Charitable Giving – Brandon Davis

Estate Planning For Business Owners | Charting Opportunities | Erin Patterson

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Welcome. My name is John Sanders. I’m an advisor with Portus Wealth Advisors. Uh, if you all know me already. Uh, welcome to this month’s Charting Opportunities. Uh, welcome, sir. sir. At Portus, we do investment management and financial planning.

A part of that financial planning involves estate planning. Today,

we welcome Erin back. Erin is an estate attorney here in Charlotte. She’s been practicing for 13 years. Um, she has a team of six, currently two attorneys. Um, hiring for a third and growing. We’ve got a pair of legals and an admin. And she is the president of Portus. Um, I’ll say it one more time. Um, I’ve worked in patents all my life.

Um, I say that honestly. So, I, I just like all the kind of, you know, [00:01:00] in the media market. So, instruments, you know, hot tags, investments, cash flows. Um, you know, you can bring in a couple thousand dollars worth of foreign products and sell them for 10, 000. Okay? It’s great to be here. I’m really excited, again, just as I get started to say that Portus has been amazing.

I know a lot of the clients and folks tuning in today are business owners. So we’ve obviously tailored what we’re going to talk about today to really talk about estate planning for you guys and make relevant topics that are of interest to you, that are important to you, that you might be sitting at your desk either thinking about taking, or simply thinking about taking.

Hopefully some interesting topics with you. John has promised me he will sprinkle in some questions, and we’ll make sure we leave time at the end for questions as well for anybody who’s here or online. We will get started, and [00:02:00] what I want to kind of start with is really how I think about estate planning for business owners, which is that there’s really a multi layer cake, as I think about it, or hear it.

Um, so we’re going to kind of move through the phases here, starting at the bottom, which is the foundational level, right? What are the sort of things that every business owner should have? Um, as a baseline to basically, as I describe it, avoid disaster, right? Like, if the worst happened, have we at least covered the foundational stuff that would make us feel somewhat okay, right?

We’ve got to tackle that first. If we can tackle the foundational level and then move up a level, I’m going to talk about what business owners typically do after they feel like the foundational is set. And then at the top of our information, as you can see, there’s lots of legacy things. Once you’ve gone over the first couple levels, if we can really pick our head up and say, what else is out there, what [00:03:00] else could I be doing to protect my family or think about my business in new ways, that’s where I get really excited, not that the other two layers aren’t fun, but we’re going to spend a good deal of our time here together focused on that legacy piece.

So, we’re going to go through these a little bit, starting with the foundational side of things, right, and I thought really the best place to start is if there’s anyone listening or here today who said, This whole estate planning thing is intimidating. I’ve been told by my advisors at Portus or I’ve been told by other friends or family I should have this done, but I haven’t yet tackled it.

At a base level, the must haves for every adult human being, whether you’re a business owner or not, um, would be having will, a [00:04:00] financial power of attorney, and a health care power of attorney. This is just base level, right? The will will dispose of assets upon death, and the powers of attorney are awesome to help with things that you might need help with during your lifetime.

They’re not, not in, in, in play with that, certainly during your life. Um. Many clients, uh, business owners as well will often have or add to the mix a revocable living trust. That’s super common. Um, we get a lot of questions if you haven’t run a planning before about what a trust is, do I need that, is that overkill?

So we’re really invested, um, with my team on making sure people understand what a trust is and is it appropriate for every family. Now, at the risk of making an overgeneralized statement, I will say the vast majority of our business owner clients do consider and many end up implementing revocable trust [00:05:00] as part of their planning.

So, I will spend a minute on the advanced slide talking about why that works. But the main reason is to try and mitigate the possibility of your business having to be listed at death for the clerk of court, which is a public file. Do you want to list the value of your business with the county upon your death and have it go through that process or would you rather it be handled privately and quickly by your family, colleagues, and friends?

Most, most business owners are going to say black, right? So we’ll talk more about trust. Um, the other thing we often see is so maybe we’ve done these things in the past, right? You’ve signed those documents, maybe it’s been five or ten years since you’ve looked at them. So we get the question all the time, well how often should I be updating these documents?

Um, and I will tell you, I have another slide towards the end, but it’s generally speaking at least every three to five years. If [00:06:00] your documents are older than that, I would highly recommend pulling them out. Literally dusting them off and getting your advisor team, your attorney, your financial advisors to kind of help you review it and see if anything has changed, right?

I’ve spent three to five years sort of as the general rule that as business owners, I would say it should be more frequent. My general rule of thumb for you guys is one to three years. Because so much is changing with the business, with tax law has, um, with more of an upset situation, that it ought to be reviewed more carefully.

So, Erin, when I’m talking to clients, there’s a few different situations, right? So, it’s either I’ve got no documents, right? I need something. Um, I have documents, but I don’t know how old they are or if it’s been a long time. Or I just recently did documents, but I didn’t know it last year. [00:07:00] Um, and so, um, another situation, let’s say, you know, we know we need something, but we stopped all labels on them, and, and did those ones.

So, but, can you, can you just tell us on, why, I mean, I think it’s a good thing to do, and ask the question. So, I say, why attorney, versus, you know, more money? Yes. So, I’m biased. I am an attorney and this is my profession, but I will tell you, I’ve had documents come across my desk because we help families after a death, um, kind of navigate that court process or administer a trust, and I can sometimes look over what I see in the documents, um, if they weren’t prepared by a well qualified attorney.

