The Laws of your Money with Ann-Margaret Episode 20

Episode Transcript

Speaker 1 (00:00):
The following is a paid podcast. iHeartRadio's hosting of this
podcast constitutes neither an endorsement of the products offered or
the ideas expressed. The following program is sponsored by New
York Priority Medical Care. Now it's time for the Laws
of Your Money, a weekly call in show with legal
tips to help you protect your money. Here's your host

(00:23):
and Margaret Caroza.

Speaker 2 (00:25):
Hello, and welcome to the Laws of your Money. This
is a show dedicated to protecting you from legal and
financial mayhem when it comes to personal finance. What does
it matter how diligently we save and invest if we

(00:46):
have a forty percent chance of losing assets to a
long term illness, an expensive breakup?

Speaker 3 (00:55):
Taxes?

Speaker 2 (00:56):
This can be a state taxes, capital gains tax, as
well as the threat to our wealth from ordinary lawsuits.
We all know we're living in a very litigious society
and we all need legal protections to keep other people's

(01:19):
myths off of our money. I am asset protection attorney
and Margaret Carosa joined today by my esteemed colleague, the
Reverend Paul Slatkus. Welcome to the program.

Speaker 4 (01:33):
Paul, Hello Anne, Happy Happy Easter.

Speaker 2 (01:38):
I welcome all of you to join the conversation by
calling us at one eight hundred three to one zero
seven to ten. Do you have a question about your
finances and the possible collision between your loved ones and

(01:58):
your finances, because if you have one hundred dollars more
than your brother in law, he is thinking of a
way to get it from you. This can be an
investment in his latest genius business plan, or alone that
he's definitely going to quote unquote pay you back next Tuesday.

(02:23):
So we need to be prepared for all of these issues.
The first topic that I want to talk about today
has to do with avoiding capital gains taxes. There is
so much misinformation going on around here that I want

(02:45):
to scream. I'm holding here an article from today's Newsday,
the so called ask the Expert column, and it's titled
tax rules for an Inherent House in Trust. So let's
take a step back before getting into the misinformation in

(03:08):
this ask the Expert column. When we buy a house,
let's say, for two hundred thousand, and it's now worth
one million, and we give it to children, one of
the many negative consequences is going to be that they

(03:29):
will have to pay capital gains on the difference between
the two hundred and the one million. What if instead
we put it into a trust. So the article starts
off by saying, correctly, if your home is in a

(03:51):
revocable trust, upon your death, it will go to the
named beneficiaries with all of those capital gains eliminated.

Speaker 3 (04:04):
Right.

Speaker 2 (04:04):
So that's accurate. The house and the revocable trust goes
to the named beneficiaries, no capital gains, no probate. And
I'm going to put you on the spot, Paul, what
do you think you know? We discuss this for many,
many weeks. Now, what do you think the downside to

(04:27):
a revocable trust is?

Speaker 4 (04:29):
You can't change it?

Speaker 3 (04:31):
No revocable you can change right?

Speaker 4 (04:34):
Oh okay, right, okay, okay.

Speaker 2 (04:36):
So the downside to a revocable trust and these devices
are very psychologically appealing. Right, I have a revocable trust.
I can be my own trustee. I can put the
assets into the trust. I can take the assets out

(04:59):
of the trust. No one is the boss of me,
but to the extent that I can get my hot
little hands on these assets whenever I wish. So can
my creditors. So can the guy suing me because he
tripped off of my front steps delivering an Amazon package.

(05:23):
So can my nursing home if I have a revocable trust.
Once the Medicare and Medicare supplement that first hundred days,
Once that payment source runs out, and I tell the
billing office at the nursing home that I have a

(05:43):
revocable trust that I did five years ago, they will say,
go revoke it and pay for your own care. So,
a revocable trust does avoid probate, it does eliminate capital
gain in appreciated assets, but it does not confer any

(06:06):
measure of asset protection with respect to the assets that
it contains.

Speaker 4 (06:13):
That's serious.

