the second thing they do is they nominate someone else, again,

00:15:43.080 | to fill in those gaps.

00:15:44.440 | So if a decision has to be made and you haven't spoken in advance,

00:15:47.920 | who answers those questions for you?

00:15:50.560 | And that's the medical side that pairs with the financial side.

00:15:53.520 | Both of those two documents together comprise the health care documents

00:15:57.360 | as a single unit.

00:15:58.840 | And I know for having filled out these documents,

00:16:01.200 | one of the big decisions you often talk about is plans for life support.

00:16:05.440 | So for anyone listening and you're thinking,

00:16:07.040 | what kind of decisions would I want to make?

00:16:08.640 | It's if you were in a coma, how do you want to treat that?

00:16:11.320 | The options are often like go at all expense to try and prolong my life.

00:16:16.360 | Or if a doctor determines that we've done

00:16:19.040 | as much as is reasonable, don't keep going.

00:16:21.640 | So those are the kinds of decisions

00:16:22.960 | that you might have a different opinion on than whoever's in charge.

00:16:26.560 | And you can specify in advance.

00:16:28.520 | Yeah, these are inherently personal decisions.

00:16:30.720 | And so your choice is specific to you.

00:16:32.840 | No one else can make the same choice that you would in that circumstance.

00:16:35.560 | They're also very difficult decisions.

00:16:38.040 | And so it's unfortunate for anyone to be asked to make a decision

00:16:41.400 | with no guidance that can be just incredibly overwhelming

00:16:44.800 | for that individual to think, what am I supposed to do?

00:16:46.840 | Am I going to pull the plug or leave them on life support?

00:16:49.880 | They can carry that doubt and potential guilt for the rest of their lifetime,

00:16:53.320 | worrying if they made the wrong choice.

00:16:55.040 | So it's not always something you do for yourself.

00:16:57.280 | It's really important for you to do this, to think about those who are also

00:17:00.480 | still alive and making decisions for you and what the benefit you can provide to them.

00:17:05.120 | And who would make that decision absent these documents?

00:17:07.920 | If I hadn't nominated someone?

00:17:09.360 | I'm guessing the law stipulates, OK, if you have a spouse, the spouse makes a decision.

00:17:13.600 | Is it the same thing?

00:17:14.680 | The closest living relative is the person who gets to make the call?

00:17:17.440 | It does. It follows the same set of rules.

00:17:20.240 | There are different rules, but they're the same structure, at least.

00:17:22.240 | So it would be your spouse, your kids, your parents, closest living relatives.

00:17:25.120 | But you can get into a situation if you have three kids

00:17:27.400 | and they're equally entitled to make a decision and they disagree.

00:17:30.280 | What happens then?

00:17:31.520 | So it can be very important because you have to make one single decision.

00:17:35.440 | And many cases, you don't have time to work out a dispute or go to court,

00:17:40.000 | get a court to intervene and make a decision on behalf of the three kids.

00:17:43.320 | Some of these decisions are very urgent.

00:17:45.120 | So having a plan is particularly important for health care decisions.

00:17:48.760 | OK, so we've got a will.

00:17:51.960 | We've got your medical and your power of attorney documents to cover your finances.

00:17:55.880 | What are other things people should be considering

00:17:58.440 | when it comes to their estate planning?

00:18:01.400 | So the other core document that many people should look at is a trust.

00:18:04.720 | And when I say trust, I mean a revocable living trust.

00:18:08.560 | There's a whole wide range of trusts, but we're talking about a revocable living trust.

00:18:13.480 | The revocable part simply means that it's able to be amended or changed

00:18:16.920 | or even revoked during your lifetime.

00:18:18.640 | And the living part just simply means you create it while you're alive.

00:18:21.480 | So it sounds complicated, but it's the workhorse of modern estate planning.

00:18:26.400 | That is the document that the majority of individuals

00:18:29.960 | who look to add something beyond a will will look to add

00:18:33.080 | a revocable living trust into their plan.

00:18:35.840 | Like the will, it allows you to make decisions after death,

00:18:39.200 | but it also applies during your lifetime.

00:18:41.080 | So a trust kind of blurs the line.

00:18:43.160 | It allows you to handle some of those lifetime incapacity issues,

00:18:46.800 | but also allows you to plan for what happens after death,

00:18:49.680 | where your assets should go, who should be in charge, things like that.

00:18:52.720 | I'll just flag for anyone listening.

00:18:54.280 | We've all seen some TV show or movie where some kid gets a trust fund

00:18:57.880 | and there's tens of millions of dollars.

00:18:59.960 | And my original knowledge of it was like, trusts are just so much money

00:19:03.520 | that they want to limit how much goes to their kids.

00:19:06.160 | I've learned over time that that is true.

00:19:08.680 | There are lots of trusts.

00:19:10.040 | They're actually usually more the irrevocable kind

00:19:12.720 | that have a lot of different tax avoidance, often benefits.

00:19:15.480 | And we're going to talk about those a little bit later,

00:19:17.360 | because I think it's really fun to understand.

00:19:19.560 | But the revocable or revocable trust is really not a thing

00:19:23.560 | just for people with millions of dollars.

00:19:25.680 | But who should be thinking about this?

00:19:28.000 | When does it make sense to say, OK, a will in some of these health care

00:19:31.280 | documents is not enough.

00:19:33.520 | Let's look at the trust.

00:19:34.960 | Yeah, so there are a few reasons

00:19:36.120 | that you might want to look to add a trust to your estate plan.

00:19:38.680 | And the first, if you focus on what a trust does, a trust gives you more control

00:19:43.200 | over the distribution of your assets, when and how those assets are distributed

00:19:47.000 | to your beneficiaries.

00:19:48.400 | So this might be useful if you have young children.

00:19:50.480 | You might want to look at a trust because that allows you to say,

00:19:52.920 | hey, I want my assets to go to my kids, but maybe not at age 18.

00:19:56.760 | I want them to go at age 25 or split half at 25 and half at 35.

00:20:01.000 | You have a little more control over when and how assets are distributed.

00:20:04.760 | Similarly, if you're in a blended family or if you're a second marriage situation,

00:20:08.640 | a trust allows you to do a little more in terms of I want to support my spouse,

00:20:12.560 | but I want to ensure that ultimately those assets pass to my children.

00:20:16.040 | I don't want to worry about leaving everything to my spouse

00:20:18.800 | and then my spouse either getting remarried or leaving everything

00:20:21.680 | to my stepchildren with my kids receiving nothing.

00:20:24.280 | So those kind of complex family dynamic situations.

00:20:27.400 | It's a great option for a trust.

00:20:29.920 | Beyond that, though, a trust has one feature that a will does not.

00:20:33.480 | Well, will goes through probate after death and it becomes essentially

00:20:37.160 | a public document and a trust stays private.

00:20:39.960 | So if you want to have a little privacy in your affairs,

00:20:42.600 | particularly after your death, a trust gives you that and a will simply does not.

00:20:46.840 | But the primary reason for most people to look for a trust

00:20:50.320 | is to avoid probate entirely.

00:20:52.720 | If that's something by nature of a will, it goes through probate

00:20:55.720 | and a trust just simply bypasses the probate process entirely.

00:20:59.240 | That can be a massive savings of not just time and effort,

00:21:02.640 | but money for a whole lot of people.

00:21:05.160 | So I have a couple of questions there.

00:21:07.320 | One, what is that general cost?

00:21:09.680 | And two, at least in California, I've always heard

00:21:12.800 | if you have less than $100,000 in assets, a will can avoid probate.

00:21:16.760 | So think about a trust when you cross that threshold.

00:21:20.200 | Is that still true?

00:21:21.360 | And what does the process look like?

00:21:23.480 | Yeah, so the probate process, it deals after death.

00:21:26.320 | It allows you to essentially prove that the will is valid,

00:21:29.160 | appoint the executor, carry out the terms of the will.

00:21:31.840 | It seems like an orderly process.

00:21:33.920 | It's anything, but it can take measure typically in months or years.

00:21:37.880 | In California, a two year probate is close to the norm these days.

00:21:41.280 | So the fees involved with probate, they vary by state,

00:21:45.160 | but then they also vary by the facts of your particular estate.

00:21:48.640 | In California, the threshold was recently raised and it's now $184,000

00:21:53.040 | of whether or not you can have some sort of short form probate

00:21:56.160 | or if you have to have a full probate.

00:21:58.000 | Once you reach that threshold, the amount that you're actually going to pay

00:22:00.680 | in terms of fees and expenses,

00:22:02.400 | it's basically a percentage of the overall value of your assets.

00:22:05.760 | But as a quick example, if you have a million dollars of assets in California,

00:22:10.280 | you might look to pay maybe $50,000 of fees

00:22:14.600 | all out the door to get through the probate process.

00:22:17.760 | And just to clarify, that million dollars is the gross value of your assets.

00:22:21.680 | So if you own a home and you're heavily mortgaged,

00:22:23.640 | you maybe have a million dollar home and $200,000 of equity.

00:22:26.880 | You're still paying that $50,000 on the full $1 million value.

00:22:31.640 | You don't just look at the net value of your assets.

00:22:33.840 | That $50,000 can be a pretty heavy bill for someone to pay

00:22:37.560 | on top of their ongoing cost to maintain their standard of living.

00:22:41.320 | And they just pull those assets to pay for probate out of whatever

00:22:45.320 | you had in your bank account and whatnot and sell your investments

00:22:48.240 | and that kind of stuff.

00:22:49.480 | Yeah, if you have liquid assets available, they'll come from that.

00:22:52.120 | Otherwise, you might be forced to mortgage a house or even sell assets

00:22:55.680 | that are illiquid in order to generate these funds.

00:22:58.040 | And that can happen.

00:22:59.080 | You do see surviving spouses who have to sell the family home

00:23:02.640 | because they cannot come up with the cash to pay for probate

00:23:05.840 | or they can't maintain the mortgage payments after death,

00:23:08.560 | particularly with a loss of a source of income.

00:23:10.800 | Life insurance proceeds

00:23:11.880 | is a great opportunity to pair life insurance with your estate

00:23:15.440 | to ensure that there is cash available.

00:23:18.160 | But if you don't have that cash available, it's coming from other assets.

00:23:21.040 | And ultimately, it's going to reduce the amount that passes to your beneficiaries.

00:23:24.400 | So California, in many different ways, is a unique state.

00:23:28.440 | How do the other 49 states and commonwealths and territories

00:23:33.120 | compare in terms of a hard threshold where things get really complicated?

00:23:37.760 | Or do many states offer that kind of short form version of probate

00:23:41.400 | that maybe isn't as daunting or expensive or timely?

00:23:44.480 | Yeah, most other states are not quite as burdensome as California

00:23:49.120 | with respect to probate.

00:23:50.080 | California, if it's not the worst, it's competing up there

00:23:52.680 | with maybe a couple of the states to be among the worst states in terms of probate.

00:23:55.920 | A lot of other states, it's a more streamlined process.

00:23:59.440 | It's maybe closer to filing your tax returns.

00:24:01.840 | You're filling out some documentation, submitting it.

00:24:03.800 | You got to have a lot of records to back it up.

00:24:05.720 | It's not quite as burdensome.

00:24:07.080 | It doesn't take as long.

00:24:08.120 | It's not nearly as expensive, but it's still not enjoyable.

00:24:11.600 | And so you have to bear in mind that you're doing this

00:24:13.880 | immediately following a death.

00:24:15.840 | So there's a lot of emotion going on, a lot of just mental struggle happening.

00:24:19.320 | And then, hey, let me go fill out this really complicated equivalent to a tax return.

00:24:23.040 | It may be easier than California, but it's still something

00:24:26.000 | that a lot of people might look to avoid without the fees of $50,000.

00:24:30.240 | You can definitely get away in a lot of other states without a trust.

00:24:34.160 | So you don't necessarily have to have a trust in every state,

00:24:37.320 | in every situation as a universal rule.

00:24:40.560 | Many people still want to trust because it does have other benefits

00:24:43.760 | outside of probate, those additional control over distributions

00:24:46.680 | and the privacy benefits.

00:24:48.600 | But it's not necessarily the probate factor alone requiring the use of a trust.

00:24:53.000 | Are there other states that if someone's listening and in that aren't

00:24:57.320 | California, that are equally challenging or maybe not as challenging,

00:25:00.600 | but states where a trust might make a little bit more sense?

00:25:04.480 | Yeah, so there are a couple of states.

00:25:05.720 | So New York is actually fairly difficult.

00:25:07.960 | Not surprising as a lot in common with California.

