Rob Strauss on Advanced Estate Planning Strategies Ahead of the 2024 Elections

February 26, 2024 – Changes to the tax code are coming and time is running out to make essential changes to estates, wills, and trusts. In today's Lifetime Planning episode of the Financial Sense Newshour, estate planning expert and "Super Lawyer" Rob Strauss at Weinstock Manion, discusses two of the biggest changes that are likely to be made with the estate planning exemption and the potential impacts from the 2024 November elections.

Rob and Financial Sense Wealth Management President Jim Puplava also discuss advanced estate planning strategies when it comes to people with large estates using spousal lifetime access trusts (SLATs), irrevocable life insurance trusts (ILITs), generation skipping trusts, gifting strategies, and much more.

To speak with any of our advisors or wealth managers, feel free to Contact Us online or give us a call at (888) 486-3939.

Stay ahead of the market! Subscribe to our premium weekday podcast

Timestamps:

00:00:00: Introduction to Upcoming Tax Changes

00:04:15: Waiting for Election Outcomes and Possible Scenarios

00:08:53: Advanced Tax Planning Strategies

00:13:45: SLAT - Spousal Lifetime Access Trust

00:16:34: Real Estate Planning and Using ILITs - Irrevocable Life Insurance Trusts

00:19:26: Planning for Large Estates

00:20:10: Managing Capital Gains and Using CRTs - Charitable Remainder Trusts

00:22:45: Explanation and discussion of QCDs and RMDs

00:24:26: Story of a client who used QCDs and RMDs effectively

00:25:11: How to contact Rob Strauss

00:26:10: The importance of preparing ahead and not procrastinating in financial matters

Transcript:

Jim Puplava:
[00:00:00 - 00:00:16]
Well, as many of you are aware, the tax laws will be changing again. The Trump tax cuts expire in 2025, and so we'll be going back to the old tax rates. What does that mean regarding estate planning? What will happen, the exemptions? That's the topic of today.

Jim Puplava:
[00:00:16 - 00:00:43]
Joining us on the program is Rob Strauss. He's a partner at Weinstock Manion. And, Rob, I want to talk about where we are today. The exemption is 13,610,000, I think is the number they're estimating that if we go back and the Trump tax cuts expire, the exemption is probably going to go back to around the six or 7 million. I'd like to get your thoughts and what you're hearing on that number.

Rob Strauss:
[00:00:43 - 00:01:17]
The estate tax exemption amount is scheduled to change in two ways, and these ways are already built into the law, and it would literally take an act of Congress to do something otherwise. So the first way in which the estate tax exemption is changing is that it's increasing with inflation. So you're right. Today it's 13.61 million in the year 2024. We would expect that as we transition from the year 2024 to the year 2025, the exemption will increase again to reflect inflation.

Rob Strauss:
[00:01:17 - 00:01:34]
I don't really know what the government's measure of inflation is for this, but let's suppose it increases to 14 million. Maybe it'll increase a little bit more. Maybe it'll increase a little bit less. For a married couple, that ends up being 28 million, approximately. It's a pretty large number, historically large number.

Rob Strauss:
[00:01:34 - 00:02:03]
But also built into the law on 1126 is a reduction of the exemption by 50%. So if it increases to 14 million on 1126, absent action by Congress, it'll fall in half to 7 million. And for a married couple, that ends up being 14 million instead of 28 million. And the question really is that all my clients are asking is that going to happen? And the short answer is, I don't know.

Rob Strauss:
[00:02:03 - 00:02:42]
But the longer answer is it's a political question. It's a question of who ends up taking control of the federal government. And it breaks down into three parts, who's going to have the presidency, who's going to have the House of Representatives, and will either party have a supermajority in the Senate. So the people who think that the exemption won't actually fall are kind of saying they believe that the Republicans will win all three of those positions because we would assume that the Republicans would want to keep the exemption high or maybe even increase it. And we assume that the Democrats are fine with the exemption falling.