Speaker 2 (06:14):
Yeah, So for those of us who correctly want to
protect assets from all of the liabilities that are out
there in this crazy world, we do need to think
about a stronger type of trust. So between you know,

(06:35):
the two terms that everyone knows about. You have all
heard of, revocable and irrevocable. Between those two polar extremes
live dozens of different types of trusts.

Speaker 3 (06:53):
So the one that.

Speaker 2 (06:54):
We talk about most for purposes of protecting the home
and other assets visa v long term care expenses is
what I call a hybrid trust. We can also think
of it as an asset protection trust because the assets

(07:15):
that are in it are protected visa ve long term
care claims. But that type of trust is technically one
of the variants of an eer revocable trust. Now this
ask the Expert column again from today's news Day, says

(07:40):
that the home in an irrevocable trust does not qualify
for the step up in basis for the ultimate beneficiaries
of the trust, and that is simply incorrect. A purely
ear revocable trust, I don't know that I ever see

(08:05):
a reason to create that type of trust, you know,
any planning that we do. We want to retain what
I think of as a set of handcuff keys.

Speaker 3 (08:18):
Right.

Speaker 2 (08:18):
We want to be able to extricate ourselves from life's curveballs.

Speaker 1 (08:25):
Right.

Speaker 2 (08:25):
I might have a falling out with a beneficiary. A
beneficiary may develop their own long term care issues or
substance abuse, or you know, mental health issues that I
want to be able to get in there and make changes.
So there are irrevocable trusts where the grandeur, the person

(08:51):
creating it, retained enough rights to enable that asset to
go to the next generation free of all of the
capital gains.

Speaker 4 (09:04):
So do these trusts. Do they say on the trust
on the top of the trust instead of the word
just trust? Is it a type of a trust? And
is it written that way or is it the content
within the trust?

Speaker 2 (09:15):
Yeah, that's an excellent question. And you know, whenever I
do a seminar, people ask, you know, what is the
exact name of this trust? And the name that you
put on the face page is largely irrelevant because it
is determined. You know what type of trust is this?

(09:37):
The tax provisions, the legal provisions are based on the
language in the document. And I apologize to everyone in advance.
This trust has to have some legal ease. But whoever
you're working with, you should sit down with them before

(09:59):
you execut cute these documents. And you want to say,
where does it say that I have one hundred percent
of the right to reside in the property? Where does
it say that I get all of the income from
the investment property? On and on and on and lastly,

(10:19):
where does it say that I can change the beneficiaries?

Speaker 3 (10:23):
That is super important.

Speaker 4 (10:26):
So how does this work? You create a trust and
unfortunately somebody passes you have the trust? Is it the
irs that makes looks at that trust? Then they go
through it and they say X, Y Z.

Speaker 2 (10:39):
Yeah, Well, you know the IRS comes in when there's
an audit. Right, So the ultimate beneficiaries are each going
to go to their own tax advisor by April fifteenth
of the year after the death, and they're going to
be asked, have you sold any real estate? And chances

(11:01):
are they sold a piece of real estate from the
parents' estate. And if they are properly advised by their
tax advisor and the trust was properly drafted, they will
say that they have a full step up in basis.
If they are part of the unlucky four percent of

(11:21):
folks who are going to be audited, they need to
be prepared to show the irs the actual trust document
and their attorneys know exactly where they're looking.

Speaker 3 (11:33):
So back to.

Speaker 2 (11:34):
This ask the Expert column, which really annoyed me this
morning over my corn flakes. It does say that you
get an exception. You do get the step up in
basis only if the grandeur retained ownership rights to the

(11:56):
real estate. But where does that leave people wondering what
happens to the built in capital gains with a stock portfolio? Right,
sixty percent of Americans own their own homes, so that
leaves an awful lot of us who don't own a home.

(12:19):
We have savings, we have investments, and we simply rent
our apartment. And my grandmother Lorraine was in this category.
She had savings, she had investments, and she rented her
apartment in Brooklyn for I think forty seven years and

(12:40):
sort of funny, she was not technically rent controlled or
rent stabilized, but she had her own little informal way
of keeping the rent down. And what she would do
is pretend to be very poor. So it was a
family owned, little multi family apartment in Brooklyn, and when

(13:03):
she would leave the apartment, she would wear this beaten up,
tattered coat and then at the corner in her shopping bag,
she would swap that out for her ming coat.

