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Darol Tuttle discusses the difference between estate planning and asset protection, while Fluent Financial’s Mitch Kramer ponders the FED’s Jerome Powell’s next move.
Episode Transcript
Intro:
Welcome to the Practical Tax podcast, with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz, LLP, a tax law firm.
Disclaimer:
The information contained in this podcast is based upon information available as of date of recording and will not be updated for changes in law regulation. Any information is not to be considered tax advice or legal advice and does not form an attorney/client relationship. Further, this podcast may be construed as attorney advertising. You should see professional consultation for your individual tax and legal situation.
Chip Franklin:
Welcome to another edition of Practical Tax with tax attorney, Steve Moskowitz. How often do you have clients that are looking 10, 15, 20 years down the road?
Steve Moskowitz:
If they’re not, part of our job is to do that because life and business isn’t just about today. If you want to be successful today, you have to say, “Well, what am I going to do in 5, 10, 20 years or more? What’s beyond that? What’s the plan?” And that’s so vitally important, and we do that in a variety of ways. For example, with a pension plan… And I use the term pension and retirement accounts interchangeably, although there’s some small technical differences. But for example, when somebody walks in the door I say, “Well, look, what about your retirement?” “Well, I just started the business today.” “Okay,” I have a tough question to ask, “Would you prefer to, A, pay more taxes or, B, pay less taxes?” and they say, “Well, I’m going to go with B.” I say, “Good move.” And then I say, “Well, okay, let’s plan for your retirement. You can literally pay less to the IRS by taking care of yourself with a pension plan down the road.”
And why would the government be so generous? Because they’re concerned about social security and paying for people, and they want people to be able to be self sufficient. Because let’s face it, in our country, if people can’t take care of themselves, what do they do? They go to the government and they say, “Take care of me,” and the government does.
Chip Franklin:
Sometimes.
Steve Moskowitz:
Who pays for that? It comes from the people that are working and paying taxes.
Chip Franklin:
Well, let’s jump in with our first guest then. Darol Tuttle is an asset protection attorney, been doing this for more than a quarter of a century. Darol, thanks for being with us today. Let me just ask you straight up, what is the biggest difference between estate planning and asset protection for you?
Darol Tuttle:
Yeah, estate planning is only about estate transfer. It really has no value proposition for the living client. They come in, they hire me, and they pay me a bunch of money. And I set up a living trust or will and then I say, “Okay, go off and die,” because really, all we’re doing is we’re saying, we want to make it easy to retitle the assets after you’re dead. Now, so the value proposition is really just peace of mind. Whereas asset protection, the way I define it, there are three threats to wealth in America today. Number one, unreimbursed medical expenses. Number two, unnecessary taxation. Number three, family and financial mismanagement. Now, some asset protection attorneys throw in protection against lawsuits and judgments, offshore trust. I don’t practice in that area of law.
And so to me, asset protection has a higher value proposition because we are transferring assets, creating trusts, proving legal strategies that are authorized sometimes by the federal statutes to make those assets unavailable to creditors to include the Medicaid agency and sometimes the tax agency after the first death. Like a credit shelter trust would be an example in the state tax arena of asset protection, you’re reaching out and you’re seizing the credit. Now, I practice in Washington state, which has the highest estate tax rate of any state in the union as high as 20%. And so, then financial mismanagement sometimes can be brutal as well. I’ve seen trust set up for kids in which the older brother trustee was stealing from the trust. A great way to prevent that is just trust protector language reporting requirements in the trust.
Chip Franklin:
Let me ask you.
Darol Tuttle:
And so, that’s how I define it.
Chip Franklin:
Both of you guys is when you set up a trust, is it important that the whoever’s setting up the trust is not the same age as you? I mean, right.
Darol Tuttle:
I’m not really in favor. I’ve been a lawyer since 1996, back in the days, I used to have hair when I was a lawyer and I didn’t have to use these reading glasses. And so, I’ve been at it at a long time and as a young lawyer, Steve, you’re probably the same way. You just kind of do what everybody does and it’s appoint the kid to be a trustee. Well, the problem is with that, you just changed the relationship, didn’t you? Because now, you got to go to your brother to ask him for money from mom’s trust. Second thing is they don’t necessarily have the skill set and I don’t see a lot of folks pointing friends to be trustees their own age, it’s usually their kids. And so, now, I’ve been spending more and more time trying to find professional trustees to handle it. Of course, you got to pay them fees and that’s a problem. But trusts are important because trust hold personal assets, LLCs, S corporations, partnerships, hold business assets. And so, you got to get that team put together the right way.