Rob Strauss:
[00:02:42 - 00:03:05]
The only. But however, with respect to that assumption hearkens back to when Obama was president and the exemption was 5 million and it was scheduled to fall to 1 million, and all of us thought that it wasn't going to fall to 1 million. All of us thought that it would become three and a half million. Why? Because Obama had campaigned on having a three and a half million dollar exemption.

Rob Strauss:
[00:03:05 - 00:03:36]
That didn't happen, and neither did it fall to 1 million. It stayed at 5 million. Why? Well, there was a compromise, and you never know where a compromise is going to come from or what a compromise is going to be. And so the best way that I have right now of handicapping what will happen in Washington and in two years, January 1 of 2026, is to think that it's unlikely that Republicans win all three and therefore it's unlikely that the exemption won't fall.

Rob Strauss:
[00:03:37 - 00:04:09]
But two things could happen. I could be wrong about the political future, and I just ask every client to think for themselves what the political future would be. They don't have to rely upon my analysis. Or there could be a compromise. It's an interesting conversation to have with clients because you get some clients who say, look, I really think we should wait until the election happens before we commit ourselves to spending money with a lawyer, creating irrevocable trusts, engaging appraisers to value hard to value assets, making transfers that use the exemption.

Rob Strauss:
[00:04:09 - 00:04:24]
We really should wait until the election. And my feelings about that are twofold. First, of course you should wait until the election. Of course you should. Why would you take action that you wouldn't have to take unless you should anyway?

Rob Strauss:
[00:04:24 - 00:05:13]
Because the size of your estate is so large. But however, estate planning attorneys like me, who deal with high end clientele who need to make this choice and this decision, and might need to implement a plan that results in the use of the exemption, that involves creating trusts and engaging appraisers and so forth. And appraisers as well, are going to be overwhelmed with clients who need our services all compressed into one short year. And I'm very concerned about having enough time, and my whole firm having enough time to be able to help all of our clients think through whether it's appropriate for them to use their exemptions and if it is, how to use them, and then to implement that plan. I'm very concerned about that.

Rob Strauss:
[00:05:13 - 00:06:07]
And so I am trying my best to get my clients to start to think through these issues and to make some preliminary or tentative or even actual decisions about what they're going to do. For example, clients who are worth well in excess of the exemption. It's pretty easy for them to decide to move forward, provided that doing so is consistent with their overall goals and objectives, because they should do so anyway. Them moving forward with using their exemptions is not necessarily tied to the concern that the exemptions are going to fall, because whether or not the exemptions fall, that category of clientele needs to use their exemptions anyway. The harder case, the clients who have more than what the exemption would fall to, but maybe less than what the exemption is today, or just a little bit more than what the exemption is today, because today they probably don't need to do anything today.

Rob Strauss:
[00:06:07 - 00:06:44]
They're probably better off holding on to their assets and getting a step up in basis to fair market value so that their heirs could sell without capital gains tax as opposed to using their exemptions. But if the exemption falls, they would wish, probably that they would have used their exemptions before they fell. That category of clientele is in a really challenging position, so they have to make a decision soon. Maybe they can afford to wait until after the election and gamble that their professionals will be available to help them. Maybe they shouldn't wait.

Rob Strauss:
[00:06:44 - 00:06:48]
It's a hard decision. So we're having these conversations with clients.

Jim Puplava:
[00:06:48 - 00:07:13]
Yeah, that's interesting, because we're dealing with two clients right now. Both of them have closely held businesses. One's worth about 70 million, another one's probably worth a little over 50. Kids are coming in the business, and this is the kind of business that could not withstand a 40% estate tax. So we're moving with their attorneys to create these irrevocable trusts and utilize the exemption.

Jim Puplava:
[00:07:13 - 00:07:31]
And like you, we're going to wait till the end of the year, see what the election is, and if they bump the thing up to like 14 million, well, then that's 28 million. That will happen next year, early on in the year, because they can't afford to pay that kind of tax. There isn't enough liquidity in the estate.