00:25:10.080 | You also get some interesting things like Cook County in Illinois.

00:25:13.720 | Not the whole state of Illinois, but Cook County in Illinois

00:25:16.520 | can be difficult to go through the probate process.

00:25:18.600 | So as a general rule, if you're in a bigger city or a higher net worth area,

00:25:23.760 | you tend to have a little bit more going on.

00:25:25.760 | The courts might be more congested.

00:25:27.240 | So the whole process just gets a little more bogged down.

00:25:29.840 | If you're in the Midwest, most of the states that tends to move

00:25:33.040 | a little more efficiently.

00:25:34.520 | So if you aren't sure what your local rules might apply to you,

00:25:37.760 | just think about what it looks like if you go to the county courthouse

00:25:40.320 | and try to get any sort of application.

00:25:41.880 | Is that relatively easy?

00:25:43.160 | Or is that something you don't want to look forward to doing?

00:25:45.080 | And that should give you a direction of which way to lean on how bad probate might be.

00:25:47.840 | So I've gone through a couple of different processes

00:25:51.000 | in my life setting all these documents up.

00:25:52.920 | One time I had a legal benefit at work where it turns out I could enroll.

00:25:58.280 | And I just did it for one year.

00:25:59.440 | I paid maybe $15 a month.

00:26:01.400 | And at the end of the I was able to go hire an attorney to drop these docs.

00:26:06.040 | And then full disclosure, once we had our first child, I used trust and will.

00:26:09.880 | And that's how we put together our whole estate plan.

00:26:12.520 | And I'm a big fan of the product.

00:26:14.040 | You guys didn't pay to come on.

00:26:15.400 | I just like the product.

00:26:16.360 | I've talked about it before.

00:26:17.560 | I am curious for people listening,

00:26:21.480 | when does it make sense to download the template of a will

00:26:25.880 | that I'm sure there's lots of free legal will templates?

00:26:28.920 | Maybe even the state provides one.

00:26:30.520 | When does it make sense to use a service like trust and will

00:26:33.880 | or others that help you automate and create documents

00:26:37.160 | that you don't have to fill out yourself?

00:26:38.840 | And when do you get to the point that it makes sense to work with an attorney

00:26:42.120 | to drop something a little bit more custom?

00:26:44.120 | Yeah. So the hard part of trusting any sort of free document is knowing

00:26:49.560 | is this actually valid?

00:26:51.320 | Has this been updated?

00:26:52.520 | Does this reflect the current laws?

00:26:54.040 | If I create this document,

00:26:56.200 | do I get what I think I'm actually expecting to receive here?

00:26:59.960 | I would say what you're paying for, but that's nothing.

00:27:01.960 | Are you really getting what you're expecting there?

00:27:03.960 | And unfortunately, I've looked at many of these free templates

00:27:06.120 | and sometimes they're just not valid.

00:27:08.760 | So there's that huge risk there of what you get.

00:27:11.560 | Some of them are good.

00:27:12.680 | So I'm not saying it's impossible to do it.

00:27:14.760 | And in some states, you can just pull out a piece of paper

00:27:16.520 | and handwrite your will and you're good.

00:27:18.200 | You're out the door.

00:27:19.160 | The mechanics of it are less difficult than somehow knowing

00:27:21.960 | what to say to carry out your intentions.

00:27:24.840 | So that's where you might want to look at something like trust and will.

00:27:26.920 | And if you need to make a quick comparison,

00:27:28.280 | trust and will is like TurboTax for state planning.

00:27:30.600 | So yeah, you can download the forms in the IRS

00:27:32.920 | and fill out your 1040 on your own.

00:27:34.520 | But most people would either have a guided experience

00:27:38.120 | through a tech platform like TurboTax.

00:27:40.440 | It just seems to make it all a little more comfort inspiring.

00:27:43.080 | You have more peace of mind.

00:27:43.960 | It's a little bit easier.

00:27:44.840 | Trust and will, we really handle most needs for most people

00:27:49.080 | where we really start to have some situations

00:27:51.720 | where you might want to go to an attorney.

00:27:52.920 | If you have really complex situations

00:27:54.680 | or if you're expecting a fight after your death,

00:27:57.320 | it's probably worth it to go see an attorney.

00:27:59.480 | Or once you get into really high net worth individuals,

00:28:02.520 | if you're over about $5 million,

00:28:04.440 | we can still handle that at trust and will.

00:28:06.600 | Our documents are sophisticated enough

00:28:08.360 | to handle those situations up to and including a taxable estate,

00:28:12.040 | 12 or 15, $20 million of total wealth.

00:28:14.680 | But you're probably going to get a better value

00:28:17.160 | if you actually go and pay the $5,000, $10,000

00:28:19.720 | to have a custom document drafted by your attorney.

00:28:21.880 | $5,000, if you have $20 million in the bank,

00:28:24.440 | not that big of a blow to you.

00:28:26.120 | But $5,000, if you maybe have $500,000 in the bank,

00:28:29.080 | it starts to be a little harder to swallow that bill.

00:28:31.240 | That's really where trust and will fits in for most people.

00:28:34.040 | Are there any other circumstances

00:28:36.280 | that might make someone say,

00:28:37.480 | "Okay, maybe working with an attorney does make sense?"

00:28:39.880 | Yeah, that's a great example.

00:28:42.040 | Especially in these children's

00:28:43.000 | particularly difficult situation,

00:28:44.840 | there's a specific type of planning

00:28:46.440 | that can be done for that.

00:28:47.960 | Trust and will doesn't currently offer that,

00:28:49.400 | although that's something that's on our roadmaps.

00:28:51.000 | We hope to have that offered soon.

00:28:52.840 | But that particular situation,

00:28:54.200 | if you want to account for a beneficiary

00:28:56.040 | who has special needs,

00:28:57.400 | it's a great option to go say,

00:28:58.600 | "Hey, maybe an attorney is better for my use case."

00:29:01.240 | Beyond that, if you have things like a prenup

00:29:03.880 | that requires certain payments to be made at death,

00:29:06.360 | or even a divorce decree

00:29:08.120 | or a marital settlement agreement that says,

00:29:09.640 | "Upon my death, I ensure that I'm gonna leave X amount

00:29:11.880 | to my former spouse."

00:29:13.080 | You may need to have custom language

00:29:15.400 | inserted into your documents.

00:29:16.680 | And typically only an attorney can provide that

00:29:19.160 | and ensure that the language in your documents

00:29:21.320 | complies with the requirements of that prenup

00:29:23.560 | or that marital agreement.

00:29:24.600 | So, if you have a situation where you may think,

00:29:27.560 | "Everybody's unique,

00:29:28.360 | and I don't want to say anybody is boilerplate,

00:29:30.120 | no one's template."

00:29:31.240 | But if you have a situation where you go,

00:29:32.920 | "I just feel like I'm not a good fit

00:29:34.520 | for this particular reason."

00:29:36.200 | You get that tingly feeling,

00:29:37.320 | that might be enough to at least call an attorney,

00:29:39.640 | see what they say.

00:29:40.760 | Maybe you could find some help.

00:29:41.800 | Maybe they go,

00:29:42.360 | "Oh yeah, I can easily handle this.

00:29:43.480 | It's not a problem."

00:29:44.200 | And you get a little guidance from them,

00:29:45.640 | but maybe use your own best judgment.

00:29:48.040 | If you feel that you aren't gonna be a good fit,

00:29:50.360 | you probably are worth paying a little bit more

00:29:52.680 | just to get the peace of mind

00:29:53.720 | of having an attorney involved.

00:29:55.000 | Are there any financial or tax benefits

00:29:57.560 | other than avoiding probate costs

00:29:59.880 | that come with setting up a trust?

00:30:01.320 | So trust can have some tax savings opportunities,

00:30:06.600 | both on a federal state tax or even a state tax.

00:30:09.800 | For most people, that's not applicable.

00:30:12.120 | The current federal state tax thresholds are so high

00:30:14.840 | that it's just not something

00:30:15.720 | most people have to care about.

00:30:16.680 | But a trust can be used to at least

00:30:18.920 | efficiently pass assets

00:30:20.520 | without incurring additional taxes.

00:30:22.360 | So if it's something that you're concerned about,

00:30:24.680 | it can do that.

00:30:25.720 | But on the flip side of that,

00:30:27.160 | the trust also doesn't really

00:30:29.000 | incur any additional taxes.

00:30:30.520 | While you're alive, a revocable living trust

00:30:32.760 | is essentially disregarded from federal tax viewpoint.

00:30:36.600 | It's your alter ego.

00:30:37.640 | It's moving assets from your left pocket

00:30:39.640 | into your right pocket.

00:30:40.920 | You don't need a new taxpayer ID number.

00:30:43.480 | You don't have to file a separate tax return

00:30:45.320 | for assets in your trust.

00:30:46.840 | It's known as a grantor trust.

00:30:48.760 | But that just means it's no change.

00:30:50.760 | So it's held in this vehicle of a trust

00:30:53.160 | that provides a lot of benefits,

00:30:54.920 | but it won't negatively impact your tax status

00:30:57.800 | while you're still alive.

00:30:59.000 | As someone who's gone through this process,

00:31:00.600 | usually you fill out a form, sign it, send it in.

00:31:02.920 | The account now has a new title,

00:31:04.760 | but it's still your same account.

00:31:06.040 | You still get your debit card with your name on it.

00:31:08.280 | It doesn't really change a whole lot.

00:31:09.640 | So I think when it comes to a lot of

00:31:11.640 | the trust we'll talk about in a bit,

00:31:13.080 | the irrevocable ones,

00:31:14.680 | that changes a lot of things.

00:31:16.440 | But in this circumstance,

00:31:18.040 | it feels more fancy and technical

00:31:21.000 | because of the way we've seen it in the media

00:31:23.000 | about kids with trust funds

00:31:24.280 | than it is actually more a document

00:31:26.600 | to just keep things more organized.

00:31:28.520 | I wish I could say that I'm eating

00:31:31.320 | a fully balanced diet every day,

00:31:33.400 | but the reality is that I am definitely not.

00:31:36.040 | So I love having an easy way

00:31:37.880 | to get my daily nutritional insurance,

00:31:40.120 | which is why I kickstart my day with Athletic Greens.

00:31:43.000 | And I am excited to be partnering

00:31:44.520 | with them for this episode.

00:31:46.120 | I started taking it

00:31:47.160 | because I wanted to see what all the hype was about,

00:31:49.400 | and I've kept it in my daily routine for months.

00:31:52.040 | Every morning, I mix it up with some cold water,

00:31:54.920 | add a few ice cubes.

00:31:56.280 | It tastes so good when it's cold,

00:31:58.200 | and I head to my office feeling focused

00:32:00.280 | and energized for the day,

00:32:01.640 | which is a feeling I absolutely love.

00:32:04.360 | I also love that it's made from 75 high quality vitamins,

00:32:07.800 | minerals, and superfoods,

00:32:09.320 | and contains less than one gram of sugar.

00:32:12.040 | It also has no GMOs, nasty chemicals,

00:32:14.520 | or artificial anything.

00:32:16.200 | To make giving it a try easy,

00:32:18.040 | Athletic Greens is gonna give you

00:32:19.640 | a free one-year supply of immune-supporting vitamin D

00:32:23.480 | and five free travel packs with your first purchase.

00:32:26.280 | All you have to do is visit

00:32:28.440 | allthehacks.com/athleticgreens.

00:32:32.120 | Again, that's allthehacks.com/athleticgreens

00:32:35.880 | to take ownership over your health

00:32:37.960 | and pick up the ultimate daily nutritional insurance.

00:32:40.680 | Science has shown that being charitable

00:32:43.880 | can actually have a huge impact on your happiness,

00:32:46.840 | which is why I'm excited to be partnering with Daffy today.

00:32:50.200 | They're a not-for-profit community

00:32:51.720 | built around a new modern way to give,

00:32:53.880 | and they have a mission I think we can all get behind,

00:32:56.840 | helping people be more generous more often.

00:32:59.880 | Amy and I use Daffy for all of our giving

00:33:02.360 | because they offer an account

00:33:03.560 | that makes it easy to put money aside for charity.

00:33:06.600 | You can make a one-time contribution,

00:33:08.600 | or you can set a little aside each week or month,

00:33:11.160 | and all your contributions are tax-deductible.

00:33:14.360 | Except you don't actually have to know

00:33:16.440 | exactly where you wanna give the money right away.

00:33:19.080 | In fact, you can make your tax-deductible contribution now

00:33:22.440 | and invest that money into stocks or even crypto

00:33:25.720 | so it can grow tax-free

00:33:27.400 | and let you have more impact in the future.