What I mean by that is even if the content looks kind of okay, very frequently you will notice that there wasn’t the right witnesses in the room when it was done. Or there wasn’t a notary to kind of put their stamp on the document. The formalities around it can often be overlooked [00:08:00] or omitted. And then that in actuality makes the document ineffective.

So I highly recommend meeting with somebody qualified. The online, you know, tools that are out there are going to kind of try to have you check boxes and move through their questionnaire and then stick you in a slot. They’re not factoring in, you know, what is relevant to your business or your family or what you actually have going on from a tax perspective.

So, I highly recommend meeting with somebody qualified to avoid that. The last thing I want to clear is just like, the business mentions in your documents, right? Like, should my core documents be mentioning my business? Very likely, yes, right? It’s, it’s usually one of your largest assets if you’re a donor, and not accounting for them in your documents can lead to unintended consequences.

So, we have clients who will say, If I pass on your aid, I know I’m going to leave the [00:09:00] business to this family member. Well, that’s a clause that has to be in the documents if you want that to be effective, right? Or you know you want the business sold, we can direct that in the documents. You can also do things that are creative like naming a business sale advisor.

Sometimes we will include that as a special role setting a rebounding test. As the person you want to guide that sale process after death. So I highly recommend, again, if, if you have an appointment send it to someone that were done a month or two years ago and that are older, revisiting it to see how is my business being handled.

Uh, that’s, that’s really, really important to make sure that your wishes for regular business passes are met.

So that’s kind of, again, as I think about the foundational level, if you can kind of do some basic blocking and tackling, at least you can try to avoid the court process. We can try to handle some basic disposition of the business [00:10:00] at a base level. There’s not more you could be doing. And I do think revocable trusts, generally speaking, like I said, are attractive.

So, so, one of the good things, um, was, um, was to explain that, you know, generally speaking, um, to the public. Uh, one is naming the three, the people that we want to serve in the task force, right? So, uh, the will, the trust, and the cause and time, right? That’s one of them. Uh, we want to make sure that the people that we want to start serving, um, as well as, added to the, uh, if we pass away and we have no will and trust and it’s up to the state, right?

That’s right. Um, and we want to kind of control our assets, you know, the amount of that. Um, yeah. Excuse me, Senator. Yeah, just to interrupt there. We tend to be control freaks, right? I’m a business owner, too, so I’m not paying any money, but we’d like to know what the result is going to be, and our whole job is to plan it out and have it mapped.

If we don’t have the [00:11:00] documents, the state has a will written for you, and I guarantee you’re not likely to like what it says. Yeah. Yeah. There being, uh, prior Yeah. Yeah. Yeah. Okay. Um, you know, having that, those tickets of trust earlier, you know, I don’t know what else to say. So, yeah. Other, other objectives on the US kind of top three that we’re looking at to at least kind of make?

It’s usually the main. Who am I giving assets to? How are they receiving them? And then who’s in charge? The how, the who, those are the main questions that we’re addressing at this level. So, I agree with that. Yeah. So, let’s say we’ve gotten all that done. We’re ready to kind of move up.

To advance planning, right? We’ve gotten through the foundational level. We’re ready to take it a notch further. What do business owners typically start doing at that level? I’m gonna point out something that’s sort of obvious, but it is the number [00:12:00] one mistake I see all of my clients making, not just business owners.

When we have a revocable living trust. One of the key concepts is that it is like a bucket. You have built a bucket, a legal bucket. If you have not filled the bucket by moving assets into the name of your removable trust, you have missed a huge opportunity, which is the opportunity to avoid your business and other assets passing through probate.

In other words, signing the legal document is not enough to have the impact that you want it to have. So implementation, what that typically looks like with a firm like ours, is a written to do list at the end of signing documents that says now that you’ve built this bucket or this trust, here’s what you need to do to properly fund it.

And that is [00:13:00] where we can be really impactful, especially if you’re a Portus client, in working directly with your advisors to make sure these to do list items get done. Did the trust get funded? Did beneficiaries get updated? And will a plan actually work the way we intend it to work and what the document said?

Does that make sense? There’s really two, two levels of it. And if you stop at base level, you haven’t yet. Not only full delegate, transmitting the whole thing. Yeah, I think that’s one of the biggest questions that comes up in my friends is how do we do that? Different assets in the past, different, like life insurance, you’re able to designate them.

Retirement house, you’re able to designate them. Let’s say I’m a broker, right? That’s right. It’s the individual person that delivers the business. Um, whether it’s the real estate, the house, um, More important to looking to move into a local trust So that we don’t lose broadband. And what, I mean, I [00:14:00] think it depends on the state you’re in too, right?

That’s right. So maybe, um, a primary residence in North Carolina Doesn’t necessarily have to go to a local trust. But maybe in South Carolina it’s better to do it than it does. And yes, I would say that. Which assets need to be bonded? Yeah, great question. So we typically, again we’ll map out a client’s assets and kind of help them figure this out.

At a high level we typically don’t need to move retirement plans, life insurance, and real estate in North Carolina. Generally speaking stay outside of the trust. The assets we are moving into a trust are typically things like individually owned bank accounts. In other words, there’s not a joint loan at all.