Rob Strauss:
[00:07:31 - 00:08:15]
So I have a couple of thoughts with respect to that. First, I think you're describing clients who probably need to use the exemption, whether or not it falls, because the value of their businesses clearly exceeds the exemption and they're vulnerable. Second, I think you're describing a really interesting situation where the client is, in effect, buying an option to do this. And I do have a handful of clients who are willing to spend their money creating the trusts today so that the trusts are in existence. If in the future, they realize that they need to use them so that they're not dealing with a run on the lawyer and they've got their trusts already in place.

Rob Strauss:
[00:08:15 - 00:08:26]
I think that's a really interesting idea for people who are willing to spend the money in advance and take the risk that they might not actually need the trusts, although I believe they will end up needing the trust.

Jim Puplava:
[00:08:27 - 00:08:52]
That's interesting because that's exactly what we presented to our client. Obviously, they have enough money to pay the lawyers to set these up, and then we're just going to wait so they'll be in place. If it doesn't happen the way we think it's going to be and it's going to be detrimental to them, well, then it gets implemented. If not, well, they're still going to need it when you're worth that much. It's well beyond the exemption anyway.

Rob Strauss:
[00:08:53 - 00:09:22]
Yeah. Jim, I have to say, I think that is a great idea. In an ideal world, every client would be adopting that idea, but of course, not every client wants to spend the money if they don't have to spend the money. And then when I'm talking to clients about what their choices are, if they do reach the conclusion that they should be using their exemptions, I'm usually talking about two very different ways in which they could use their exemptions. And those ways are first, they could make gifts to their children.

Rob Strauss:
[00:09:22 - 00:09:53]
Usually you wouldn't make a gift directly to children. Usually instead you would create an irrevocable gift trust for that purpose, because using an irrevocable gift trust would confer upon the children three benefits, or maybe four that they wouldn't be able to get with an outright gift. And those benefits would be, first, at least some degree of divorce protection. Second, at least some degree of creditor protection. Third, generation skipping, which is great, which means their children are the beneficiaries for their whole lives.

Rob Strauss:
[00:09:53 - 00:10:50]
But when their children die, the assets inside of those trusts are not part of the children's own taxable estates and pass automatically free of estate tax to the grandchildren. And using that structure allows the client to remove assets from the estate tax system for three or four generations. Or if you go to a state that doesn't have a limitation on how long trusts can last, then you could remove those assets from the estate tax system for 30 or 40 generations, which is amazing. And the advantage of that is it's really efficient. The fourth possible benefit is that the client could pay the income tax on behalf of the children, and that's the equivalent of making a gift to the children of the income tax that's paid, but it does not count as a gift that in and of itself, often, if there's enough time, can be more valuable than the gifting.

Rob Strauss:
[00:10:50 - 00:11:14]
So giving to the kids is great. It's very efficient. The downside to giving to the kids is that if the parents think they might need that wealth, they don't have that wealth, and they don't have access to that wealth. So that kind of structure doesn't work for every client. For example, if clients were worth parents, husband and wife, worth $30 million, yeah, they should use their $26 million exemptions.

Rob Strauss:
[00:11:14 - 00:11:37]
But if they did, they would only have three and a half million left. That probably doesn't work for them. So there is an alternative. We're doing a fair amount of the alternative for those clients who are not comfortable using their exemptions in favor of their children, immediately, the alternative is called, and I'm sure you're familiar with this, Jim, a spousal lifetime access trust. So what's that?

Rob Strauss:
[00:11:37 - 00:12:25]
Well, mom could create an irrevocable gift trust, a slat spousal lifetime access trust for the benefit of dad. And mom could gift up to the exemption amount of assets into that trust for dad's benefit, where dad is the beneficiary his whole life. And when dad dies, those assets automatically continue to be held in trust for the benefit of children and are not subject to estate tax. And dad has access to the income generated by those assets for his whole life and the principal back if he needs it. And similarly, dad could create a slat spousal lifetime access trust for the benefit of mom, where mom is the beneficiary for her whole life, and dad could gift up to the exemption amount of assets into that trust, and mom gets the income and the principal if she needs it.