00:33:29.480 | Then, whenever you're ready,

00:33:31.640 | you can give to any of more than

00:33:33.480 | one and a half million charities, schools,

00:33:36.040 | or faith-based organizations in a matter of seconds.

00:33:39.400 | So head on over to allthehacks.com/daffy

00:33:42.920 | if you wanna start giving today.

00:33:44.840 | And for a limited time, if you visit that link,

00:33:47.480 | you can get a free $25 to give

00:33:50.040 | to the charity of your choice.

00:33:51.400 | Again, that's allthehacks.com/D-A-F-F-Y.

00:33:57.320 | One of the questions that you have to figure out

00:34:00.920 | is who's going to be the trustee of the trust

00:34:05.960 | if you were to pass?

00:34:07.000 | And usually that is you and your spouse might create it

00:34:09.800 | and the spouse takes over.

00:34:10.840 | Can you talk a little bit about that decision?

00:34:13.640 | Because I think some people listening

00:34:14.840 | are probably gonna go through this and have to think,

00:34:16.600 | "Okay, who is gonna manage these financial affairs?"

00:34:19.480 | And let's say my kids are young

00:34:20.840 | and they're not ready for the money.

00:34:22.520 | What happens to it?

00:34:23.640 | How do those decisions get made?

00:34:25.080 | So the trustee, they're the CEO of the trust.

00:34:28.360 | They have a lot of administrative

00:34:29.560 | and financial responsibilities.

00:34:31.000 | And that includes everything from keeping records,

00:34:33.960 | paying taxes after death,

00:34:35.640 | making sure the distributions are actually made.

00:34:37.960 | They also work with a lot of professional advisors,

00:34:40.840 | whether it's a lawyer, an accountant, somebody like that.

00:34:42.840 | They have a lot of more sophisticated requirements.

00:34:47.480 | And so you also wanna make sure

00:34:49.000 | that you have someone that understands you

00:34:50.600 | and your decisions

00:34:51.320 | because they still have to exercise their own discretion.

00:34:54.200 | Sometimes it's not a black and white decision.

00:34:55.960 | The trustee has to make a choice.

00:34:57.960 | You wanna make sure that choice that is made

00:34:59.880 | is one that you would agree with.

00:35:01.240 | So choosing someone who can handle all of those duties well,

00:35:04.760 | it can be difficult.

00:35:06.200 | You're right.

00:35:06.600 | Most people do look to name a spouse or a child

00:35:09.000 | or a family member as their trustee.

00:35:10.680 | But if you don't have a spouse

00:35:12.600 | or if your children are very young,

00:35:13.960 | they may not be good choices.

00:35:15.400 | You can look to name a sibling or a parent,

00:35:18.680 | but is that the right person?

00:35:20.520 | It's ultimately gonna depend on what's right for you.

00:35:22.680 | The most common choices are spouse and children,

00:35:25.560 | other near family members,

00:35:26.920 | close friends are a common option.

00:35:29.320 | There are business partners that you can choose

00:35:31.560 | if you have a close working relationship.

00:35:33.640 | But if none of those apply,

00:35:34.680 | there are professional fiduciaries or even a bank

00:35:37.320 | who can step in and serve as trustee.

00:35:39.800 | They charge a fee for it,

00:35:41.000 | but it's more of a corporate approach

00:35:42.680 | of what you're getting.

00:35:43.560 | You're opting into,

00:35:45.000 | "I am choosing to have this bank serve as my trustee."

00:35:48.280 | They're gonna make very corporate decisions.

00:35:50.360 | But sometimes that's good

00:35:51.320 | if you don't have another alternative

00:35:52.840 | that you can comfortably rely on to fill in

00:35:55.000 | and make those decisions for you.

00:35:56.360 | Yeah. I mean, I know for our circumstances,

00:35:59.880 | we didn't want to leave our children

00:36:02.520 | who right now are one about to be born

00:36:04.920 | and two years old with money at that age,

00:36:07.560 | which I don't even know if you could legally do.

00:36:09.560 | So this person was gonna have to manage our assets

00:36:12.760 | until the right age,

00:36:14.120 | which meant managing the investments.

00:36:16.120 | What happens when the funds

00:36:17.960 | that you're invested in pay dividends?

00:36:19.320 | Do you reinvest them?

00:36:20.520 | When do you change asset classes?

00:36:22.440 | If you look at a trust

00:36:23.960 | that was maybe written 10 years ago,

00:36:26.280 | you probably never thought

00:36:27.240 | maybe you'd want to invest some percentage

00:36:29.400 | of your portfolio in cryptocurrency,

00:36:31.080 | but now you might.

00:36:32.040 | So for us, we thought about

00:36:33.560 | who can make those kind of investment decisions.

00:36:36.200 | And it was just a very different calculus

00:36:38.680 | than "Who do we want to take care of our children?"

00:36:42.360 | Those are just fundamentally very different.

00:36:44.520 | And so we didn't choose the same person for that.

00:36:47.080 | And it was much more of an investment mindset

00:36:49.560 | that we wanted someone to think about

00:36:51.400 | and be fair with money.

00:36:52.920 | Because am I right calling them "Him's clauses"?

00:36:55.640 | There's like a phrase of what discretion

00:36:58.440 | you give the trustee over things.

00:37:00.360 | And that really helped me think about

00:37:01.640 | who could make those decisions.

00:37:02.840 | - Yeah, it's a really important point.

00:37:04.360 | And it is a "Him's clause", H-E-M-S,

00:37:06.360 | health, education, maintenance, and support.

00:37:08.040 | You can talk to your favorite lawyer about it,

00:37:09.400 | but it provides certain instruction

00:37:11.400 | as the terms of when assets can be paid out

00:37:13.800 | to a beneficiary or when assets

00:37:15.640 | have to be held in the trust.

00:37:17.000 | But the bigger point is the person

00:37:20.120 | who fills the role of the trustee best for you

00:37:23.160 | may not be the person who fills the role of guardian

00:37:25.640 | or fills the role of executor,

00:37:27.080 | fills the role of your power of attorney.

00:37:28.440 | So the default many people think is

00:37:31.320 | "I'm going to name my spouse for everything."

00:37:33.480 | But that may work, but maybe your spouse

00:37:35.640 | isn't the person who wants to handle

00:37:37.000 | these complex financial situations.

00:37:39.080 | So maybe you want to name your spouse

00:37:40.440 | to care for your children, obviously,

00:37:41.880 | make personal decisions for you.

00:37:43.720 | But maybe you want to name your brother

00:37:45.000 | who's a tax lawyer to handle

00:37:46.600 | your financial investment decisions

00:37:48.040 | if that's more suitable for your particular needs.

00:37:50.440 | So you don't have to name one person in every role.

00:37:53.160 | You can name individuals that are suited

00:37:55.160 | for each particular role.

00:37:56.600 | You want to make sure they're coordinated

00:37:58.040 | and able to work together.

00:37:59.640 | But each role should be accounted for different

00:38:02.040 | or as a one-off, if you will.

00:38:03.480 | So it can be someone that serves another role,

00:38:05.800 | but it doesn't have to be one person

00:38:07.240 | filling every fiduciary role throughout your estate plan.

00:38:09.880 | One thing we did, which isn't required,

00:38:14.040 | but we wrote a side letter for the successor trustee

00:38:17.720 | because they have this ability to control

00:38:20.360 | the health, the education, the maintenance.

00:38:22.920 | Do the kids go to private school or not?

00:38:25.000 | That's a financial decision.

00:38:26.120 | The trustee would get to decide that.

00:38:27.880 | So we just wrote a letter to that person and said,

00:38:30.360 | "We want you to know that here's how we would think

00:38:33.080 | about spending money on our children.

00:38:35.080 | Would we want them to have some money

00:38:36.680 | to go on vacations or study abroad?"

00:38:40.120 | Things like that.

00:38:41.000 | It was less about we thought this person

00:38:42.680 | would make the wrong decision,

00:38:43.960 | but we just wanted to make it easier for them

00:38:46.120 | to make the decision we would have made.

00:38:47.960 | I don't think you guys have built in a feature

00:38:49.880 | to write a letter to a friend,

00:38:51.480 | which doesn't really need a product.

00:38:53.080 | But that is something that we did on the side

00:38:55.640 | just to make sure that we weren't doing

00:38:57.880 | what a lot of people do.

00:38:59.000 | And if you Google online,

00:39:00.120 | there's some crazy Reddit posts about people saying,

00:39:02.920 | "Well, did you decide that the trust will only pay

00:39:05.560 | for their college if they get above a 3.7?"

00:39:07.960 | And then someone said, "Well, I don't know.

00:39:10.520 | What if it's a 3.6?"

00:39:11.720 | And you get into these really tough situations

00:39:13.720 | where if a kid were to get sick or have an accident,

00:39:17.080 | maybe their GPA drops.

00:39:18.440 | Now you don't pay for their college.

00:39:20.040 | And so we took the approach of not trying to outline

00:39:23.960 | every little nuance of everything that would happen,

00:39:26.040 | but to choose a person we trusted

00:39:28.040 | and give them some guidance

00:39:29.640 | and give them the discretion to make those decisions.

00:39:32.040 | That's always been my professional recommendation

00:39:35.080 | is it's really hard to predict the future.

00:39:37.640 | But it's a lot easier to find someone that you trust

00:39:40.280 | and give them direction.

00:39:41.560 | And then ultimately, you're just relying on them

00:39:43.240 | to make the best choice that they can.

00:39:45.320 | As a parent, that's all you're trying to do every day

00:39:47.320 | is make the best choice that you can in a situation.

00:39:50.040 | Nobody knows what next year is going to be like.

00:39:51.800 | If you'd asked this 5 years ago,

00:39:53.000 | "Were we going to have a global pandemic?"

00:39:54.840 | No one would have raised their hand.

00:39:56.360 | If those few who did,

00:39:57.560 | we would have looked at with skeptical eyes.

00:39:59.480 | But you can't predict the future.

00:40:01.480 | But what you can do is you can pick people you trust.

00:40:03.880 | And if you can do that,

00:40:05.000 | and you can give them the guidance

00:40:06.600 | in that letter of instruction,

00:40:07.640 | it may not be legally binding, but it's helpful.

00:40:10.280 | And sometimes helpful is all you need.

00:40:11.960 | Do you have to tell or do you recommend

00:40:14.520 | telling all of these people this thing?

00:40:16.200 | I know that one of the decisions that we had to make

00:40:18.600 | was "Gosh, who we might want now?"

00:40:20.760 | We actually thought about it in hindsight.

00:40:22.040 | We said, "Gosh, if we had to make this decision 5 years ago,

00:40:24.680 | some of those people are people

00:40:26.200 | that we're not as close to anymore,

00:40:28.280 | or maybe something happens to them."

00:40:30.200 | And we thought, "Gosh, if we tell the person

00:40:32.040 | who is the trustee or the guardian now,

00:40:34.520 | and then we change it,

00:40:35.640 | that's going to be pretty awkward to be like,

00:40:37.080 | "Hey, I know for the last 4 years,

00:40:38.680 | I've thought you'd be good to manage my affairs."

00:40:40.680 | I changed my mind.

00:40:41.880 | Is this something you have to tell people about?

00:40:44.120 | Or should you?

00:40:45.160 | You don't have to.

00:40:46.360 | But generally, it's a good idea to tell people.

00:40:49.000 | And when it's a good idea,

00:40:50.040 | what I mean is having that conversation in advance

00:40:53.560 | is one of the easiest ways to avoid conflict

00:40:56.520 | or disagreement or dispute after death.

00:40:59.320 | You save so much hassle

00:41:00.920 | by having that conversation upfront.

00:41:02.520 | It's not easy.

00:41:03.480 | People don't want to have that conversation

00:41:05.080 | about death in most cases.

00:41:07.320 | But it also doesn't have to be hard.

00:41:08.840 | It can be as simple as,

00:41:10.120 | "Hey, I've created an estate plan,

00:41:12.120 | and I've named you as trustee.

00:41:14.120 | Are you okay with that?

00:41:16.600 | Also, here's where my documents are

00:41:18.360 | in case something happens to me."

00:41:19.880 | And you don't have to get into the details,

00:41:21.640 | but you can at least inform people of the decisions.

00:41:24.680 | And if those decisions change later,

00:41:26.360 | it can be as simple as,

00:41:27.480 | "Hey, I've updated my estate plan.

00:41:29.320 | I've named someone else as trustee

00:41:31.560 | to fill these needs right now.