Speaker 3 (13:18):
So she was very adept at gaming a lot of systems.

Speaker 4 (13:23):
Reminds me the Rockefellers would walk around with holes in
their jeans.

Speaker 3 (13:28):
Is that right?

Speaker 2 (13:29):
That's right, Well, Lorraine could beat them because when she
went to the supermarket. I've already shared that she was
a little bit of a kleptomaniac, So you know, the
the bins with the loose candy. You know her opinion
was those are samples and she was entitled to them.

(13:49):
But she and her boyfriend would actually take the labels
off of cans of food and with a sharpie right
hat food ten cents on it. So they got terrific bargains.
But once the stuff came home, you never knew.

Speaker 3 (14:08):
What was What was it? You know, artichokes?

Speaker 1 (14:12):
Was it? You know?

Speaker 3 (14:13):
Pasta sauce? Who knows?

Speaker 2 (14:16):
Yeah, So when it comes to a trust and the
capital gains, you need to deal with someone who knows
what they're talking about. Now, as an attorney, I am
not giving anyone investment advice. Conversely, I question why would

(14:40):
a financial advisor be giving legal advice.

Speaker 3 (14:45):
It's not that simple.

Speaker 2 (14:48):
So whether you get the step up or you don't
get the step up, it depends on the type of
trust that you have, if it's properly drafted, and your
loved ones will get the step up.

Speaker 4 (15:03):
I have a question here that was presented to me.
What is a life estate and how does it differ
from a trust?

Speaker 2 (15:11):
So I think a lot of people have heard the
term life estate, and prior to two thousand and six
I would create a fair number of life estates for
my clients because the so called lookback period, and that's
the amount of time that the real estate or other

(15:34):
assets need to be in a protected fashion before they're
rendered invisible for long.

Speaker 3 (15:42):
Term care purposes.

Speaker 2 (15:45):
Prior to two thousand and six, the life estate only
had a three year look back or baking period, so
compared to a trust, which was always a five year
look back, all things being equal, we would often go
with the three just to get that protection under our belt.

Speaker 3 (16:09):
So what is a life estate? That's where I, as the.

Speaker 2 (16:13):
Sole owner, transfer the home to let's say my three children,
and I retain lifetime ownership rights and that's in the deed.
I can stay there for the rest of my life
and Mary, Susie and Johnny are the de facto beneficiaries.

(16:36):
When is that not a good thing? Well, it's not
a good thing. If I end up having to go
to a nursing home and I'm out of the property
for a period of four months, there's a legal presumption
that I am not returning. And if the family tries
to generate some money to keep the property going by

(16:59):
renting it out, under New York state law, that rental
income needs to be paid to the nursing home. So
the life estate is not ideal. And what if there's
a tragedy and a child predeceases me with the life estate,
my son Johnny's one third interest, where.

Speaker 3 (17:23):
Does it go?

Speaker 2 (17:24):
It goes to his wife, who I may or may
not like, right, and now she can try and force
a sale of the property. And you know, it's just
not an ideal situation.

Speaker 3 (17:38):
Number one.

Speaker 2 (17:39):
Number two, the life estate only applies to your primary residence.
It only applies to real estate. You can't have more
than one life estate and tell a long term care
provider that they're all off limits. It will only apply
to the primary residence, and the life estate, unlike a

(18:03):
good trust, cannot protect other assets. So if we have
a brokerage account or CDs or savings that we also
want to confer some measure of protection on a life
estate fall short and I would say, I really haven't
done any life estates in my office since two thousand

(18:27):
and six.

Speaker 3 (18:28):
Yeah, all right.

Speaker 2 (18:29):
Next topic I want to jump into is for people
who have family businesses. Do you know eight out of
every ten jobs in the United States come from a
small business, and the sad reality with a small business

(18:51):
is that seventy percent of them fail to survive for
the next generation. It ends up tanking.