Or things like business assets or individually owned real estate, right? Especially if it’s an estate other than not currently. So figuring that out, your attorney should be helping you do that, right? Again, we talked about engaging with that attorney. But they should be walking you through what does go into the trust and what [00:15:00] doesn’t.

If you walk away with any uncertainty there, you need to get, get clarity around it. Um, but y’all, not all assets come outside of your worksheet. Some come outside of you, and some outside of this year. That’s important. And again, really, I’ve worked with really, really smart, intelligent, amazing business owners.

We want to know the ins and outs of what they’re doing on a daily basis. I mean, zooming out and thinking a little bit more globally about what we learn and the nature of how it passes, that really is worth the time and energy to

Sell agreements up on the screen because again, many of us as business owners would say, well, you know, I don’t need my business. My business is gonna be handled according to the buy sell. Me and my partners already have this all worked out. The issue that I find there is that these buy sell agreements are nine times out of 10, not review frequently enough, um, and they can [00:16:00] have clauses that are, for lack of a better word, just outdated.

So we see things all the time that say, if one business owner dies, then, uh, there’s a mandatory buyout, right? The estate must sell the interest back, and the company must buy it back. That’s fine, but have we looked at the flaws for determining the price of the business? A lot of times, decades have gone by, or years have gone by, and formula flaws or extensions of the agreement that said prices can get really outdated.

So it’s more of a progression and kind of making sure it’s up to date. What a lot of folks don’t realize is that that buy sell agreement is a contract, right? You have a forfeit contract when you sign up your business partners, and that contract will override what your original interest is. So sometimes I think business owners get confused and think, well, am I putting in my bill what I want to have in, but if the buy sell contradicts it, [00:17:00] that can create a conflict, and the contract is what sets up the buy sell.

Please make sure you buy something that’s completely reputable. Karen, is that bond sale agreement part of the operating agreement? Is that what you’re referencing or is it an outside document? Good question. Usually part of the operating agreement. It’s usually a special article within your operating or your shareholder agreement that says what happens, it’s usually called like transfer restrictions or transferability, what happens if an owner dies.

Every, almost every business owner I meet with and I ask At the first meeting, what does your by sell say? We don’t know. Right? We’ll have to look at it. Um, just a moment. Some of us are ready. I just want to make one point in my presentation. We’re pretty religious. You said this from one minute on. Why am I Muslim?

Yeah. Yeah. So, with that one, you’re seeing disastrous results, right? Because you might think, even if you have one business [00:18:00] partner who’s your best buddy that you’ve known for decades and you tell me He’ll take care of the family. He’d buy it out and pay, pay my wife or my husband. It will not happen. I have seen disastrous results.

You want it in writing for the same reason you want the estate plan documents in writing. So that you have certainty and your family knows that things are going to be handled and governed according to the actual document. Not left to chance. I’d say most of the time a spouse of a business owner isn’t necessarily interested in still earning a business right, but they’re looking for the value, right?

So disagreements can happen. They look at the value of their spouse, and that’s why everything’s the value. Like they’re saying, it’s important to make sure that that’s up there. That’s great. Absolutely. Um, and then once you have the plan to get a transfer funded, you’ve got to find a spouse where you need to get them.

This year in advance, but just [00:19:00] communicating to key stakeholders what the plan is going to be for the business. You know, it makes the employees, whether you realize it or not, uncomfortable to think about, especially if there’s one business owner, what happens if this pet poncho is gone, right? Then what?

Um, so whether it’s communicating it clearly to employees that there is a succession plan or a plan in place, or even among the owners or business partners, I think that’s a critical step. We very often do see business owners approach a state planning at similar points in time, which can be very collaborative, right?

Not that you have to have the same attorney, but if you’re working with an attorney, and this one’s working with an attorney, and you’re working with an attorney, there can be some, you know, benefits of scale, right? If we want to get an appraisal done of the business, we can do that all at the same time, and we can pay for it.

But if we’re not communicating it to folks, there, again, is just a chance of competition. Um, and then I want to make the point too, not just [00:20:00] within the business, but also to folks like John was just saying, spouses, right? If I die suddenly gone, and I’m a business owner, does my spouse know who to call, what to do, how to extract the value out of this business?

Or is that going to be an overwhelming thing for them? Um, in the content you sent out, kind of the presentation today, I’m going to be saying a little bit about the content. I’m going to talk through this a little bit. Um, prior to really getting a lot of this planning work done, so even I, in Denmark I believe it was horrible and tragic, but the worst part is his wife coming back to the United States, not knowing really what the plan was for the business that he was the sole owner of, and trying to extract what value she could from it, while simultaneously running the business.

So, it was a highly uncomfortable time for her for many reasons. Um, ultimately ended up selling for what we [00:21:00] have, the value that you probably could have thought of. She was still living and there had been more coordination while on the fly. So, we want to avoid that. Aaron, I was, I was thinking that, you know, typically people think about, you know, debt as a trigger.

But there are other triggers that I think are under Under, uh, recognized that’s work and such as disability or people retiring or leaving or, you know, being guilty of some kind of malfeasance and being enforced. That, and, um, and the other thing I was, I was thinking about is that, that the form of the agreement matters as far as whether it’s redemption, uh, or a cross purchase.