Chip Franklin:
Steve, do you have clients that decide on distributing the funds before death as slowly as a…?
Steve Moskowitz:
Oh, absolutely. And it also depends on the size of the estate, because some people want to have what’s known as a program of lifetime giving to get appreciating assets out of the estate. Suppose for example, you have a building and you bought it for low amount of money and you think it’s going to go up and up, you can get it out of the estate. However, you have to balance that with giving up the stepped up basis if you held it. So one of the balancing actually say, “Well, wait a minute, what are we talking about here? How much is involved?” And let’s face it, if mom and dad own this property, we have a huge exemption amount that covers most Americans. Most people listening to this show are not going to pay estate taxes because they’re way under the exemption amount. So you say, “Well, wait a minute, it’s not like the old days where there was a very low amount in the old days” as low as you remember the 600,000.
Darol Tuttle:
Yeah, 6/25. That’s what it was when I came into practice.
Steve Moskowitz:
That you say, “Well, okay,” and there’s all types of things we did to say, “Well, let’s work on that valuation,” like putting two people on the title and saying, “Well, what’s the fair market value of that?” But now with the exemption amount being so high, you want to have the step up in basis. And what step up in basis is, suppose grandpa bought a building for $10,000 when he was a young man. And if he gives it to granddaughter while he’s alive, she essentially takes his basis, he sells it the next day he got a 990 capital gain and pays tax on that. If grandpa left that in his will or his trust, granddaughter would get a stepped up basis. So now, she sells it the next day for a million bucks. But her adjusted basis is not 10,000, it’s now a million fair market value date of death of decedent. And now, it’s a million minus a million zero capital gain, zero tax.
So again, you have to weigh, yes, there can be advantages and there’s all kinds of things. For example, one of the things you probably are familiar with, CRTs, a charitable remainder trust where somebody says, let’s say of this situation, husband and wife don’t have anybody they want to leave the house to. And they say, “We want to live here the rest of our lives, but when the second spouse passes, we want this house to go to the charity of our choice.” The actuary comes in, makes an actuarial evaluation dependent on the ages. And then, they get a huge tax deduction right now while they’re living, they pay less income taxes. And you say, “Well, gee, the deduction is so large that we don’t have enough income to offset.” That’s okay, you can carry it forward.
So there’s just an endless array of what do people want to do? But the first thing we do before we do a plan is say, what are your wants and desires? Because we could have twin siblings alike in all respects financially. And one says, “Everything for the kids.” And the other one says, “I believe in the Warren Buffett method, you leave something to the kids that ruins them. I want to reduce my income taxes.” We have very different plans.
Chip Franklin:
I wish somebody had ruined me when I was young. Let me ask you about the threats to this, because there’s two that I want to get to and we don’t have a ton of time. But the first was financial mismanagement. Do most people see they’re doing it while they’re doing it and just choose to ignore it? Or is it something that creeps up on them? And the second question, again, this goes to both you, is about the medical because obviously the increases in that and people that are approaching Medicare and the supplemental stuff. Do they adequately anticipate these are incredibly big costs? So first one first is the financial mismanagement. Is that stuff that would fall into your bailiwick, Steve? Where they get behind in taxes and the government comes in? What do you think?
Steve Moskowitz:
That happens. So what we have to do is see what’s going on and there’s all kinds of differences here. And not only do we want to take care of the taxes, but we want to preserve the asset as much as possible too. And in asset protection, there’s all kinds of things for asset protection. An example of asset protection is the lock on your front door.
Chip Franklin:
Right.
Steve Moskowitz:
That’s asset protection.
Chip Franklin:
I get it.
Steve Moskowitz:
And then, we go on to all kinds of things. Another part of asset protection is retirement plans.
Chip Franklin:
Can I jump in the medical thing though, just before we run out of time. Because that’s the one that worries me the most, is like if you and your spouse, you save well, you get to a point… Are there medical conditions today that Medicare and Medicare supplemental insurance don’t cover that could tear you apart, Darol?