Speaker 3 (19:02):
And this is.

Speaker 2 (19:03):
Often a result of the failure to plan. So if
you have a small business and maybe it started on
a shoe string budget and it's grown whatever the business is,
a pizzeria, bagel shop, a linen delivery service, and let's

(19:25):
say it's now really successful, and you have one child
who is involved in the business, and you have three
children who are not involved in the business. How do
you bequeath that asset to the next generation. And if

(19:45):
you do not take special actions, I think it's nearly
guaranteed that that business will not survive because the child
who is involved in running the business may be forced
by the other three to sell it, to come up
with liquidity to buy them out. And you know, it's

(20:09):
often not the siblings themselves, who are you know, pushing
to sell the business. You have in laws in the mix,
and you know they want to cash out. So what
we want to do, you know, in general terms, with
a family business, the overwhelming majority of which are run

(20:31):
as what we call sole proprietorships, so they don't really
have a special legal structure. We want to create a
legal structure. This can be a type of corporation. It
can be a limited liability partnership. My go to structure
for flexibility is probably an LLC, a limited liability company,

(20:56):
and we take that business. We create the l LLC,
which issues one hundred membership units, and we want to
recapitalize those one hundred membership units to issue ten voting

(21:17):
units and ninety non voting units. The parent will retain
the ten voting units and therefore can retain all, you know,
business making decision over the entity during their lives. And
what do we want to do with the ninety non

(21:37):
voting units, Paul?

Speaker 4 (21:39):
The trust?

Speaker 2 (21:40):
Yes, yay, we want to put the ninety non voting
units in the trust because the LLC or the LLP
or the corporation in and of itself will not avoid probate.
You know, people think they did the ll see. Okay,

(22:01):
that's going to guard against liability, which it will. It
will not, however, avoid probate without the trust, and it
will not protect the value of those membership units from
long term care expenses or divorce. So we want to
have the ninety non voting units in the trust, and

(22:23):
then we want to say, upon the death of the
parent that the ten voting units together with ten non
voting units go to the child who is running the business,
and the other three children will each get twenty non
voting units. And now the corporate governance documents, the bylaws

(22:48):
if it's a corporation, or the operating agreement if it's
an LLC will say that the non voting membership unit
owners cannot force a sale.

Speaker 3 (23:04):
So that is.

Speaker 2 (23:05):
Going to protect this little business for the next generation.

Speaker 4 (23:10):
I have a question. Forty years my fortieth anniversary of
my own little business. I have no idea how congratulations
stayed in business. All the steers, But I'm an escorp.

Speaker 3 (23:21):
I think you're anes corp.

Speaker 4 (23:22):
Okay, yeah, so is that what we're similar to these things?

Speaker 3 (23:27):
Or is that well?

Speaker 2 (23:28):
I don't like to give anyone personal advice, but let
me ask you hypothetically, would the hypothetical Paul slack is
be the sole shareholder of SAIDs corporation? I am okay,
So then you, you or your friend would want to

(23:49):
think about recapitalizing the corporation to issue preferred and non
preferred shares of stock.

Speaker 4 (23:58):
I think they did that when they and I took
the corporation out. You know, the law firm who took
the corporation had you know X amount of shit preferred
and shares?

Speaker 3 (24:08):
Do you have a binder?

Speaker 4 (24:10):
I have a whole documentation I paid for to create it,
and that's corporate Okay.

Speaker 2 (24:17):
So yeah, if it issued preferred and non preferred, you
want to take the non preferred shares and put them
into a trust because the corporation in and of itself
will not avoid probate.

Speaker 3 (24:31):
Fifty percent of us have.

Speaker 2 (24:33):
Wills, but we don't want to have to rely on
that will because a simple will will not protect us
from having to go through probate. It's not going to
protect a minor child who's a loved one who's named

(24:54):
as a beneficiary in here. We want to, you know again,
change the conversation from who is getting my stuff.

Speaker 3 (25:04):
To how are they getting it?