Rob Strauss:
[00:12:25 - 00:12:53]
And when she's gone, the kids get it free of estate tax. And the benefit of this structure is that it allows mom and dad to use their respective exemptions but maintain access to the assets. It's potentially very powerful. Now, there are all kinds of rules and restrictions that apply to the way in which you write those trusts. The most important being that the IRS says those trusts cannot be mirror images of each other.

Rob Strauss:
[00:12:54 - 00:13:19]
They have to be different, one from another in material ways. So we're always thinking through with our clients what the appropriate differences are to make it work for the client. But a client who doesn't feel comfortable transferring the exemption amount of assets because they think they need them in order to continue to be able to live a secure financial existence the slat structure is a pretty interesting alternative.

Jim Puplava:
[00:13:19 - 00:13:36]
We're using that with one client, roughly around the 30 million mark, and the assets in part of the estate is securities and the other part is real estate. So there'll be different assets in the different trusts, which I think qualifies for what you're talking about.

Rob Strauss:
[00:13:36 - 00:13:45]
Having different assets in the two trusts is absolutely one of the ways in which we make the trusts not identical to each other. And that's a great idea.

Jim Puplava:
[00:13:45 - 00:14:23]
And what do you think also, and especially when you start getting into the larger levels, I keep thinking of what Jackie Onassis did with her estate. She set up an eyelet and she set up generation skipping trusts, where you have, especially with somebody like the two people I'm talking about, they have a lot of assets in real estate and in a business which are illiquid. So in addition to doing the kind of things we discussed, we also have something like an eyelet, a life insurance trust that will create the liquidity or cash to pay for the balance that will be subject to estate taxes.

Rob Strauss:
[00:14:24 - 00:15:18]
Yeah, I'm a big fan of using irrevocable life insurance trusts. Eyelids and I have a little special sauce that I want to share with you for improving the tax efficiency of the way in which an eyelet works. Most of the time that folks are creating islets, the way they get money into the islet to enable the islet to make premium payments is by including in the islet provisions that allow the beneficiaries of the islet to withdraw the cash that's been gifted to the islet, so that when a gift of cash is made to the islet, it becomes the equivalent of making a gift of cash to those beneficiaries. But when an islet is designed in that way, it's almost impossible to cause the islet to be generation skipping exempt. And so here's a way that you could cause the islet to be generation skipping exempt.

Rob Strauss:
[00:15:18 - 00:16:23]
Create the islet, omit those provisions that allow the beneficiaries to withdraw the funds, at least in the first year. Make a small gift of cash to the islet, 5000 or $10,000, allocate generation skipping exemption to that small gift of cash. And then, because the islet will need cash to make premium payments, have the islet borrow the cash that it needs, not from a bank and not from the client, but from the gift trusts that the client created for the benefit of kids or from the gift trusts that are slats that the clients created for each other's benefit and in that way, 100% of the insurance proceeds can also be generation skipping exempt because that initial gift of cash is the only gift that would ever be made to the islet. And therefore, 100% of the islet is generation skipping exempt. And you could even name those gift trusts as the beneficiary of the islet.

Rob Strauss:
[00:16:23 - 00:16:30]
Doing it that way allows the client to be the trustee of the gift trusts because the client can't be trustee of the island.

Jim Puplava:
[00:16:30 - 00:17:02]
That is an excellent point. And there are so many things, but I think, Rob, one of the things that you would, I'm sure, agree with is if you are in this situation, you have a large estate beyond the exemption or close to that exemption, your estate is still growing. It's a business or it's real estate. Don't wait. As some people say, well, I'll just wait to see what happens to the outcome of the election, and then if it goes adversely, well, then hopefully my attorney will have the time to deal with me.

