Transcript Edited For Clarity

Scenario: “Discussing the Secure Act, generation skip taxes, and ensuring that your grandchildren receive the gifts that you want to give them when you pass away.”

Enpo: Good morning! , this is Enpo calling on behalf of My Financial Coach. Joe, I’m glad that they were able to connect and one of the things that we’re doing is reaching out to some of our subject matter experts to learn a little bit more about a few topics that our listeners are interested in. But, before we move on to today’s topic, why don’t you go ahead and give us all a little bit of background about yourself as well as your experience.

Joe: Okay well I started out in public accounting, and had a short stint with Price-Waterhouse which is now Price-Waterhouse-Cooper. I spent a little bit of time working for a bank in Switzerland. And, I came back and entered the insurance business, estate planning business. Long time ago, back in 1979. And started our own firm in 1985 in terms of the creative side of how to plan for people’s businesses, their estates, as well as just the average rank and file family executive type. So we specialize in high net worth individuals. Typically they own companies. They are senior executives and the continue of helping people protect and save and grow their assets so that’s a little bit of background. We have a pretty good size staff in terms of handling all the backend support areas. I like what I’m doing. Actually, I love what I’m doing. It’s always wonderful to help people.

Enpo: Well, it comes through Joe. So, one of the things that we want to do is to get your expertise on an area that perhaps you have already dealt with with your clientele, especially those that are in this high net worth space they’re concerned not necessarily even for their own finances which are completely in order but they’re looking down the line. They’re looking at their children and once they’ve set them up in a good position, sitting down and thinking more about their legacy. So, I want you to picture of one of your clients that you’ve worked with for a while. You’re insured their financial foundations have been laid. Now they they come up and say “I’ve given it some thought: my kids are doing all right I want to make sure that our family continues our legacy well after I’m gone. How do I make sure that I give something to my grandchildren?”

Joe: Well that is a very interesting topic and the challenge is: how do you know what’s going to be the situation five ten or twenty five or even thirty five years from now? There is a wide range. People have a different definition of what they would consider to be wealthy. Could be that someone believes they’re wealthy with three or four million dollars. Someone might consider themselves not wealthy with a thirty or forty million dollar net worth. Or someone who, in my opinion, is… you know, wealthy, is in that forty million plus range. The challenge has always been: generation one – grandma and grandpa. Typically have worked really hard. Built a big business, been successful in what they’ve done and you know they’re probably doing fine. The question then becomes: What you wanna do for your grandkids? Do you want to skip your kids, but what you wanna leave your grandkids, depending upon if you give it away, quote today, but lock it up. Or, you give it away at death. Giving it away while you’re alive, you have to be very careful to say: “I know we’re never ever gonna need any of this money for these assets and I can give you case after case where wealthy grandparents were making significant gifts to grandkids and the wealthy grandparents situation shifted where they might have been (literally, this is the case) were 40 to 50 million and probably company sold out to publicly traded company. They were heavily weighted in the stock as a publicly traded company, and they were just about ready to start selling off their assets. They had a two year wait before they could sell some of their stock and their stock took a fifty percent plunge in one day. It created havoc. With the gifting that they had done, they went “oops! I wish we wouldn’t have gifted it all away.” Not all of it, but a good portion. But, a very simple way to be able to do that is – you can do a couple of things in some irrevocable trusts, or something that we call a “survivor standby trust”. But, it’s the ability to either transfer assets, and many times it can be done through a life insurance premium. The life insurance premium is then used in the trust to pay for the life insurance policy on grandma and grandpa, or generation… you know the parents. Generation one. There is lots of different nuances in that, but I’ll stop there if you want to ask a little more detail on some specifics and I’ll answer those as well.

Enpo: Yes, so for our listeners and many of them definitely haven’t considered the personal aspects of giving away money. Perhaps you’re right it could very well be that they may have a really good financial plan put together. However plans may change based off of things such as sudden market moves. Some of the other things that may shift are government policies. Could you speak a little bit about perhaps the generation skip taxes?

Joe: Yes. Very, good question. The amount of money that an individual could give was capped. Meaning in terms of bequeathing to the next generation or anybody they wanted was capped at about five million prior to the recent tax law change in 2018, and then it went up to eleven million four. What is commonly not addressed, or thought about is by the way that eleven four it’s going to revert back to 5 million in the year 2025.So, the planning technique would be to gift, up to eleven four into the trust, the eleven million of four eighty… and get it in there now, given that you don’t need it. The IRS has basically said (and again not I’m not an attorney, or giving a legal opinion) but they’re not going to claw it back. So, if you get the gift taken care of prior to 2026, then they are going to claw back and take it when it gets to 5 million. Congress changes, presidents change, national sentiment changes… we are in the middle of the corona virus problem… who knows what’s gonna happen in the next 2 to 6 months?… so you know those types of things. Generation skipping trusts are basically designed… a step before that, let me give you the 3 things from the stepping stone: so you have a survivorship standby trust. You can then do an irrevocable life insurance trust. Then you can also do the generation skipping trust or GST. GST can be incorporated in the first two, but the general concept of the generation skipping trust is that you can give away, during your lifetime – that eleven four million, mom can giveaway, grandma can give way eleven four, grandpa or dad can give way eleven four and get into the generation skipping trusts and pay no gift tax and pay no quota estate tax because they’re still living. Once they pass away, the generation skipping trust now has whatever amount is in there. There’s no estate tax on it. They can have it for the lifetime income benefit for either their kids or their grandkids. Depending on what state, you can go great grandkids to great great depending. So, my caution is that when you’re doing it just for your grandkids, and it turns out you think your kids are okay… but something bad happens to your kids, or something, you know just out of control happens. You go “my goodness, my one daughter” or “my one son could really use the money.” You’ve just got to be very careful that you don’t necessary cut somebody out down the road that you thought was just in great shape today. But, back to the grandkids. So you can say “This money is in this generation skipping trust. It’s sitting in the trust, so that when I die, there is no estate tax. That grows, during my kids and grandkids lifetime, it also grows.” now you’re required to distribute the income to the income beneficiaries… well technically you’re not, but if you keep in the trust, it’s going to be a higher tax bracket, so generally speaking you can have distributions to the income beneficiaries. You can put an incentive in there as well so they don’t quote spoil your kids or grandkids or great grandkids. You can do something where there is an incentive and say “If you make a certain amount of money, you’re going to get more income versus just kind of sitting on your hands. You can make special provisions for kids or grandkids or great grandkids that are disabled, or they go on to school teaching or into a nonprofit setting where they’re doing great things so you can build some incentives into that. But the idea is that that eleven four then grows over the next 30 years to 24 million. There is no estate tax when the grandkids die, or the or the kids and on going. You can give money to the next generation – your grandkids. I would always caution people to be careful, you may not know all the grandkids yet because they may not be born yet. Giving some provisions in the trust, you certainly don’t want to spoil the grandkids together make certain that they get up every day. They want to work. They want to be active members of society, so you can do some designs in the generation skipping trust to do that. So that’s kind of a long answer that there’s some thoughts.

Enpo: Well, I believe that you’ve definitely helped us put this puzzle together. Joe, as always your insight is very helpful and I think our viewers are enlived and enriched by your expertise.

Joe: Okay thank you.