And that has implications as well. Absolutely. Thank you, Gerald, for bringing that up. Yeah, so what he’s saying is basically, again, when we look at that transferability article in [00:22:00] the document, there are different ways to structure that. And again, you may have signed that shareholder or operating agreement years ago and not really understood the impact of it, which is why it’s important to have your advisor team look at it.

When we consider whether the stock is going to be bought back upon a debt, Or whether we’ll focus more on a disability scenario or some other. Uh, life event that might unfold. This one just wants to sell to an Apple Sonic person. Is that allowed? Do they have to first offer it to the other owners? At what price can they sell it?

All of that is super, super important. And life insurance really can come into play if it’s a cross purchase kind of situation. But getting an insurance expert involved is obviously critical to making sure that that is appropriately set for insurance coverage to cover what the price is supposed to be affordable.

There will be no insurance professionals in this room, I’m not sure. He’s the expert, in other [00:23:00] words. Call him in. So, so that’s kind of the advance planning side of things, which really brings us to where I get really nerdy and excited, and that’s the legacy planning, right? If we’ve covered the basics and we’ve got all of that in place, what else is there?

This is sort of the peak because many business owners, again, might have checked the box and said, Yep, I have an estate plan. Yep, we want to have a trust. We should be good. But the bigger picture is really focusing on, again, extracting value from the business in the way that you intend, which will look different for every buyer.

Is it that we’re trying to sell in two years, right, and liquidate? Is it that you want to pass this business to future generations and see it live on well past your lifetime? Whatever those goals are, if they’re not being talked about within a state planner thoroughly and often, they should be. So let’s talk about some of this.

The first thing we have here is optimizing the [00:24:00] business structure. What do I mean by that? So we meet with a lot of business owners who are scrappy and amazing and started it from the ground up. And may have grown into something that is well beyond what they ever imagined, but along the way, maybe didn’t stop to structure or think about how they could better set up the legal side of things in a way that makes sense, not only for now, but for future, and again, extracting value upon debt.

A lot of our business owner clients have multiple operating entities. And so we often see folks setting up holding company type structures and then rolling underneath it their operating entities. What does that do? Well, if we have one holding company at the top, it’s easier to do estate planning with, it’s easier to get bigger discounts when we’re trying to value the company for federal tax purposes, and it really can go a long way to making sure that that’s set up [00:25:00] correctly and we can maneuver more easily.

Um, I’ll give you an example. I have a client who is a Titan, Conagary, Charlotte, restauranteur, business owner. Started the, the company decades ago. Amazing success, right? Still around today. But the issue is that there, over time, were multiple LLCs created. And everyone had different ownership and partnership.

Oh, and then we had some real estate locations, right? So if you look at things in terms of ownership matrix, It is a little bit of a mess. He’s now ready to sell to try to liquidate for his family and build some legacy wealth. But the issue is that outside buyers are not finding that structure effective.

And he doesn’t know, even if he’s going to sell to other partners again, how to structure it in a way to actually extract the value. Do you know why? The buy sell agreement was never done. So, they are basically operating with just a [00:26:00] handshake deal. He’s that friend of mine. Um, but we’re struggling right now to come up with ways to bring everybody back together.

Because the other owners obviously think that they have a stake in making this thing. When he’s really the founder and we want him to be setting it up. So, if you haven’t looked at the type of tax classification you have, Should I have a holding company or not? Am I structured correctly in conjunction with your other advisors, CPAs, and, and others?

I would highly, highly recommend doing that. Um, and it will make the state of New Britain. Also, a question, um, Chris Rosey in terms of different LLCs represent Rosey services and holding companies. Um, I have a question that I get is What’s up with LLC, right? Should it be in Ontario, should it be in Wyoming, should it be in Delaware, and what state is LLC going to be tonight?

Yeah, so good question. Um, and y’all probably see more than I do. I typically tend to [00:27:00] recommend that my clients here that are based here are setting up North Carolina LLC. Um, not that there aren’t advantages in some of the other states mentioned, but generally speaking, if you’re operating a business here, I find pretty good advantages to doing business here in our home state.

Trust, we often go outside of North Carolina, so there are states that have better state law rules when it comes to where should I create a certain type of trust, and that often is where we’ll look outside of our own state, rather than who is responsible for it. But do you see, do you see that? Do you see a lot of clients coming up in Wyoming or Delaware?

Not a lot, not a lot. I think they’re always going to pay for clients that are coming to us. Yes, that’s true. That’s true. That’s right. That’s my general opinion. Um, here’s where I think I can relate [00:28:00] as interesting, and this is where we usually introduce your critical class students. So we talked earlier about the local trust within ARD.

The ear pickable with an eye version is a whole different ballgame, right? Why are these usually introduced? Well, as I explained it to folks, it is usually to pick up an asset and move it off of your balance sheet. out of your taxable estate. That’s the most common reason we see it done. There are other reasons, active protection and whatnot, but in order to, to kind of say, I don’t want this in my taxable estate or my estate has grown so high that I’m worried about taxes, irrevocable trusts were sort of a separate bucket you build to And what we’re typically doing with those is utilizing lifetime gifting to move certain assets, right, out of your estate.