00:41:33.240 | But I still have these documents in this place."

00:41:35.160 | Or "You're still serving as my power of attorney."

00:41:37.400 | Whatever the update may be.

00:41:38.920 | People respect the information.

00:41:41.720 | It's ultimately your choice.

00:41:43.000 | And is it worth trying to save an awkward conversation now

00:41:48.040 | if you know that the likelihood

00:41:49.320 | is that you're going to wind up having

00:41:51.080 | your family, your heirs, your beneficiaries

00:41:53.000 | dealing with that situation later on?

00:41:54.840 | Most people, when they think about it, say,

00:41:56.920 | "I'd rather just go ahead and get this out of the way

00:41:58.840 | and have maybe an awkward conversation.

00:42:00.600 | But I know I'm not going to have a fight

00:42:02.920 | that I'm leaving for my family after my death."

00:42:05.000 | That makes sense.

00:42:06.440 | I created my estate plan.

00:42:07.880 | Things change in life.

00:42:08.920 | How do you think about when it makes sense to update them?

00:42:12.120 | Is that something you do every year?

00:42:13.640 | Every time you have a major life event?

00:42:15.480 | So, many people think of estate planning

00:42:17.000 | as a one-and-done situation.

00:42:19.160 | And unfortunately, it's not that way.

00:42:21.880 | Estate planning should be something

00:42:22.920 | that evolves with your life.

00:42:24.440 | So, what's good for you now

00:42:26.600 | may not be what's good for you

00:42:27.960 | in 5, 10, 20 years from now.

00:42:29.800 | So, your estate plan should change

00:42:31.240 | as your life changes as well.

00:42:32.600 | But there's a simple rule at Trust and Will.

00:42:34.760 | We think that after any major life events,

00:42:37.480 | you should look to update your estate plan.

00:42:39.080 | So, if there's been a birth or a death,

00:42:41.320 | a change in marital status, anything like that,

00:42:43.560 | take a look at your estate plan.

00:42:45.000 | But even if you haven't had any major changes

00:42:47.080 | and you look at your plan and you go,

00:42:48.680 | "Everything's about how I still want this to be."

00:42:51.080 | Every three to five years,

00:42:52.440 | it's worth just reviewing your plan,

00:42:54.040 | maybe even refreshing it

00:42:55.160 | because the laws do sometimes change.

00:42:57.400 | And you wanna make sure that you don't have a stale

00:42:59.320 | or an outdated plan.

00:43:00.360 | You wanna make sure that your plan continues

00:43:02.200 | to represent your interests and your desires.

00:43:04.760 | So, any major life events every three to five years,

00:43:07.320 | or if you have some specific change,

00:43:08.760 | you need a new guardian, anything like that,

00:43:10.840 | go ahead and take a look, update your plan.

00:43:12.360 | It's really not that hard to get a plan updated

00:43:14.280 | once you have the first plan in place.

00:43:15.800 | Great.

00:43:16.840 | And you just mentioned where you keep the documents.

00:43:19.240 | I'll share a company that I started using on my own

00:43:22.040 | called Trustworthy,

00:43:23.160 | which is basically this family operating system

00:43:26.040 | where you store all the documents while you're alive

00:43:29.000 | are great for just managing between your partner.

00:43:31.080 | And were you to pass,

00:43:32.600 | you can actually nominate people

00:43:34.520 | who find out in advance that were something to happen,

00:43:37.400 | they could reach out to the company and get access to.

00:43:39.720 | So, we've put things like our estate plan,

00:43:42.760 | our insurance documents,

00:43:44.200 | just where we hold bank accounts and financial accounts,

00:43:47.560 | all those kinds of different things we put there

00:43:49.800 | and then just sent a few friends that we trusted.

00:43:52.280 | Here's where they are.

00:43:53.400 | If something happens to us, you know where to get them.

00:43:55.160 | So, that's another company like Trust and Will that I use.

00:43:58.040 | So, my Trust and Will docs

00:43:59.160 | are in my Trustworthy account online.

00:44:01.720 | And that's great.

00:44:02.280 | Trust and Will, we've recently added the ability

00:44:04.680 | to upload additional documents

00:44:06.200 | to be stored with your estate plan.

00:44:07.640 | It's a slightly different approach.

00:44:08.600 | Ours is typically focused more on the estate planning side.

00:44:11.400 | But the ultimate goal is to make sure

00:44:12.760 | that all the documents that you need,

00:44:14.360 | which includes your estate plan

00:44:15.800 | and things like your insurance documents,

00:44:17.320 | other important information,

00:44:18.600 | they're available to the people who need them.

00:44:20.680 | So absolutely, find a solution for that

00:44:22.680 | because having a will is the first step.

00:44:25.160 | But having a will that no one can find

00:44:27.080 | doesn't do you any good.

00:44:28.440 | You need to make sure that people know where that is,

00:44:30.680 | how to access it when they need it.

00:44:32.360 | So, it's important to have the document,

00:44:33.960 | but make sure there's also still accessible when it's needed.

00:44:37.000 | Are there any other tips, tricks,

00:44:39.160 | hacks on protecting your family?

00:44:41.080 | Things that you've picked up along the way

00:44:42.360 | that are worth sharing?

00:44:43.160 | Well, I think the recommendation that I always give

00:44:46.360 | is to have that discussion upfront.

00:44:48.040 | Tell people what your plans are.

00:44:49.560 | And if you have a plan, let people know,

00:44:51.320 | "I have a plan. Here's where it's located."

00:44:53.560 | Maybe fill them in on some details.

00:44:54.920 | That is the number one tip.

00:44:57.080 | But beyond that, you can really consider

00:44:59.400 | the importance of having backups and plans in place.

00:45:02.760 | You want to think about trying to over-plan

00:45:05.080 | rather than under-planning for any situation.

00:45:07.400 | So your situation is unique.

00:45:09.560 | What I plan for may not meet your needs.

00:45:12.200 | What you plan for may not be appropriate for my needs.

00:45:15.080 | So, if you are worried about some particular specific scenario

00:45:18.680 | that may only apply to you,

00:45:20.360 | or even if it may never apply to you,

00:45:21.640 | but it's just this nagging doubt in your head, plan for it.

00:45:25.400 | Put a provision in place that will buy you that peace of mind

00:45:28.280 | just to know that you have something there.

00:45:30.120 | That peace of mind, that self-confidence,

00:45:32.360 | that is worth its weight in gold for so many people.

00:45:35.400 | The relief that people feel

00:45:36.680 | once they've completed this process,

00:45:38.680 | they then wonder, "Why did I put this off so long?

00:45:40.760 | This was, A, not that hard.

00:45:42.440 | And B, I feel so much better."

00:45:44.280 | But the last tip, to make sure that your family

00:45:47.160 | has a plan in place as well.

00:45:49.080 | So if you have kids and they're getting to the age of 18,

00:45:51.480 | talk to them about estate planning.

00:45:52.840 | It's awkward, it's difficult, but you're a parent,

00:45:55.080 | you have to guide them into becoming adults as well.

00:45:57.960 | But if you have siblings or parents that don't have a plan,

00:46:00.920 | guess who's going to be stuck dealing with that mess?

00:46:02.920 | You are.

00:46:04.360 | So yeah, it's a bit of a self-interested conversation,

00:46:06.840 | but talk to your family members.

00:46:08.360 | Do you have a plan in place?

00:46:09.720 | What do you want to happen?

00:46:10.920 | You can start that conversation

00:46:12.840 | and ultimately not rely on them to start it,

00:46:16.440 | but you can start that conversation

00:46:17.880 | and you're still both going to be better off

00:46:19.320 | for having raised the topic

00:46:20.680 | with your family members as well.

00:46:21.960 | Any tips for that conversation?

00:46:24.200 | I imagine, at least in my circumstance,

00:46:26.440 | my parents had never really talked to me

00:46:27.880 | about their plans or anything like that,

00:46:30.440 | but I can see how it can come off a little bit.

00:46:32.280 | "Hey, how much money am I going to get when you die?"

00:46:34.600 | That kind of conversation.

00:46:35.960 | Any suggestions for broaching the topic

00:46:38.520 | in the best way possible?

00:46:39.560 | The easiest way to raise it is to start with yourself and say,

00:46:43.720 | "Hey, I've created an estate plan.

00:46:45.960 | Here's where it's located."

00:46:47.320 | But it made me think, "Do you have an estate plan?

00:46:49.720 | What can I know to ensure that your wishes are carried out

00:46:53.400 | after your death?"

00:46:54.440 | And that's the focus is,

00:46:55.560 | "What can I do to ensure that you get what you've planned for?"

00:46:59.320 | You don't have to talk about specific assets.

00:47:01.480 | And if it comes up that like,

00:47:02.440 | "Hey, you've been named as guardian for my children."

00:47:04.760 | Then you can have the conversation of,

00:47:06.120 | "Okay, well, what would you like to happen for your kids?

00:47:09.240 | Would you want them to go to private school or public school?

00:47:11.320 | Do you want to go to summer camp?

00:47:12.600 | What should you tell me that I can be

00:47:15.400 | as best a guardian as possible for your plans?"

00:47:17.800 | Ultimately, you're trying to learn how to fill

00:47:20.760 | that expectation as best as possible.

00:47:23.080 | And if you focus on it that way,

00:47:24.360 | most people don't see that as,

00:47:26.680 | "You're trying to figure out

00:47:27.640 | what you're going to get when I die."

00:47:29.000 | It's not money-grubbing, greedy.

00:47:30.600 | It's really, "Oh, how can I help you out with this?"

00:47:32.920 | And it tends to be received a little bit better.

00:47:35.080 | That's really helpful.

00:47:36.680 | Well, I also want to thank Trust & Will

00:47:38.360 | because I reached out to you guys

00:47:40.040 | because I've known you for a while

00:47:41.320 | and asked if there was anything they could do.

00:47:43.400 | So big shout out to Trust & Will for partnering with us

00:47:47.320 | to get everyone listening who wants to sign up a discount,

00:47:50.360 | allthehacks.com/trustandwill

00:47:53.000 | and you'll get 15% off any estate plan.

00:47:55.320 | Really appreciate you guys doing that.

00:47:57.560 | Anything else before we wrap up?

00:48:01.080 | I always like to emphasize that Trust & Will

00:48:03.560 | has a wealth of resources available

00:48:05.880 | to learn about estate planning.

00:48:07.080 | So if you have questions that haven't been answered today,

00:48:09.240 | you're not sure what your next step should be,

00:48:11.080 | head to Trust & Will, check out those resources

00:48:13.320 | and make sure that you feel empowered

00:48:14.920 | to take those next steps with your estate plan.

00:48:17.000 | Ultimately, it's your plan, it's your needs.

00:48:19.160 | And if you feel good about the decisions that you're making,

00:48:21.960 | that's a win for everybody.

00:48:23.160 | So check it out, Trust & Will.

00:48:24.360 | That resource library is easily available.

00:48:26.920 | Don't even have to sign up.

00:48:27.800 | There's lots of resources available for you there.

00:48:29.960 | Just to be clear, those resources are free.

00:48:31.720 | They're just on the website for anyone to read.

00:48:33.320 | Yeah.

00:48:33.720 | Yeah.

00:48:34.440 | Awesome.

00:48:34.920 | Patrick, thank you so much for being here.

00:48:36.520 | I love it. It's been great.

00:48:38.120 | I've enjoyed speaking with you.

00:48:39.160 | When we think about trust, we think about more advanced things.

00:48:44.040 | And so I'm not the expert here.

00:48:46.280 | I wanted to talk to someone who I think really understands

00:48:49.560 | all of the advanced tactics people are using

00:48:52.360 | to both avoid taxes now, avoid taxes in the future,

00:48:55.960 | be able to transfer money to their children.

00:48:58.040 | So I'm really excited to bring on Mani from Valor,

00:49:01.480 | who has built an entire business around this that's really interesting.

00:49:04.840 | Mani, thanks for joining me.

00:49:06.440 | Really appreciate it, Chris.

00:49:07.800 | Excited to join you.

00:49:09.080 | I'll give you a little bit of context on those things that you're talking about.

00:49:12.200 | TV context on ourselves.

00:49:13.320 | So Valor, our entire idea is how do we use technology

00:49:16.280 | to make these tax and estate planning tactics more accessible

00:49:20.360 | so that everyone can build wealth more efficiently.

00:49:22.600 | The problem we're solving is most of these things,

00:49:24.920 | your audience may know about it, you may know about it,

00:49:26.840 | but it's a black box to most people.