Speaker 2 (25:07):
You know who amongst us doesn't have a screwball family situation.
This can be an estranged relative. It can be a
financial black hole.

Speaker 3 (25:20):
No matter you know how.

Speaker 2 (25:22):
Much money you loan them or give them over the years,
they still get themselves all tangled up in overspending and
financial mismanagement. That type of beneficiary needs to have their
share of your estate doled out carefully over the course

(25:44):
of a certain period of time. Otherwise they will blow
through their share of the estate and they're going to
make life a living hell for their brother and sister.

Speaker 3 (25:55):
Right who could?

Speaker 4 (25:56):
So this was way back when, you know, a long time.

Speaker 3 (26:00):
You're back on your corporation.

Speaker 4 (26:01):
So yeah, so the lawyers worked this out, or an
accountant works this out, or who makes sure that these
things are wisely done?

Speaker 3 (26:09):
Well, Paul, hopefully someone did, right.

Speaker 4 (26:12):
Yeah.

Speaker 2 (26:13):
Yeah, So if you want to next week for show
and tell, bring your book in. Happy to look at
it and tell the folks. So what you have in there? Yeah,
tell them you don't want any surprises. So you're saying
you did this forty years ago?

Speaker 4 (26:30):
Uh? Yeah, I did? I have two. I have a
for profit in a nonprofit nonprofit two thousand and two,
the other one nineteen eighty five.

Speaker 3 (26:37):
Okay, all right, bring your stuff in and let's see
the surprises that maybe they're better not be any maybe
lurking than the paperwork.

Speaker 2 (26:46):
I want to give you a few minutes to talk
about the exciting event you have coming up this week.
But I want to tell folks that next week we
are going to be focusing on a topic that we
have covered before. The month of May is National Pet Month,

(27:07):
and the overwhelming majority of us have pets, and we
don't think about the legal lives of our pets. Do
you know you can be sued, Paul if your dog
impregnates another dog in the neighborhood.

Speaker 4 (27:22):
Yeah, so I don't have a dog.

Speaker 3 (27:24):
Okay, you don't have dogs.

Speaker 2 (27:26):
But we need to protect ourselves from the mayhem that
our little furry loved ones can get into. And because
it's Easter, I promised my good friend Cecilia, who is
the biggest animal lover I've ever met, for those people
who were er responsible enough to gift little bunnies or

(27:51):
little chicks as an Easter gift to someone, and the
novelty of those little animals off, these little creatures will
not be okay if you just kind of let them
run free and release them in the wild, or put
these little ducks at the nearby pond.

Speaker 3 (28:12):
That is not good contact.

Speaker 2 (28:15):
Or responsible animal rescue organization to help you place these
little animals.

Speaker 3 (28:21):
So Paul, tell us about Earth Day.

Speaker 4 (28:23):
Okay, Tuesday, April twenty second, we're doing a concert. You
can see it on YouTube our Good News broadcast channel
We're doing it in Times Square. We welcome you to
come down from eleven thirty to four pm. We'll have
an exhibition area as well as a concert for four
and a half hours. It's maybe the largest Earth Day

(28:45):
concert in the world. Partners with the Borough President Mark
Levine as well as the founders of Earth Day in
an organization called home.

Speaker 3 (28:52):
How can people donate.

Speaker 4 (28:55):
Well, they can go to Pause the World for Peace
dot org. That's our non pit. We sure could use it.
It's a very expensive show. It's a gorgeous show. It's
going to be magnificent, awesome.

Speaker 2 (29:07):
Paul.

Speaker 3 (29:07):
Yeah.

Speaker 2 (29:09):
So with that, we're at the end of another show.
I want to thank you for listening, and I hope
all of you who celebrate Easter have a beautiful, blessed Easter,
and we hope you will tune back in next Sunday
ten thirty for the Laws of Your Money.

Speaker 3 (29:27):
Take care everyone.

Speaker 1 (29:40):
The preceding program was sponsored by New York Priority Medical Care.
The proceeding was a paid podcast. iHeartRadio's hosting of this
podcast constitutes neither an endorsement of the products offered or
the ideas expressed.