That might be a portion or all of your business, or it [00:29:00] might be things like cash. You can move all sorts of different types of assets to your bank. So, tax monetization is usually this round review, the legacy phase. Again, that really applies to all different shades and types, per se. I don’t care if my kids have to pay taxes, not a big deal to me to over, literal, my literal dead body before they pay taxes.

We need to do everything we can to lock it down. This is usually a critical trust where we can try and minimize, um, the income, the state taxation between people who come in and say, I want to save taxes, but I usually get real worried over what type of taxes are we worried about? Your income tax bill this year, or what your kids will eventually have Um, and increasing planning techniques is really going to come into play if you’re contemplating at any point, at any point selling your business and you have not talked to an estate planner early about it, [00:30:00] I highly, highly recommend it.

The reason is that we can actually gain a lot of advantage by doing this early and before there’s an LOI or some other commitment to sell the business. Once we have an LOI in hand or that commitment’s been made, my ability as a planner to do a lot to help you goes drastically down. Why? Because you set the value of that business with a third party, right?

The LOI says I’m going to sell my company for five million dollars. I can’t then come in as an estate planner and argue for gifting purposes that the business is worth less. And therefore you’re using less of your lifetime tax exemption. I’m using a lot of new terms. So, I’m going to look to John to slow me down, and I’m going to explain more of a couple of them on the next slide.

So, what we’re talking about in, you know, the states, right? And so far, yeah. [00:31:00] 2017. Right? That, uh, that lifetime exemption bill, we’re looking at 14 million. Um, and then the legislation also says that after this year’s tax exemption. Right. So the thing is that using logistic gonna that right? It not less than that.

Um, I know you don’t have a crystal ball and you don’t know what Congress’s gonna do. Are they gonna maket mm-hmm . Right? Are you getting a lot of rush to get document done and still use it before you lose it? Or are people saying, hey. The way the elections went, it’s going to be fundamentally fine, and if they do feel that way, then what’s the advantage of going ahead and making an effort to win irrevocable trust, rather than you just kind of pick it up and hand it over to the court?

Good question. Yeah. A lot of folks, I would say, are taking the wait and see approach, you know, especially now that we’ve gotten through the election, and we know kind of the makeup of finalized decrees in the White House. There’s less chance [00:32:00] when you think, generally speaking, that the exemption amount is going to sunset when it’s set to do at the end of this year.

So, it’s probably not going to be there. They’ll kind of, first of all, they’re going to say, don’t hold me to it. But I think they’re going to end up extending. The question is, what will that look like, right? Will they extend it for another four years? Or because of deficits and other things, will they extend it for two years, right?

Even if they do a two year approach, it’s still not as fun in one way. So your follow up question is, well, what do I do about this, right? Like, do I go ahead and give now, or is it better to wait and see? My answer is always going to be it depends, right? I’m a lawyer, so that’s my go to. It depends on your situation.

Um, the advantage to making the gift now, to the extent you’re comfortable and able to do it, is that any gift made now, you’re freezing the value of it currently, and whatever you’ve [00:33:00] gifted and moved off your balance sheet can then grow, right, at the state tax rate off balance sheet. Um, so, any waiting to see just means you’re losing that growth and that appreciation of that achievement, which could be happening for your kids.

Awesome. Well, those are most of my assets at my home, or at least. Yeah. Alright, so if I’m going ahead and making a gift, it’s going to be different than Christmas. Sure. And, uh, a gift to an irrevocable trust, knowing that, To be able to leave and get a financial aid. I can’t retain control over that, right?

But can I still control and run the business the same way? Can I still get to be responsible? Yeah, love that question. So, the most common way to address that is to consider creating non voting units of the company. Um, but you would retain all the voting units for the company. Um, whenever that was done at the start of the company or is in place now, you know, usually isn’t relevant, but you can always revisit the [00:34:00] operating agreement or the company shareholder agreement to create non voting shares.

It’s much easier in a state planning context to be playing with non voting units so that you, the business owner, still retain voting control to the extent you want to. Good question. Yeah. Most business owners aren’t readily giving up control of their businesses. Um, we didn’t have any, you know, we didn’t have a chance to raise much on some of this, but we’re working on these state exemptions currently being 14 million from our area plan.

And that means again, if you’re married, you’ve got 28 million available, almost as like a coupon. And you can deal with it as you’re on your way. Or you use higher debt with time for beneficiaries having to pay for state tax. The estate tax rate is still set at 40%. I don’t see that changing. There’s not talk of it changing.

But that really applies to any amount over and above the exemption [00:35:00] group on that that you’ve got. So getting a good appraisal of your business, which I’m going to talk about here, is really important, right? A lot of business owners, maybe, would say, I don’t know if I have some support. I have no idea.

Which is normal, right? You’re not tracking anything on a daily basis. I think I had a speaker recently, um, who’s an appraisal expert, right? Um, and we highly recommend, if you’re going through any sort of advanced estate planning, having an independent appraisal done by a qualifying appraiser, like Rob, who was here, um, at one of the presentations, to kind of get a sense of what is at work.

And could I apply discounts, right? The biggest misconception I see business owners tell me is, well, we want the appraisal to come in high. I think the business is worth 25 million dollars I want it to come in as low as possible. And this is often what we want business owners to grasp. Why do we want a low number?