00:49:28.920 | But let's start at the top of what is tax planning and estate planning,

00:49:32.760 | which you've both mentioned.

00:49:33.800 | When most people think about tax planning,

00:49:35.640 | it's how do they use legal tax rules,

00:49:38.120 | things that the IRS has okayed or the government has okayed to reduce their taxes.

00:49:43.080 | So this could be their taxes on their salary, their capital gains,

00:49:47.080 | their stock they've received from their company or their side hustles.

00:49:50.200 | It's how do you take advantage of whatever rules

00:49:52.680 | and opportunities the government has laid out to reduce your taxes

00:49:55.720 | so you can keep as much income for your use during your lifetime.

00:49:59.480 | That's what tax planning is really focused on.

00:50:02.600 | Now, estate planning is thinking about a little bit longer time horizon.

00:50:05.720 | It's taking the assets and the wealth that you, your family have built up,

00:50:09.560 | and how do you pass on as much of that as possible to the next generation?

00:50:13.800 | The big constraint here is the lifetime gift exemption.

00:50:17.400 | In the US, there's a limitation on how much you can gift in assets to other people

00:50:21.720 | before the government starts to tax it.

00:50:24.200 | So as of now, the individual limit is a little above $12 million.

00:50:28.600 | So that means as an individual, you can give $12 million or as a couple,

00:50:33.480 | a little above $24 million before the government starts to tax your assets with the estate tax.

00:50:39.720 | Which is a really high rate.

00:50:41.080 | Yeah, the estate tax makes all other taxes look low.

00:50:43.480 | So just the federal tax rate alone is 40%.

00:50:46.760 | It does graduate, but it gets to 40% pretty quickly.

00:50:50.280 | And that's just federal.

00:50:51.720 | So then you can start to layer on state taxes on top of that, and it can get much, much higher.

00:50:56.840 | Now, some of these state estate taxes actually start at levels below this $12 million.

00:51:01.160 | It depends on a state-by-state basis.

00:51:03.000 | But the federal is the most punitive.

00:51:05.000 | And that's primarily what people are concerned about.

00:51:07.480 | If they're trying to pass on as much of their hard-earned wealth to their kids or grandchildren,

00:51:12.840 | how do they work around the estate tax?

00:51:15.640 | And this is where estate planning comes into play.

00:51:17.480 | So it's a little bit different time horizon of,

00:51:19.240 | "Are you focused on how do you maximize assets for your use?

00:51:22.360 | Or how do you maximize assets for future generations or some combination?"

00:51:26.200 | And that's where more of these different structures come into play like irrevocable trust.

00:51:30.440 | Yeah. And we've talked a bit earlier about the basics of estate planning.

00:51:35.560 | And I think what you're doing is interesting because it marries the two a little bit.

00:51:38.920 | Some of the tactics that we'll talk about are things that you might be able to use,

00:51:42.760 | even if you're nowhere close to hitting $24 million with a spouse.

00:51:47.720 | And some of them might be less ideal or not worth it if you're not that close.

00:51:52.600 | And just so everyone knows, I'm not an attorney.

00:51:55.400 | Monty, I don't think you're an attorney.

00:51:57.080 | This is not meant to be personalized financial or tax advice.

00:52:00.840 | But we're just going to explore some of these tactics that I think are really mystified.

00:52:05.400 | You hear trust and people are like, "Oh, they're so fancy."

00:52:07.560 | I just want to break down a bunch of them and walk through them.

00:52:10.840 | So people understand what they are, how they work,

00:52:13.720 | how people are legally either avoiding or postponing taxes,

00:52:18.440 | and for many people, how they could fit into their lives and when they make sense.

00:52:22.440 | Yeah, that sounds great.

00:52:24.360 | I wrote a newsletter a few months ago, and I did my own research.

00:52:27.800 | And I'm not the expert like you are.

00:52:29.560 | I'd known about a few of these.

00:52:30.920 | And I wrote about GRATS, and Charitable Remainder Trusts,

00:52:34.520 | and ILITS, and Family Limited Partnerships.

00:52:37.000 | Those are the things I highlighted and wrote a paragraph on.

00:52:39.720 | And even in just preparing for this interview and looking at your company,

00:52:42.920 | I realized, "Gosh, I really didn't know what I was talking about then."

00:52:45.560 | And I caveat it with, "I don't know what I'm talking about, but this is my quick research."

00:52:49.400 | So I'm glad we can clear things up.

00:52:51.720 | So maybe we start with Charitable Remainder Trusts.

00:52:53.880 | At a high level, Charitable Remainder Trusts are typically used for

00:52:58.440 | people when they're selling highly appreciated assets

00:53:01.720 | because their core thing is their tax exempt structure.

00:53:04.520 | And the easiest way to understand these and the most relatable thing is

00:53:07.960 | Charitable Remainder Trusts are very similar to a standard IRA

00:53:12.360 | that most Americans use to build their wealth.

00:53:14.440 | IRAs, just as a quick reminder, it's individual retirement accounts.

00:53:19.480 | And the core benefit for most people is that you can contribute between $5,000 to $8,000

00:53:23.800 | per year to your IRA.

00:53:25.560 | And the assets grow in your IRA on a tax-free basis.

00:53:29.320 | Until you take money out of the IRA, you can buy and sell the assets, and you won't pay taxes.

00:53:35.000 | And this is to the power of compound wealth,

00:53:37.240 | which it creates an incredible amount of wealth for people over a long time period.

00:53:41.720 | Charitable Remainder Trusts are very similar to that.

00:53:44.120 | They're also a tax-exempt structure where assets that are sold in the trust,

00:53:48.680 | you don't pay taxes on until you receive a distribution from the trust.

00:53:53.400 | Now, the big difference and where this comes into play is,

00:53:56.520 | there's a couple of key differences.

00:53:57.800 | One, you can contribute an unlimited amount of assets to a Charitable Remainder Trust

00:54:01.640 | instead of being limited to $5,000 to $8,000.

00:54:03.560 | So common use cases, if someone has paid off the mortgage on their house

00:54:07.960 | that they've lived in for 20 years, and they want to sell it,

00:54:11.480 | they can't put it into their IRA, but they could move that house into a Charitable Remainder Trust

00:54:16.520 | and then sell it and avoid the taxes when they sell their house and reinvest that money.

00:54:22.840 | So just to take kind of a quick example, let's just say the house is worth a million dollars.

00:54:28.040 | And to keep numbers simple, their cost basis was close to zero when they bought it.

00:54:32.680 | So they bought in a really great place that's exploded in value.

00:54:35.400 | If they lived in California, probably when they sell it,

00:54:38.760 | pay 35% or $350,000 in taxes and take away $650,000 if they didn't do anything.

00:54:46.040 | But instead, if they put it into a Charitable Remainder Trust,

00:54:48.520 | they would upfront get about 10% of that value as a charitable deduction to write off their income.

00:54:53.800 | So $100,000 charitable deduction.

00:54:55.880 | But critically, when they sell that million-dollar home,

00:54:59.000 | the trust wouldn't owe any taxes on it.

00:55:01.480 | So it would keep a million dollars to reinvest, put into the market,

00:55:05.160 | or any of the other investment options that they're looking at.

00:55:07.560 | And just with simple math of if a million dollars invested at the market versus $650,000,

00:55:12.520 | you're going to generate a lot more income and wealth for yourself.

00:55:16.040 | That's the key piece.

00:55:17.560 | So let's say you work at a company, you've got some shares.

00:55:20.920 | When they were granted to you, they're really inexpensive and you exercise them.

00:55:24.600 | Now they're worth a lot.

00:55:26.040 | Yeah, you could pay taxes and invest it.

00:55:28.360 | Or you could contribute these to a Charitable Remainder Trust

00:55:31.560 | and then not pay the taxes because it is a charitable vehicle.

00:55:35.400 | And you get a deduction for that donation.

00:55:37.400 | And then the trust can use that full million dollars to keep investing it.

00:55:40.840 | So if you otherwise were going to donate a million dollars to charity,

00:55:44.440 | that seems comparable.

00:55:46.120 | But can you talk a little bit about how

00:55:48.040 | this is not just something that is beneficial to charity, which it is,

00:55:52.520 | but it also is beneficial to you?

00:55:54.200 | Yeah, it's a great question.

00:55:56.440 | This is where a lot of people are wondering, "Why is it called the Charitable Remainder Trust?"

00:56:00.440 | And the way that this works is every year from a Charitable Remainder Trust,

00:56:03.880 | or at least annually, you're allowed to take money out of the Charitable Remainder Trust.

00:56:07.880 | That amount is set up front when you create the trust of what percentage of trust assets it is.

00:56:13.000 | But that's kind of the critical thing is the core part of this is that

00:56:16.360 | you're expected to get 90% of the value out of the trust.

00:56:20.120 | And the charity is expected to be left about 10%.

00:56:23.560 | And that 10% that you leave behind,

00:56:25.800 | this is what enables the structure to stay tax exempt so assets can grow.

00:56:30.280 | And you only give that 10% at the end of the trust term.

00:56:33.800 | And for most folks, this is at the end of their life.

00:56:36.200 | So they'll take their highly appreciated equity in the company,

00:56:39.240 | they'll put it into Charitable Remainder Trust,

00:56:41.320 | they'll sell it, they'll keep that entire principle in the trust, reinvest it.

00:56:45.160 | And then every year, they can start to take distributions from that trust.

00:56:49.320 | And then at the end, they'll leave a piece.

00:56:51.560 | When they pass away, that'll go to a charitable cause that they care about.

00:56:55.320 | The easiest way to think about it is the government is giving you a 0%

00:56:58.520 | interest loan on your taxes, so that you can reinvest in the market in exchange

00:57:02.360 | for leaving a small percentage for charity at the end of the trust.

00:57:05.880 | I've seen the calculators you make on your website.

00:57:09.800 | And because you're able to invest money without paying taxes and grow it along the way,

00:57:16.920 | it turns out you end up over your lifetime with

00:57:20.280 | more money coming back than you would have otherwise.

00:57:23.080 | So you actually... The charity benefits and you benefit.

00:57:26.200 | Yeah, that's 100% right.

00:57:28.520 | If you're selling an appreciated asset, or if you live in a high-tax state,

00:57:32.360 | you will come out ahead personally by using a Charitable Remainder Trust to sell the asset

00:57:37.960 | and do the money that you receive over time by being able to avoid that taxes.

00:57:41.880 | And as like a cherry on top, a charitable cause will also benefit.

00:57:46.600 | But even if you ignore that piece, you will personally benefit.

00:57:50.040 | And if you really care about the charitable cause, then it's a real win-win all around.

00:57:54.440 | I know what you give up is a little bit of liquidity.

00:57:56.760 | So can you talk about the trade-off is that million dollars in my example,

00:58:00.760 | you can't take it all out next year if you wanted it.

00:58:03.960 | Yeah, exactly. It's a great call out of the way these Charitable Remainder Trusts work is

00:58:08.120 | every year you can take out a certain percentage of the assets.

00:58:11.000 | This is the downside and the benefit is...

00:58:14.840 | If you sold all those assets personally in your name, that $650,000 after taxes,

00:58:19.640 | you can pull it out and do whatever you want with it at any time.

00:58:23.000 | The Charitable Remainder Trust, you can only withdraw a certain percentage per year.

00:58:27.640 | That percent depends on how long you set the trust up for.

00:58:30.200 | But let's just say you can pull out 10% a year.

00:58:33.080 | Instead of if there's a million dollars in the trust,

00:58:35.320 | that means you can pull out $100,000 that year.

00:58:38.280 | Now, that means that you don't have access to that full $650,000 or a million dollars.

00:58:42.600 | So you have less upfront liquidity.

00:58:44.840 | And this is one of the key trade-offs you're making is you get less upfront

00:58:48.120 | liquidity in exchange for your assets being able to stay in a

00:58:51.800 | tax-free environment and continuing to compound and grow on a pre-tax basis.

00:58:56.360 | It's a little bit of the "Do you need the money now or are you trying to create more

00:59:00.360 | long-term wealth?" And that tilts the "Should you sell it in your name or should you use this

00:59:04.680 | structure?" And it's not all or nothing, right?

00:59:07.480 | So if in a given year, you were to make $2 million, you don't have to put all $2 million

00:59:12.120 | in any of these vehicles, you could put 10% of it or 20%, correct?

00:59:16.360 | Yeah, exactly. So for instance, we have some customers who are tech employees.

00:59:21.080 | And as part of the IPOs last year, they had a couple million dollar exit for their assets.