Jim Puplava:
[00:17:03 - 00:17:18]
It would be better to do the planning up front. If you got that kind of money, spend some of the money like my clients are. They're setting up the trust. They're there, they're sitting, and if it goes against them, they'll actually initiate the trust. But plan in advance.

Jim Puplava:
[00:17:18 - 00:17:20]
Don't wait till the last minute.

Rob Strauss:
[00:17:20 - 00:18:14]
The best advice that has been given during this call is that advice. Plan in advance. I have to tell you that in the run up to the 2020 election, when the early polling, which of course, was wrong, suggested that there would be a blue tsunami, and if there were going to be a blue tsunami, there would be wholesale changes to the estate tax laws that caused lots and lots of our clients to get involved in taking steps to capture all the benefits before they changed. We got so busy that we actually had to turn away new clients. And I would really and truly hate for a client who needs to have this work done to not be able to get this work done, because the lawyers didn't have time.

Rob Strauss:
[00:18:14 - 00:18:34]
And it's not like we were going home at 04:00 in the afternoon and hanging out by the pool. We were working until midnight. Seven days a week I build. During that period, I billed three years worth of time in just 18 months. It was crazy how busy we were.

Rob Strauss:
[00:18:34 - 00:19:00]
We literally did everything we could possibly do to help as many clients as we possibly could and still couldn't help everybody. And that was a time when the law did not change, and none of the clients that we did help complained about the work that we did. They all understood that they should be doing that work whether or not the law changed.

Jim Puplava:
[00:19:00 - 00:19:26]
And that's the thing, because we all know, and there's a tendency with politicians, one administration gets in, they want certain things done tax wise, then all of a sudden, it flips. It goes to another party. They have their own agenda, what they want to do. And I think that to try to have some kind of plan or contingency. And I think, Rob, you would agree, this really applies to the type of clients we've been talking about.

Jim Puplava:
[00:19:26 - 00:19:41]
The large estates, the family businesses, illiquid. I have one client. Everything they own outside their IRA and pension isn't real estate. But we all know real estate isn't. You know, we're doing an eyelet and we're doing some of the other things.

Jim Puplava:
[00:19:42 - 00:20:10]
I want to talk about something also that people have used. Just say you're one of the fortunate people that bought Apple or Nvidia or something, or the magnificent seven. You've got these large, massive capital gains. A lot of the mag seven don't pay much in dividends, and you'd like to get out. But here in the state of California, you're going to pay 23, eight with the Obamacare tax, you're going to pay maybe up to 13, three on California.

Jim Puplava:
[00:20:10 - 00:20:21]
So when you add it all up, Rob, you're paying 37, 38%. Let's talk about charitable remainder trust as an option if you are dealing with massive capital gains.

Rob Strauss:
[00:20:21 - 00:21:09]
Yeah, I think that if you're determined to sell an asset like that with high value and low basis, so that upon the sale, there would be a lot of capital gains, I think you have to consider doing a charitable remainder trust. And it's not axiomatic that doing a charitable remainder trust would actually put more money into your pocket than not doing one and paying the tax. But it often is the case that that's a true statement. So we have clients who do charitable remainder trust because they want money to go to charity, and they'll do it, whether or not creating the CRT actually results in putting more money in their pocket. But most of our clients would rather do a CRT only if it puts more money in their pocket.

Rob Strauss:
[00:21:09 - 00:21:27]
So what does that look like? You establish a CRT, you identify the asset that you would sell, you give that asset to the CRT. Now, the CRT owns that asset. The CRT sells the asset. The CRT itself does not pay any tax when it sells the asset.

Rob Strauss:
[00:21:27 - 00:21:54]
So if it has an asset that's worth 100 and you give it that asset and sells that asset, it now has 100 of cash. It does not pay tax. The CRT then pays an annuity back to the client for a term of years, not to exceed 20 or for the lifetime of the client. And there's some math involved in connection with what that payout rate can be and how long the term can be. We always have to run the math.