We want the low number because [00:36:00] the lower the number is, The less of your coupon you’re using up when you’re gifting it to a bureau of trust, right? The higher the number, the more of that you’re using to take the white out. So, we can later on discount, and folks like Rob are skilled at doing that, based on lack of control, if you don’t own the business 100%, and lack of So, you’re going to be able to go up to the street and sell it to somebody.

So, those discounts can sometimes add up to 25, 30, 35 percent. And that just means that you’re using less and you’re paying off for a safe tax purchase. Um, I won’t go over all these points again. John touched on it. It’s a use it or reuse it. So, we need

to use that exemption or it goes away. Um, if the son said it first, and you’ve already gifted 14 million, you’re golden. You did it when you could, but if you wait, and it drops to [00:37:00] 5 million, you’re capped at 5, right? So, it’s a use it or lose it concept. The IRS has said they’re not planning to claw back in future years, meaning, again, if you gave it in a year when you could, you’re good.

They’re not going to come back and say, well, now we’re taking it back since we’ve never turned it back to you. The benefit I’ve found for you is that future appreciation occurs outside of your estate to the benefit of whoever you want to benefit. Is it your spouse? Is it your children? Is it close friends or charities, right, that you want to benefit?

Moving it out of your estate lets that growth happen off of your balance sheet and helps the people that you want to help. The biggest question we get asked these days is, well, how much should I be gifting? Right? Like, how much of my business would I give away? Is there a magic number? The answer is there’s not really a magic number, right?

It’s always going to depend on your comfort level and making sure that you, number one, are taken care of. We [00:38:00] haven’t given away more than you might need. Um, but now through that level, it’s just kind of saying, Well, you know, HomeCuts cannot afford to give based on federal law. So, at the moment, I’m telling clients, unless you’re giving more than five or six million dollars away, you’re not necessarily moving the needle, other than getting that appreciation that happened outside of your estate.

Right? Um, and that’s because the exemption amount has dropped to five or six million. You can still do that next year. Does that make sense? Okay, do you have a complaint? And then

finally, yeah, just the need for access and resourcing, right? So we’re going to talk about gifting a portion of a business, or cash, or real estate, or anything that you own to, like, your reputable trust. Do you still need access to it? And if so, there are different sorts of strategies you would avoid for people who say, Oh, I still need that, or I might need some of that.[00:39:00]

Because one of the key concepts with peer reliable planning is that we’re normally sacrificing some level of control. To move it off your balance sheet, right? The IRS is not going to let you do that and then have all these strings that allow you to pull things back or change your mind. They want to know that you’re done, given that, and it’s out of your, uh, like, that’s really important.

And the last thing, right, just related to timing considerations, I always am surprised at the number of folks who say, I’m ready to do some advanced estate planning or legacy type planning. I need it done, you know, three weeks. I hate to tell you this, but it’s not just, you know, that that’s not enough time for me to do my job effectively, because you need to explore which strategies you would be using, talk about all the ins and outs, and make sure you’re comfortable, but it also requires a lot of coordination with other parties.

So again, whether that’s your financial advisor [00:40:00] assuring us that you have enough to give or your CPA saying, yes, that’s going to work from a tax perspective, right? We’ve got to pull in the whole team, and that does take time and runway. When it comes to appraisals, right, again, going back there for a minute, anytime we’re going to employ one of these techniques and we happen to have an appraiser we pulled in, their typical runway often is at least a couple months, right?

They’ve got to go through the financial. Um, and that takes time too. So I highly, highly recommend, you know, even if it isn’t really on your radar today to be selling your company, it would still be worth a conversation to understand what the typical runway looks like. And my minimum, what I tell people, is at least six to eight months before an LOI is in the air.

I would not look to do planning if there’s an LOI already here or we’re selling Vexcon. It’s just much harder to unfold currently. Part of that would be to stick to the statute in section 2, which is a legal document that [00:41:00] said if we did 2 minus 2 plus 2, the IRS can come in and say, I really didn’t do 6, 1, 2, 3, 4.

No, we went ahead and did 1, 0, 4. And I did 1, 0, 3, 4. We want to avoid that because they can come in and call a lot about paying for a major amount. Uh, so no wrong ways included.

Yeah, so just in terms of gifting and irrevocable trust, right, there are a lot of strategies in terms of irrevocable trust from, uh, if you’re doing life insurance trusts, if you’re doing life insurance and you want to use that strategy. Uh, if you’re, if you’re philanthropic, there’s charity for us. And so we can give some charity, we can also give some gifts there.

Um, and then, you know, the biggest thing that, uh, the biggest hesitation that clients have. As they say, I don’t blame you, you don’t control them, because I don’t want that. Right? And so, I know that, that slides became pretty popular [00:42:00] a few weeks ago. Um, because you’re able to, kind of, make a good, sort of, a, a trust that would benefit the styles that they needed.

Are slides still, kind of, a hot tool to use? Or is it a really old strategy that you’re seeing a lot of recently? Is there anything, frankly, you haven’t quite seen in a while? I definitely would say SLATs are the most popular, and to break down that acronym, again, it’s Spousal Lifetime Access Trust, or SLATs for short.

And that is essentially you taking the trust for your spouse and giving assets to them. It usually only works, right, if you’ve been married a long time, because you’re counting on your spouse to still give you some indirect access to what you do technically and what you don’t need today. When you can’t get really powerful, and it’s popular for that reason, because the client who said, I might still need this, I’ve been married 20, 30, 40 years, that’s a great strategy and being often, often employed.