00:59:26.920 | And they ended up putting 50% into a shareable remainder trust.

00:59:29.480 | And then they sold the other 50% in their own name to buy a home.

00:59:32.840 | So it depends. It's not all or nothing. One of the big benefits of these shareable remainder trusts

00:59:37.480 | is you don't have to put in all the assets upfront.

00:59:39.800 | You can put a little bit of assets initially. You can add assets a year from now,

00:59:43.160 | two years from now. They're fairly flexible. So you don't have to make the decision upfront.

00:59:47.640 | Now, this is an irrevocable trust, which is part of why you get these tax benefits.

00:59:51.800 | So once you do put assets in, you can't decide to change your mind

00:59:55.320 | after the fact. But you will start to get those distributions.

00:59:59.400 | And you don't have to make the big decision upfront. You can set up, put a little bit in,

01:00:02.600 | add more over time, or you can split your shares up. So it's fairly flexible that way.

01:00:07.400 | And ultimately, what people do, it just depends on your life situation.

01:00:10.600 | Do you have a lot of big purchases coming out? Or life events changing in your life?

01:00:15.320 | Do you plan to take some time off? Or do you not need the money and you want to reinvest and create

01:00:19.640 | more long-term wealth for years down the line when your kid's going to school or you want to

01:00:23.880 | take a couple years off from working? That tends to be very situational dependent based on the

01:00:28.360 | person, their lifestyle, and what their needs are. One quick follow-up. So yes, it's irrevocable.

01:00:33.400 | You can't take the money out. But how much control do you have over the investments?

01:00:36.440 | Can you set it up in a way that you have just a brokerage account and you can go in and trade

01:00:40.200 | and buy anything? Yeah, you can be in charge of making your own investments. So you can

01:00:45.000 | set it up to have a robo-advisor control it. You can set it up so that you're making those

01:00:48.440 | investments. Charitable remainder trust, one of the great things is you can invest in almost

01:00:53.480 | any asset. There's really just 2 restrictions. And this is similar to self-directed IRAs for

01:00:59.320 | people that are familiar with it. There's what's called a self-dealing prohibition where you can't

01:01:04.200 | invest in assets that you will personally benefit from. So for instance, the charitable

01:01:07.800 | remainder trust could invest in a rental property for real estate, which is allowed to do. But you

01:01:12.760 | couldn't buy a rental property and then live in it yourself. So as long as it's a passive

01:01:17.560 | investment, you can invest in real estate, stocks, crypto, do angel investments for people in tech.

01:01:24.360 | There's a huge myriad of opportunities. And really, the restrictions are self-dealing

01:01:28.840 | and taking leverage. You don't want to create debt inside of the charitable remainder trust.

01:01:33.000 | So you don't want to be taking high leveraged options or trades like that.

01:01:36.760 | So for most people, they don't have to change their investment philosophy or what they want

01:01:40.280 | to invest in, or who's managing their investments. It fits into their lifestyle that way.

01:01:44.520 | Awesome. Okay. So that's charitable remainder trust. I know

01:01:49.240 | Grats are similar in that you often want to donate highly appreciated assets.

01:01:54.200 | Can you talk a little bit about how they're different?

01:01:56.280 | Yeah. So in most cases, the people that are benefiting from the charitable remainder trust

01:02:01.160 | are the same people who put the assets in. So if you set up a charitable remainder trust,

01:02:05.160 | in most cases, you're also going to be receiving those annual distributions from the trust

01:02:09.480 | and benefiting personally, financially. Grats, that's in the tax planning situation.

01:02:14.360 | Grats fit more into the estate planning bucket of solutions where Grats are focused on how do

01:02:19.720 | you efficiently pass on assets from one generation to the next, and are really focused on minimizing

01:02:25.560 | your estate taxes. So just to start with, Grats stand for the Grant to Retained Annuity Trust.

01:02:31.800 | And kind of an interesting aside, the way that they were created was the previous favorite

01:02:37.560 | estate planning tool was called a GRIT, and Congress tried to outlaw GRITs. And when they

01:02:43.800 | changed the legislation to outlaw GRITs, they actually created a loophole that enabled Grats,

01:02:48.520 | which are significantly more exploitative towards avoiding estate taxes. So

01:02:55.000 | they took a broken system, they tried to make it better, broke it and made it worse.

01:02:59.000 | Now, how do Grats work? They essentially take advantage of, in most cases, an arbitrage between

01:03:04.520 | what is the government's discount rate, or what is the government's assumed growth rate of assets,

01:03:09.240 | and what do you actually achieve? Same, you're starting with a million dollars. And let's say

01:03:13.240 | the government's interest rate is 2%, or it was not that long ago. Obviously, things are changing

01:03:19.880 | pretty quickly right now. So the government is assuming that a year from now on that million

01:03:25.320 | dollars, you're going to gain 2%, or $20,000. The way a Grat is set up is that the Grat,

01:03:32.200 | you set up for a number of years, and let's just say you set up for two years in this example,

01:03:36.040 | it is going to pay you what's called an annuity stream, which is why it's called a Grant to

01:03:41.880 | Retained Annuity Trust. It's going to pay you a set amount of money. Let's just say it's going

01:03:47.000 | to pay you $500,000 for two years. So, in year one, it pays you $500,000. Now, the government

01:03:55.720 | is going to assume that there's $520,000 left in the trust, because they assume assets grow at 2%

01:04:01.320 | a year. And then in year two, it's going to pay you another $500,000, and it's going to assume that

01:04:08.120 | the $520,000 grew to $530,000 and left $30,000 behind. That $30,000, from the government's

01:04:17.320 | point of view, is going to, in most cases, it's your kid or whoever you're trying to

01:04:21.720 | have inherit your assets. So, the government assumes $30,000 passed on to your kid. Now,

01:04:27.800 | the reality that most of us know is your assets are probably going to grow faster than 2%. The

01:04:32.600 | historical market return of the S&P is a little above 10%. So, let's say your assets are actually

01:04:37.480 | growing at 10% a year. So, after year one, that $1 million is worth $1.1 million. Okay,

01:04:43.320 | you lose $500,000, there's $600,000 left. After that second year, when there's $600,000, there's

01:04:49.400 | now $660,000 left. That $500,000 then comes back to you, and then there's $160,000 left in the

01:04:57.480 | trust. The government, from its calculations, only says that you gifted $30,000 to the inheritor

01:05:04.680 | or the beneficiary of your grant, even though you passed $160,000 on. So, this is where you can

01:05:11.640 | essentially pass on, in this case, $130,000 estate tax-free from a federal standpoint.

01:05:18.200 | The big advantage here is the higher you can grow your assets than the government's interest rate,

01:05:24.520 | the more you can pass on and avoid the estate tax. It's your comment on highly appreciated assets,

01:05:29.640 | why it's become so valuable. If you take, let's just say, startup equity or something that has a

01:05:33.880 | low current market value, but you feel like there's a good bet in two years it's going to be

01:05:38.120 | worth $10,000 or $100,000 X that value, the government's assuming if you put it in, it's

01:05:43.080 | worth $10,000 today. And let's just say, three years from now, it's going to be worth $10 million.

01:05:47.960 | The government is assuming that $10,000 is growing at 2% a year.

01:05:52.760 | So, it's negligibly going to be worth nothing in $10,000 to $15,000 in three years. All of that

01:05:58.280 | upside passes on without paying the estate tax. That's so interesting. So, it's probably not

01:06:04.520 | a tool that's useful to the average person who's not even coming close to $24 million.

01:06:09.800 | But if you own a business or you own a piece of a business that's worth

01:06:14.120 | 10s or 100s of millions of dollars, or you think you might, it could come into play.

01:06:18.360 | The purpose of this conversation is not to necessarily share every tactic that everyone

01:06:22.840 | listening can use, but to unveil the mystery behind some of these things we hear about. And so,

01:06:28.120 | it's fascinating to hear. And your example, by the way, was just for two years. I assume if we

01:06:33.400 | continue that example for 20-30 years, the compounding of the S&P at 10% leaves a whole

01:06:40.440 | lot more than $30,000 or what would have grown at 2%. Yeah, exactly. Every year that you do this,

01:06:47.720 | you're able to leverage the difference between the government's assumed growth rate and what

01:06:51.080 | you can get to pass on even more value. One of the more prominent examples was when before

01:06:55.720 | Facebook IPO-ed Mark Zuckerberg, Sheryl Sandberg, Dustin Moskovitz, they all set up grats. They took

01:07:01.720 | the pre-IPO price of their Facebook shares. They put those shares in. They set up for I don't know

01:07:06.520 | how many years. And then after the IPO, all of that appreciation was able to pass on and avoid

01:07:12.360 | the estate tax. So, this is to your point of if you have a family business that's worth 8 or 9

01:07:17.800 | figures or you're already above that, it's a really powerful tool to minimize those estate

01:07:23.640 | taxes and preserve as much of your hard-earned income for future generations. That's so fascinating.

01:07:29.880 | So, I am quite comfortable right now, which is actually true almost every day. And that's thanks

01:07:36.040 | to Viore. And I'm excited to be partnering with them for this episode. They make performance

01:07:40.520 | apparel that's incredibly versatile. Everything is designed to work out in, but it doesn't look

01:07:45.480 | or feel like it at all. And it's so freaking comfortable, you will want to wear it all the

01:07:50.200 | time. Seriously, I am pretty sure it's more comfortable than whatever you're wearing right

01:07:54.200 | now, unless you're wearing Viore, in which case you already know what I mean. And it's not just

01:07:58.920 | for men. My wife is as obsessed with Viore as I am. My favorite is the Sunday Performance Joggers.

01:08:05.000 | I think I have three pairs and they are probably the most comfortable pants I've ever owned.

01:08:09.560 | Their products can be used for just about any activity, whether it's running, training, or yoga.

01:08:14.920 | They're also great for lounging, running around town, or their meta pants can even work for a

01:08:19.320 | night out. Honestly, I think Viore is an investment in your happiness. And for all the Hacks listeners,

01:08:24.840 | they are offering 20% off your first purchase, as well as free shipping and returns on US orders

01:08:30.840 | over $75. So, you should definitely check them out at allthehacks.com/viore or in the link in

01:08:38.760 | the show notes. Again, go to allthehacks.com/viore and get yourself some of the most comfortable and

01:08:48.120 | versatile clothing on the planet. Getting the crew together isn't as easy as it used to be.

01:08:54.920 | I get it. Life comes at you fast, but trust me, your friends are probably desperate for a good

01:09:00.680 | hang. So, kick 2024 off right by finally hosting that event. Just make sure you do it the easy way

01:09:07.400 | and let our sponsor Drizzly, the go-to app for drink delivery, take care of the supplies.

01:09:13.000 | All you need to come up with is the excuse to get together. It doesn't even have to be a good one.

01:09:17.640 | It could be your dog's birthday, that the sun finally came out, or maybe you just want to

01:09:22.040 | celebrate that you got through another week. With Drizzly, you can make hosting easy by taking the

01:09:27.400 | drink run off your to-do list, which means you can entice your friends to leave their houses

01:09:32.200 | without ever leaving yours. And since I know you like a good deal, Drizzly compares prices

01:09:37.160 | on their massive selection of beer, wine, and spirits across multiple stores. So, when I really

01:09:41.960 | wanted to make a few cocktails while we were hosting family last week, not only could I get

01:09:46.120 | an Italian Amaro delivered in less than an hour, but I found it for $15 less than my local liquor

01:09:51.800 | store. So, whatever the occasion, download the Drizzly app or go to drizzly.com. That's D-R-I-Z-L-Y.com

01:10:00.440 | today. Must be 21 plus, not available in all locations. I just want to thank you quick for

01:10:07.800 | listening to and supporting the show. Your support is what keeps this show going. To get all of the

01:10:13.720 | URLs, codes, deals, and discounts from our partners, you can go to allthehacks.com/deals.

01:10:20.840 | So, please consider supporting those who support us. Okay. We got a lot to get through, but I want

01:10:26.040 | to come back to charitable lead trust. Less about appreciated assets, but still helpful to avoid

01:10:31.560 | taxes in a high-income year. Can you talk a little bit about those?

01:10:34.760 | Yeah. The long name of it is charitable lead annuity trust. This is a really powerful tool

01:10:39.160 | if you've got a big bonus, or short-term capital gains, or high ordinary income,

01:10:43.880 | to be able to write off your income today. And the way that this works is you set up

01:10:48.360 | this charitable lead trust for a number of years, let's just say 20 years,

01:10:52.680 | and you put a million dollars into it. You get a million-dollar charitable deduction

01:10:56.840 | today to write off your income. But you're not giving that entire million dollars away now.