Rob Strauss:
[00:21:54 - 00:22:32]
Distributions from the CRT to the client in satisfaction of that payment obligation are themselves taxable. Every single distribution is taxable. But the theory is that if the distributions are spread out over a long period of time, the tax is deferred over that long period of time, and there is real value in the deferral. The more capital gains tax there is to defer, the more likely it is that the client would actually put more money in his pocket by doing a CRT than by not doing the CRT and paying the tax upfront. It's not always true.

Rob Strauss:
[00:22:32 - 00:22:46]
You have to run the numbers very carefully and accurately in order to make that determination. But it absolutely can be true. And where it is true, client benefits in a real way, and so might charity. And that's pretty cool.

Jim Puplava:
[00:22:47 - 00:23:15]
I love this kind of thing. I wonder if you have just a couple of moments to speak about the QCDs, where I think the exemption this year for if you're taking a distribution from an IRA, you can give up to 105,000 to a charity, so it doesn't enter your taxable income and you've met your required minimum distribution. Can you speak to that for a minute? Because that's something that is hitting more people as the population ages.

Rob Strauss:
[00:23:15 - 00:23:36]
Yeah. So obviously, if you have a qualified plan and you reach the magic age, you have to begin taking required minimum distributions. Those distributions are subject to income tax. If you don't need the money, then you're receiving that distribution, you're paying a bunch of income tax. The rest of the cash is part of your estate.

Rob Strauss:
[00:23:37 - 00:24:21]
So there is built into the tax law, this really cool provision that sort of circumvents how an income tax return would work. It allows for a direct donation of that distribution from the required minimum distribution. A direct donation so that if, for example, it were $100,000, the $100,000 is not added to your personal income tax return and counts as income, and then you get a deduction for $100,000. But it's not a one for one deduction, and the net ends up being if you do it that way, you're actually paying some tax. So this really interesting rule allows for the money to go from the IRA directly to the charity.

Rob Strauss:
[00:24:21 - 00:24:27]
It never touches your tax return. You therefore never pay any tax. It's very powerful.

Jim Puplava:
[00:24:27 - 00:24:53]
Yeah, I have a client that's charitably inclined, and one of the things that we were able to do by using this is we kept them out of going into a higher bracket for their Medicare premiums because the RMD would erase their income. And most people don't realize there's six brackets for what you pay in Medicare premiums. So it was a win win. They got to give to the charity that they wanted to go to anyway, and we kept their premiums down.

Rob Strauss:
[00:24:53 - 00:24:59]
Rob, that is really clever. I just have to commend on figuring that out and doing that. That's very clever.

Jim Puplava:
[00:25:00 - 00:25:25]
Well, thank you. Know, once again, it has to work. They were giving to charity anyway, so this know killed two birds with 1 st. As we close, Rob, if somebody would like to find out more about what you guys do, and maybe they're in that category and, you know, I need to do something now rather than wait and just hope somebody will have the free time. How could they get a hold of you?

Rob Strauss:
[00:25:25 - 00:26:00]
Well, thank you for that opportunity. You could call and my telephone number is 310 553-8844 310 553-8844 or you could send an email. And my email address is rstrauss[at]weinstocklaw[dot]com.

Rob Strauss:
[00:26:00 - 00:26:02]
Be happy to help.

Jim Puplava:
[00:26:02 - 00:26:18]
And if there's one thing I hope anybody listening to this podcast comes away with, if you are in that situation, don't procrastinate, don't wait. At least explore the option and have things in place in case you need them, rather than rushing at the last minute and hope you get good advice.

Rob Strauss:
[00:26:19 - 00:26:23]
That is exactly the right thing to say, Jim. It really is.

Jim Puplava:
[00:26:23 - 00:26:25]
All right, Rob, as always, it's a pleasure having on the program. I hope to speak with you once again.

To speak with any of our advisors or wealth managers, feel free to Contact Us online or give us a call at (888) 486-3939.

Stay ahead of the market! Subscribe to our premium weekday podcast

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