Last [00:43:00] two on the IRS, they’re not necessarily attacking them if they’re done correctly, and if we don’t run about, like, step transaction rules. So we like to build in a lot of Kind of spacing in between to make sure that that’s done correctly. That’s the most popular feature right now. Excellent. The other one that I think is just confusing is like, if you’re like, I kind of like the sound of all this, but that all sounds fancy and complicated.

We have a lot of clients who are saying, I’m ready to kind of dip my toe into the gifting world. Um, but I’m not ready to go full throttle or give any of my business. Maybe you’re pulling large distribution better, and you could say, why don’t I start just kind of putting some cash aside for kids, for example, who can create irrevocable just kind of children’s gifting trusts, that if we don’t even grow up, like, more gradually, we may not have cash, but more financially, you can send cash out to grow for your kids in a way that can really benefit them and also you.

When [00:44:00] do we set up irrevocable trusts, both types, class, or like children’s trusts? Usually the person setting them up stays responsible for paying the income tax, which is a benefit, but sounds terrible. It’s a benefit because if you keep paying the income tax for your body and continue to leave them in their own state, while that happens, you’re only for the benefit of keeping them for its benefit without them having to pay that tax for their body.

We’re going to talk about, this is the last slide that I have, just like, how to file an update, and what does an

exhibit look like, and then we’ll, we’ll open it up for questions. Uh, so I touched on that on the start, you know, again, just generally, usually three to five years commitment along with business owners, I see one to three years. The most frequent changes we see, again, have to do with family. Right? How often does someone [00:45:00] pass away in your family and it’s tragic, but you don’t remember that they’re named in your plan, either as a recipient of assets or in a key role that needs to be swapped around.

Outset for funds is always changing and in flux. Sometimes this confuses those who think, well, you know, the whittling of the transcript happens all over the mouth of what this asset is worth. We never do that. We don’t do that. But, if your assets have grown significantly, it’ll need you to revisit how your trust is structured, or what it means if you pass away from a tax perspective.

It’s worth revisiting as assets evolve. And then the laws are always changing. We talked about one of the biggest changes today that we have on the horizon, which is the sunset of the Tax Cuts and Jobs Act 2017. Um, but there are other laws that are more workable. I’ll give you one example. Um, We have a lot of clients who say, I did the foundational planning, I have a will, I have powers of attorney, and I say, great, but when [00:46:00] was that power of attorney signed?

Oh, you know, 2016. 2015, maybe even. So, state law was rewritten in 2018 related to powers of attorney, and so, not that you can have it over when it’s invalid. It’s still valid. But it doesn’t have the latest and greatest of what, like, a bank would expect to see, um, if your agent were to try and use that document.

No. So, regularly, kind of, updating and reviewing things that you would just probably be totally unaware of is important, and a lawyer should be avoiding this. I’m going to go with that. Yeah. So, I’m going to have a voluntary financial self care. I’m able to name someone that is able to make the decision for their financial needs.

Yes. Um, my kids, as they get older and they’re turning of age, they also should have powers of attorney. Yes, yes. Thank you for asking that. I see this all the time, right? As each of our kids kind of gets to that 18 and [00:47:00] they’re going off to college age, they absolutely should start exploring at the foundational level.

There are no documents that say, My parents, I’m one of my son in law. We think, oh, we’ll always be in charge. They’re in college. I can still make decisions. Absolutely. So they would need to have at least a basic financial power of attorney and health care power of attorney before they leave for college.

Uh, I don’t think I would recommend it. What I feel like learning about mostly depends on what assets they have. Like, even if they have a small bank account or something like that, I think having just a basic will drawing makes really good. So, seduce, um, talk to your advisor, kind of have a game plan, maybe read, grab documents.

Um, once the documents are signed, then we’re funding your notable trusts, right? Yeah. Yeah. Yeah, yeah. Whatever proves safe in your house. [00:48:00] Um, a lot of it is still kind of an outdated conception of like, keeping a bank safe deposit box. We don’t typically love that, or are hard to get into, especially if you’re not a signer on the account.

So I just want you to know, basically, fireproof locks kept in your house. And here’s something obvious. Ready? You have to know your key, where that safe is, and how to get into it. You can’t have actual family members have to bring space to, like, locks and escapes. They don’t know where the key is or how to get in.

And there’s only usually one original well that needs to be located, and so that can be filed.

Yeah, um, you talk about revocable trust. Yes. What, what sort of uh, there must be some threshold where if I have a dollar on that word, it doesn’t work. Like, you’re not going to set up a revocable trust and transfer a dollar into it. Right. What, how do you describe the [00:49:00] threshold where that starts to make sense?

Yeah, great question. So, in North Carolina, like, although the legal answer first, if it’s 50, 000 or less, it’s considered an uneconomic trust, so I definitely wouldn’t consider it, you know, as a base level there. Most of our clients, you know, who are considering trust, I would say have at least a million or more in assets that would be moving to that trust.

That’s a general rule of thumb. Again, I have some kind of more elderly clients who say, Well, I’ve just got my house and my basic checking account, maybe they’re not worth a million, but they’re trying to really improve this and make it just a little bit greater. So, not only is it a dollar a trillion, but I would say it’s kind of a general rule of thumb.