01:11:02.760 | You're actually able to reinvest it. So, you're able to take that million dollars,

01:11:06.680 | you put it in charitable lead trust, you put it into the market where it's going to grow

01:11:11.000 | 10% a year, 8% a year, whatever you assumed is, and you get a charitable deduction now.

01:11:15.960 | Probably wondering like, "Why would you get a charitable deduction now if you're not giving

01:11:19.640 | away the money?" It's similar in some sense to a donor advice fund, where with a charitable

01:11:24.840 | lead trust, you're promising in the future years to give away a set amount of money

01:11:28.760 | to a charitable cause. So, it could be a donor advice fund, could be a foundation,

01:11:33.800 | could be the American Red Cross. But you're promising to do that in the future.

01:11:37.160 | So, you can say that in year two, I'm going to give $10,000. Year three, $15,000. Year four,

01:11:43.400 | $20,000. And when you are setting up this charitable lead trust, essentially,

01:11:47.640 | the government is taking their interest rate, and they're figuring out what is the present value of

01:11:52.520 | their future donations. And so, they're taking that and they're giving you an upfront charitable

01:11:58.520 | deduction for the present value of those future charitable deductions. Now, a big part of this

01:12:03.160 | advantage is that discount rate that they're using, again, to the same kind of example as a

01:12:08.280 | grant, it tends to be lower than what you would be able to get if you invest your assets in the

01:12:12.440 | market. Right now, it's 2.2%. And I'm willing to bet that the markets are a little bit choppy now.

01:12:19.160 | But in a long time horizon, most of us would hope to achieve a better than 2.2%

01:12:22.760 | return in the market. So, you're able to write off your high tax income now,

01:12:28.120 | reinvest that money in the market, and give those charitable donations in the future.

01:12:33.320 | And any appreciation above what is donated to charity, you're able to at the end of the trust,

01:12:39.480 | so in 20 years in this situation, keep that money for yourself or have that money returned back to

01:12:44.520 | yourself or future generations. So, it's a great opportunity for folks that you can write off high

01:12:50.600 | tax income now, reinvest that money, and then give to charity later in the future.

01:12:55.720 | If people are just charitably inclined, it's a really good way to set aside money to go to a

01:13:00.360 | charity in the future, very comparable to a donor advice fund, except it also has some tax planning

01:13:05.960 | and estate planning benefits, if those matter to you as well. But it also just guarantees that,

01:13:11.240 | "Hey, this cause that you care about, you're going to set them up to receive X amount of money for

01:13:15.320 | how many ever years you set up the trust for." So, it has a lot of purposes, but really underutilized

01:13:20.920 | for folks who have a big bonus or high tax year. I know the assumed interest rate affects

01:13:27.240 | everything and the government's interest rate changes. But if you take an example of $1 million,

01:13:32.120 | you get that full write-off, you put $1 million in a charitable lead annuity trust,

01:13:36.280 | you're going to end up donating probably at least $1 million to charity.

01:13:41.400 | But because of the arbitrage, do you end up getting back $1 million? What ends up coming back?

01:13:48.040 | The easiest way to think about this is the longer you set the structure up for,

01:13:51.640 | and the faster your assets grow, the higher the rate. So, if you set this up for 25 years,

01:13:56.600 | and your assets are growing at 10% a year, you may get a 50% return on your capital than if

01:14:02.040 | you've done nothing at all. It may be an additional $500,000 in absolute cash that

01:14:07.160 | you're going to get on top of whatever that million is going to compound to.

01:14:10.520 | In a circumstance like this, I would give away $1 million into a charitable lead annuity trust,

01:14:15.960 | there would be donations made over the years, and I'd get the remainder.

01:14:19.480 | Had I not done that, I would have paid taxes. If you're in the highest brackets in California,

01:14:24.680 | I might have paid half a million dollars in taxes and I'm left with half a million to invest.

01:14:30.120 | Would I have been better off ever if I don't factor in the charitable donation? Do I actually

01:14:34.840 | ever end up being better off over a period of time if we assume a higher interest rate,

01:14:40.120 | like you said, a 10%? Yeah, this is where you can generate an additional

01:14:44.600 | half a million dollars. And this is the whole point. Take your situation that you brought up.

01:14:49.640 | If you're in a high tax rate place like California, if you earned a million dollars,

01:14:53.560 | you may pay literally half of it or more to the government. So you only have $500,000 to invest,

01:14:59.480 | versus if you're able to avoid taxes on that million dollars. If you have $500,000 in the

01:15:04.760 | market versus a million dollars being reinvested in the market, that million dollars is going to

01:15:10.040 | create a lot more compounding wealth. And that million dollars, you're going to give some of

01:15:14.360 | that to charity every single year. But just that million dollars compounding at 8% or whatever our

01:15:20.280 | assumed growth rate is here, it's going to over a long period, over 20 plus years, 25 years,

01:15:25.000 | going to create a lot more wealth. For 25 years, taking a base case, you'll probably create an

01:15:28.760 | additional half a million dollars of wealth for yourself after taxes.

01:15:31.960 | Not factoring in the fact that you're generating probably at least that or more

01:15:37.080 | in charitable contributions. Yeah. Yeah. So it's really like

01:15:40.040 | you're creating an additional half a million dollars of wealth for yourself,

01:15:43.560 | plus you're creating probably $1.2-$1.3 million in charitable causes to help advance things that you

01:15:49.480 | personally care about. So you're doing good in the world, you're creating wealth for yourself.

01:15:54.040 | It's a really powerful combination. Let's say someone decided that this year was a really big

01:15:58.120 | year, they had a big windfall, and they were going to donate $100,000 to their donor advised fund,

01:16:03.640 | or just to the American Red Cross or whatever the cause it may be.

01:16:07.080 | If you were already planning on giving away money, is there any reason that this wouldn't

01:16:12.200 | have as much or more impact on both the charity and the returns you get back?

01:16:17.160 | No. This has tax benefits. Using this, you're going to come out further ahead

01:16:21.000 | than any of those other strategies. The only downside, if you take the charity's point of view,

01:16:25.480 | if you give $1 million to the Red Cross this year, they'll get $1 million this year.

01:16:31.000 | Whereas if you put it into a charitable lead annuity trust, they may get $1.2 million over

01:16:36.040 | 25 years. So there's a "when you plan to give it, how much do you want to give?"

01:16:40.680 | But from a "they'll, over the long run, get more money." But with a donor advised fund,

01:16:46.520 | or just giving directly to the Red Cross, you're not going to get any tax benefits out of it.

01:16:50.920 | So that's the big difference. With a donor advised fund, you also get that big upfront

01:16:54.680 | charitable deduction. So if you put in $1 million into a donor advised fund,

01:16:58.600 | or you give to the Red Cross, you get that upfront charitable deduction.

01:17:01.080 | But you don't get any money at the end of the trust that comes back to you.

01:17:05.320 | When you give it to those two causes, that kind of money is gone. It's doing good in the world,

01:17:09.560 | but you're not getting any money that returns to you. With the charitable lead annuity trust,

01:17:15.320 | you get that upfront charitable deduction. Money over those 25 years goes to the Red Cross,

01:17:19.800 | and then whatever's left in the trust at the end returns back to you.

01:17:22.920 | So that's the cherry on top that you get at the end that's not available with those other

01:17:27.000 | structures. I don't know why, but for some reason, it seems like every time I talk to

01:17:31.560 | someone from New York, they all seem really excited about islets, which I know are related

01:17:37.080 | to life insurance. Is there a reason why it's so great in New York? I don't understand,

01:17:40.920 | as I read them, why they're as cool as some people make them sound.

01:17:44.280 | Yeah. Insurance is its own interesting niche where there's a lot of tax opportunities.

01:17:50.280 | The core thing is it tends to be more of an estate planning structure. Essentially,

01:17:53.720 | an islet stands for irrevocable life insurance trust. And what you're really doing is you're

01:17:58.920 | buying life insurance, you're putting it into this irrevocable trust. And so you're really

01:18:03.640 | gifting the benefits of life insurance. So i.e. the payout when you pass away to your kids or

01:18:09.880 | spouse or whoever it is. The big benefit is hopefully when you buy your life insurance,

01:18:15.720 | your risk of dying is pretty low. So your life insurance is valued at a pretty low rate.

01:18:20.920 | So let's say it's worth $100,000 now. It's worth $100,000. You put it in this irrevocable trust.

01:18:27.160 | Over time, you will continue contributing the premiums towards the life insurance.

01:18:32.120 | And that money in the life insurance is being reinvested in the market, or it's increasing

01:18:37.080 | the value of the policy as you naturally get older. And let's just say when you pass away,

01:18:41.240 | it's worth $5 million. That $5 million doesn't count towards your state gift limit. Because

01:18:47.560 | you contributed the asset when it was worth $100,000, it only counts if you give a $100,000

01:18:52.760 | gift to your kids or your future generations. Even though when you pass away, it may be worth

01:18:58.040 | $5 million. That's the key benefit is you're able to essentially lock in a low gift value

01:19:04.280 | and allow it to appreciate over time. Now, why is it so big in New York? I don't know.

01:19:09.400 | There's also a big thing to broadly watch out with life insurance. There's a lot of people

01:19:14.120 | who take a lot of cuts of the pie when they're selling it to you. And it tends to be really

01:19:18.120 | lucrative for brokers, agents, advisors. So people do love to sell life insurance because

01:19:24.040 | they know they're locking you in for a really long time horizon. And so there's a lot of

01:19:28.280 | commission that gets spread out. I don't know if that impacts New York, but it is definitely

01:19:33.480 | a powerful tool. I don't know if it's quite as important for folks who aren't worried about the

01:19:38.200 | estate tax to start with. My advice for life insurance has always been that term life is

01:19:43.160 | the thing that makes sense for almost everyone. And unless you're working with an accountant

01:19:47.800 | and an estate planning attorney that together decide that there's some more complex way to

01:19:52.520 | take advantage of a whole universal etc life set in a trust or even... And we won't go into it now,

01:19:58.840 | but private placement, life insurance, these other things. One, stick to term life. And two,

01:20:04.600 | almost all the other strategies are not really as beneficial unless you're at,

01:20:09.800 | approaching or over that $24 million estate tax limit.

01:20:13.160 | Yeah, 100% agree with that. I think in most cases, people a lot of times overthink this,

01:20:17.320 | or they get sold to. Most cases, people should just do the standard, "This term life insurance,

01:20:23.240 | you know what it is, you know what you're getting, you're not being sold to and being ripped off."

01:20:26.760 | And unless you have really particular needs, or a team that's getting each different answer,

01:20:32.280 | where it's like PPLI, etc, which makes sense in certain situations, it's better to keep it simple.

01:20:37.480 | I agree. I even had a listener send me an email and say, "Hey, I spent the last 10 years selling

01:20:44.040 | whole life. Please don't tell anyone on your show to buy it. I won't name who they are because I

01:20:48.200 | don't want to get them in trouble with their job." But even a guy who sells it said he wouldn't

01:20:52.120 | recommend it. And ultimately, what I understand is with this estate tax limit, all of the estate tax

01:20:57.320 | planning tactics are really just about trying to take a bigger amount of money and fit it into a

01:21:04.280 | smaller amount now so that you can donate it when it's less and counts less towards your limit.

01:21:09.000 | Another one that I know I found, which is outside of the trust world, so I'll do my

01:21:13.640 | best to explain it, is around setting up a partnership or an LLC for your family.

01:21:19.240 | And the way I understood it was, you create this LLC, you put assets in it or a partnership,

01:21:25.320 | and you give the value of that business goes to your heirs, but the control of the asset

01:21:33.240 | stays with you. And so the IRS will give you this benefit of saying, "Oh, well,

01:21:38.200 | if you're giving your children a business that has $50 million, but you control all of it and

01:21:44.840 | they don't get to choose what happens, well, you could lose it all. You could make terrible

01:21:48.440 | investments. So we're going to give a huge discount." And I don't know what that discount

01:21:52.280 | is. I think it's closer to like 80%. So now you're able to say, "Oh, I'm giving my kids

01:21:57.080 | a $10 million business instead of a $50 million business." And then when you pass away,

01:22:02.600 | the control is transferred. My understanding is that all these estate planning tactics are like,

01:22:06.760 | "How do you find a way to give large sums of money either now or in the future today,

01:22:10.840 | when you can price them or value them at a lot less?"

01:22:13.720 | Yeah. That nailed it on the head. And there's 3 descriptions people often

01:22:18.120 | call this. They call it like, "How do you gift values?" It's called the freeze.

01:22:21.800 | You freeze it at its current value when you expect it to appreciate in the future.

01:22:25.640 | Let's just say you have startup equity or something you expect to appreciate significantly.

01:22:29.640 | You gift it at the low value today. And then when it appreciates in the future,

01:22:33.560 | it's already in the ownership of a trust or your kids.

01:22:37.160 | And that future value doesn't count as your gift value. So that's the freeze.

01:22:40.920 | There's also a term called the burn. Whether it's you paying taxes, this is where

01:22:45.080 | grats come into play. So in a grat, even though the assets, some of the money is coming back to you,

01:22:51.800 | all the appreciation passes on to your kids, you are liable for the taxes that are paid on assets

01:22:58.920 | income realized in the trust. And the big advantage of this is you're literally...

01:23:02.920 | By paying the taxes personally, you're reducing the value of your estate.

01:23:07.080 | So in other words, you're burning down your estate. And then the third category is discounting.

01:23:11.880 | Whether it's control with these family partnerships of... You can structure these

01:23:16.440 | things in all sorts of different ways, whether it's control, or it's a hard-to-value asset,

01:23:21.560 | or you reduce the intangibles. How do you reduce the value

01:23:24.920 | below what you probably think it's worth or what you can actually realize in the market?

01:23:29.880 | There's a famous example where Phil Knight, the founder of Nike,

01:23:33.960 | took Nike shares, put it in an LLC. And then he gifted parts of it over time to his son.

01:23:39.800 | And each time he just gave it to his son, it was at a discount because it was a non-controlling

01:23:44.680 | interest. And so he's able to take something like a 15 or a little bit higher discount on

01:23:48.520 | those assets, even though Nike shares are very liquid. We can sell them at any time in the market.

01:23:53.880 | But because it was part of this structure, they're able to discount it.

01:23:57.480 | And so as a result, from an IRS standpoint, he was giving less value,

01:24:01.560 | which means there's less taxable gifting that he had to pay to the government.

01:24:05.560 | I'm holding this document up here that I got from Morgan Stanley at a talk once.

01:24:10.200 | And it's like, "Here are the better outcomes of using all these strategies." And in this case,

01:24:13.960 | it's a crazy one that I'll run through it. But it said, "If you just set up a basic

01:24:18.600 | revocable trust and you transfer money, and you have exactly $45 million,

01:24:22.520 | by the time your children get the money 30 years later, you're going to have $281 million,

01:24:28.680 | but you'll pay $112 million in taxes, and they'll only get $190 million."

01:24:33.640 | And they're like, "But if you go through..." And in this example,

01:24:37.400 | they set up a family limited partnership, a grat and a revocable trust, and then 2

01:24:42.840 | defective irrevocable trusts. So it's like the most complex, insane example that...

01:24:47.960 | By the way, if you have $45 or $50 million, you're probably working with someone to do

01:24:51.960 | stuff like this. But at the end of the day, it says your net estate post-tax with this example

01:24:57.560 | was $500 million versus the $198 million that you would have paid in the previous example,

01:25:04.040 | netting you an extra $300 million. So we talked about some of these strategies.

01:25:08.920 | And while they might not practically be relevant for most people listening,

01:25:13.320 | it's pretty crazy to dig into the way they work for certain people and how they're able to unlock,

01:25:20.040 | in this case, hundreds of millions of dollars of value.

01:25:22.520 | There's one more thing that you guys do around stretch IRAs that I think might actually benefit

01:25:28.440 | people who are in circumstances like this. Correct me if I'm wrong.

01:25:31.880 | Do you want to talk a little bit about that?

01:25:33.160 | Yeah. And before I get into that, people hear about these trusts. And for most people,

01:25:38.440 | they don't mean much. But the returns are pretty incredible. In that situation,

01:25:42.280 | it's an additional $300 million on $200 million of assets. Whether you have $50 million or a

01:25:49.320 | couple $100,000, there's a lot of these opportunities. Now, the big challenge for

01:25:53.480 | most people is... A sad fact is the US tax code for the last 50 years has grown by 150,000 words

01:26:00.760 | a year. There's just no way you can keep up. And so what this means is unless you have that team

01:26:06.360 | of lawyers and accountants, you're going to miss out on these opportunities and you're going to

01:26:10.360 | significantly fall behind. And not to get too biased, that's the problem we're trying to solve

01:26:14.680 | is how do we use technology to help people find and take advantage of these opportunities?

01:26:18.600 | Because otherwise, the tax code is not built for someone who doesn't have high 9-figures.

01:26:23.640 | It's funny, you mentioned someone who has $50 million. Most of the situations we see in this

01:26:28.360 | world is there's folks with that, they don't actually have access to good folks in this.

01:26:31.720 | Because it's one of the hardest things to get access to is high-quality folks who can help

01:26:35.800 | you with this tax and estate planning. Because guess what? Like all the family offices with

01:26:40.040 | billionaires, they tend to snap up the best folks in those spaces. Because it's just so valuable.

01:26:45.800 | You're talking about those results that you're seeing there, that's hundreds of percent of

01:26:49.000 | additional value for your children. If you're a billionaire, what price aren't you going to pay?

01:26:53.480 | And there's no way that me or you or your audience can compete on a per hour basis or salary to hire

01:26:59.240 | that best person that billionaire wants. It just creates this huge challenge for folks to take

01:27:04.520 | advantage of the stuff despite how meaningful it is. Jumping to the Stretch IRA piece, this is

01:27:08.760 | probably one of the most applicable things for most people of tax planning opportunities for

01:27:14.440 | context. Most Americans, when they're building wealth for their retirement and their financial

01:27:19.800 | safety net, they use either a standard IRA or a Roth IRA. They're actually irrevocable trusts

01:27:25.800 | that the government has specifically created and outlined benefits for to help people better save

01:27:30.760 | assets for their retirement. With a standard IRA, it allows you to contribute pre-tax money,

01:27:38.360 | and it allows the assets to grow in an IRA on a tax-free basis until you start taking withdrawals

01:27:43.480 | after you're 59 and a half. Now, historically, when people pass away and they have an IRA with

01:27:49.240 | money, they would do what's called over a Stretch IRA or Rollover IRA, where let's say it was my

01:27:55.880 | parents. Their IRA would roll into my IRA. And so, it would stay on a pre-tax basis,

01:28:01.480 | and it would keep growing and compounding. And I would wait until I'm 59 and a half to start taking

01:28:06.920 | distributions and paying taxes. Now, in 2020, there was a law called the Secure Act passed,

01:28:14.440 | which essentially stopped people from being able to roll over their IRA between generations.

01:28:19.240 | So now, instead of my parents' IRA being able to roll over into my IRA, I have to keep it in their

01:28:24.200 | IRA for a max of 10 years. And then when I do withdraw it, I have to pay ordinary income tax

01:28:29.400 | rates on all the withdrawals. So, if you're in California and New York, you may be paying 50%

01:28:34.600 | to 55% of those assets. The solution that's come about since the Secure Act was passed in 2020

01:28:42.840 | is people taking their parents' IRA, being willed and rolled over into a charitable remainder trust.

01:28:48.760 | And the big benefit of this is when it passes the charitable remainder trust,

01:28:54.360 | it can remain in there for more than 10 years and keep compounding on a pre-tax basis.

01:28:58.920 | So you get a lot of the benefits of the Stretch IRA, where instead of rolling over from my

01:29:03.800 | parents' IRA to my IRA, it is rolling over from my parents' IRA to my charitable remainder trust,

01:29:10.360 | but can keep growing on a pre-tax basis and isn't constrained to 10 years. And once it's in the

01:29:16.120 | charitable remainder trust, the appreciation after that rollover isn't taxed at ordinary

01:29:22.040 | income rates. So, that appreciation isn't going to be taxed at 50%. If you're in California,

01:29:25.880 | it'll be taxed at 35% long-term capital gains. So, you get more pre-tax growth,

01:29:31.320 | as well as you can pay lower tax rates on the withdrawals.

01:29:34.600 | We see a lot of folks whose parents are getting elderly and they're planning for

01:29:38.600 | how do they pass on these assets, particularly a lot of financial advisors who are trying to

01:29:42.600 | help their clients for intergenerational planning, really roll this out to their clientele,

01:29:47.640 | for them to help create more wealth in the family, preserve that.

01:29:50.520 | Because the Secure Act was just passed in 2020, most folks aren't aware of the best way to deal

01:29:55.720 | with it. Because again, unfortunately, the tax code isn't accessible. And so, you've got a lot

01:30:00.600 | of folks where they have money, they've contributed money to their life, but it's really hard to

01:30:04.760 | figure out what do I do. And even though it is meaningful, it's a tough challenge.

01:30:09.000 | You said some of the tax code is not accessible. But on top of that, a long time ago, before I

01:30:13.960 | think the myths of the tax avoidance trusts to avoid state taxes, which we won't get into now

01:30:20.200 | because I think it came out that a lot of states outlawed them. I was looking into this and I

01:30:25.000 | realized, "Oh, wow. One of the reasons that this isn't easy for people to do is that the cost to

01:30:31.240 | administer these trusts and to set up the trust were so high that I spent all this time talking

01:30:36.600 | to someone and found out, "Wow, this is a great way to maybe avoid high California taxes," only

01:30:41.800 | to find out they were like, "Well, it's going to cost us $25,000 to set up a trust. And you're

01:30:46.280 | going to pay 1.5% a year for someone to manage and administer it and do the investments."

01:30:50.760 | And I was immediately like, "Well, you should have said that up front because I didn't have

01:30:53.720 | enough money for that to make any difference." But can you tell us a little bit before we wrap

01:30:58.760 | about how you guys are trying to make this a little bit more accessible and affordable,

01:31:04.440 | especially for people that might benefit from the charitable remainder, the charitable lead trust,

01:31:09.800 | which aren't necessarily tools for people with $24+ million.

01:31:13.960 | Yeah, definitely. Funny enough, the situation you talked about, that was the reason I started

01:31:19.240 | the company, was I went through that exact situation. And when I saw lawyers' costs and

01:31:23.560 | accountants' costs, it made the ROI negative for me to set it up. And going through that process,

01:31:28.520 | you realize there's a better way to do it. And so, the idea behind Valor is that we've

01:31:32.680 | automated a lot of the setup and administration for these charitable remainder trusts,

01:31:37.320 | charitable lead trusts, and GRATS so that there are no legal fees up front. So, instead of paying

01:31:42.440 | that lawyer $25,000, you're avoiding that. And then also, the annual fees to administer these

01:31:48.440 | trusts, we've dropped those. Compared to that situation, we're less than a sixth of their costs.

01:31:52.600 | Compared to most of the other folks we see in the market, we're less than half the cost.

01:31:56.280 | And the whole idea is, by dropping these costs, we can make the ROI worthwhile for more folks and

01:32:01.240 | help them build more wealth. We've obviously both been building companies in this space.

01:32:05.960 | The whole premise of fintech is that you can use technology to enable others to build wealth more

01:32:11.320 | efficiently and open up opportunities. And that's what we're doing here. How do you take

01:32:15.480 | these black box of irrevocable trust and wealth building structures that historically have only

01:32:21.080 | been available to those with 9 figures and help everyone build wealth using them?

01:32:25.640 | Yeah, it's fantastic. The blog posts you guys have written on the Valor site are great. They

01:32:30.040 | go into more detail than most companies do. I'm going to link to a handful of them in the show

01:32:34.120 | notes so that people can go check them out. If they have any questions or want to reach out to

01:32:38.200 | you guys, where should people find you? valor.io, V-A-L-U-R.io. Always happy to chat with folks

01:32:46.040 | there to answer more questions. We have, as you mentioned, a lot of content. We also take calls

01:32:50.760 | with folks to help walk them through and understand these structures as well. So that's the best place

01:32:54.920 | to reach us. Awesome. Thank you so much for being here. Yeah, really appreciate it, Chris. I

01:33:00.040 | appreciate your time and love your podcast. I really hope you enjoyed this episode. Thank you

01:33:05.800 | so much for listening. If you haven't already left a rating and a review for the show in Apple

01:33:10.440 | Podcasts or Spotify, I would really appreciate it. And if you have any feedback on the show,

01:33:15.240 | questions for me, or just want to say hi, I'm Chris@allthehacks.com or @Hutchins on Twitter.

01:33:21.800 | That's it for this week. I'll see you next week.

01:33:24.440 | Transcribed by https://otter.ai

01:33:35.940 | you