And it’s a way of identifying the beneficiaries that we’re seeing. I met with a client this morning, they have five kids, you know, if they’ve got a million going in, by the time you triple that out to five kids, it’s probably not worth retaining each one. So, looking towards the [00:50:00] future is important. So, value and level of complexity.

Yes, yes. So, if I just have one account that’s in my name, I’m going to appropriate that with its, uh, investment account. I could put it together and you can transform that, uh, with where they, you know, in the Chicago area. That’s right. It’s a pen. My favorite thing. Correct. You know, they mentioned the philanthropy and uh, philanthropic trust, um, and he was asking about threshold and I was wondering about that with respect to charitable planning, uh, and whether or not business owners, generally speaking, are receptive to that as part of the, part of the planning.

Charitable planning? Yeah. Let me see if I have the statistics on that journal or how many of mine are actually interested in it. They’re real interested in the benefits that come along with the charitable planning from an income tax [00:51:00] perspective. So sometimes pre sale, you know, there’s a sale that might be appropriate to get a box of water in a month, I speak, but a couple months out.

And it can be strategic like moving some of the stock or ownership of the company to a charitable trust and getting the immediate income tax And later when the company settles, later you basically are having that help. That your stock was held by that charitable trust. That can be a real, a real benefit.

I don’t know that I would say though that the vast majority of my clients are charitably inclined. Business owners, I would tend to think more about legacy for themselves and their family, generally speaking. But I love building in charities, and there’s a lot of different tools you can employ, if that’s important to a family.

Donor advice funds are huge too right now. We love those from an income tax perspective because we’ve shoved the money in, we get the end of the year right off, which is great. Um, so we’re seeing a lot of different funds. Everyone makes [00:52:00] it great here today. Close, close. Yep, yep. Tune in next month. Um, our speaker and our next event is going to be on that side.

Uh, dates, kind of stuff, more slow. Uh, go back to, um, earlier. You mentioned, uh, kids as they turn 18. Um, can you talk a little bit about who makes, you know, parents estate plans, but kids estate plans, as they get bigger on 18, late 20s, and early 30s, and how do you, That’s basically it. Yeah, yeah. I love when kids start hitting kind of their mid twenties.

It gets more interesting, and we start having more conversations with our clients about, Would you like to bring the kids in? How would you envision we start talking to them about this? We talked about communicating to key stakeholders. Usually kids are right in that mix, right? So I have some clients who say, I’d like to share [00:53:00] the structure of the plan with them, but I don’t want them to know every dollar or cent that I own.

Fine, right? What we’ll do is back out the asset diagram that we put together and just leave the flowchart arrows. Here’s kind of how it works and who you’d call if something happened, right? Those are interesting conversations and most of my clients have kids, again, fortunately, who are doing well and capable of like, taking that information in and digesting it.

And I think at a base level, at least knowing who to call if something happens is really, really important. Things get super interesting if it’s a client who says, Great, I had a guy last week who sold his business for 30 million, I think, a year ago. and said, I have three adult kids. I’d like to start transferring some wealth to them.

What’s the best way to do that? But I’ll just look at it, you know. So he’s got three adult kids. We talked through that children’s trust strategy I mentioned. And we actually brought all three of his kids into the office. We got to explain to them, here’s the [00:54:00] structure mom and dad are creating. Here’s what it means for you.

Here’s how this will unfold. Here’s who you’re going to talk to about it. Um, that’s really impactful. I love those sorts of family sessions to kind of get to see generationally, how is this wealth going to transfer? And in that scenario, right, mom and dad are starting with like millions each kid, but have plans over time to transfer more as they watch other kids actually clean the lab gift.

Wasn’t that a really powerful way to introduce them? It’s supposed to be an extra million for them.

Yeah, yeah, it just takes a couple, so, yeah. Karen, I was wondering when you were talking about kids that are doing well, what if they’re, you know, they have a black sheep that’s not doing well? Yeah. And I know there’s incentive trusts, um, that are done. Do those work well, um, or, um, you know, in terms of making a more favorable outcome, like providing some [00:55:00] incentives?

Yeah. Yeah, I don’t necessarily love that approach. Um, I have found usually if those sorts of issues are at play, whether it’s substance abuse or drug problems or whatnot, I don’t know that necessarily saying I’m going to incentivize you with these legal documents or dangle the spirit of wealth over here is my favorite approach.

Um, however, what that does bring up is that the documents should account for those possibilities even if your kids right now are golden and never gonna have them. You think? They could, right? So kind of building in the what ifs is what we typically do. Our documents are built to be comprehensive. To say in the future if a beneficiary has a sort of issue, here’s how the trustee is directed to respond.

And I think that keeps the plan flexible enough to account, account for the ignorance. Awesome insights. Appreciate you coming. Thank you for having us. We’re here. We’re here.[00:56:00]

We’re online. If you need to get in touch with us, you are available. Yep, my name and contact information. We’re local, obviously, in Delaware. Um, very close to the Port of Salt. So, happy to chat through anybody that has questions and kind of stay in touch. Um, if it’s not me again, it’s Johnny Slade. We’ve got a whole team that can assist.

I’m happy to be here. Thanks for having me. Great. Uh, can you guys sign up for the 12th for Vegas National Orchestra? March 12th, right? Yep. See you then. Thanks.