Darol Tuttle:
Yeah, let me jump up and reframe the issue. I’m an elder law attorney, that’s how I started. So the law firm record for the most paid per month for long term care is $30,000 a month.
Chip Franklin:
Holy.
Darol Tuttle:
I have a lot of cases of the 18,000 a month, 17,000, so many cases at $12,000 a month, I cannot tell you. And sometimes, tax is irrelevant. Let me give you an example, I have permission to tell this story by the way. So the $30,000 a month case was a $2 million estate net worth. And when you apply for Medicaid and one spouse is sick and the other one’s well and sick spouse has a large IRA, large assets, we can make a transfer of assets to the well spouse convert it to income and be Medicaid eligible, the very next day with really no disadvantages, except the liquidation of the IRA in that particular case it’s a lump sum distribution, so it’s all income, right? Generated an $85,000 tax liability.
Now, in this case, it’s simple mathematics, isn’t it? $30,000 a month, every single month. If you don’t pay it, they evict you basically. And so, $85,000 was a tax liability. The financial advisor on that case said, “You got to fire your lawyer. He’s invoking a tax penalty that doesn’t know what he’s doing.” And I’m like, “Okay, I’m taking a risk.” But the risk is she lives more than three months. She lived 18 months. And so, in that…
Steve Moskowitz:
And I should actually mention the fact that on the tax side, a lot of times a tax payer, this is especially true as they go up in incoming assets, has other things that can offset this.
Darol Tuttle:
Well, in some states it’s a technical nuance in the code, because you can annuitize an IRA that belongs to the ill spouse with the designation and the check going to the well spouse because the rule is for the well spouse can have unlimited income. And so, what we have to do is, the sick spouse can only have $2,000. I live in a state where IRAs are not exempt. They’re subject to spend down. And so, we can’t in our state, but some states you can convert that big lump sum IRA to an annuity and it pays to the well spouse, you’re immediately eligible with no tax liability.
Steve Moskowitz:
And other things that you can do. I know we’re running out of time. There’s all kinds of tax playing things you can do even on that 85.
Chip Franklin:
I’m just going to have to work till I’m 80 I think. And that, or maybe.
Darol Tuttle:
We’re living on time. Let me tell you, this is what everybody needs to know. And you’re from California, so living trust for a dime dozen and because everybody wants to avoid probate. However, the most important trust in asset protection law period is not entitled 26, it’s entitled 42. You can create a trust in your will, it has to be in a will for the benefit of your spouse. And if you leave your estate to this 42 USC trust, it does not count as an asset for Medicaid purposes. Transfer penalties do not apply. The five year look back does not apply and no Medicaid lien can ever apply. And on top of it, it is a credit shelter trust for estate tax purposes. And there are 10 states with estate tax. I mean, California does not have an estate tax, so you don’t have that problem. But if you’re over a million dollars in Oregon, you’re subject to a tax as high as 16%.
Chip Franklin:
Darol, we got to get you back when we can focus on these things piece by piece.
Darol Tuttle:
And I had a lot more to say on it, I do.
Chip Franklin:
Thank you so much for your time and for being here.
Darol Tuttle:
Sure.
Steve Moskowitz:
I love it, it was a pleasure to talk.
Chip Franklin:
A real pleasure.
Darol Tuttle:
Nice seeing you guys.
Chip Franklin:
How do I know if I’m an employee or a contractor and why is that important?
Steve Moskowitz:
It’s super important because if you think somebody’s a contractor and they’re not, you’re going to get hit with a large bill for the payroll taxes and other things too. And not to mention lawsuits, if they get injured and they say, “Well, you’re not covered by workers’ comp. So how do you tell the difference? There’s an IRS forum, actually 20 different questions, but the heart and soul of it is how much control do you exercise over somebody? So if you say, “Okay, John, you want to come in eight o’clock in the morning, start work, you’ll work from eight till noon. You have lunch from 12 to 12:05 and you come back at 12:06 and you work the rest of the day and do this and this.” That sounds like an employee.
On the other hand, somebody like us where you say, “Okay, I want you to do my tax return.” We say, “Okay, fine.” That client has the right to go ahead and tell us what they want done. But they don’t tell us how to do it, they don’t tell us the hours to do it. And you also take a look at, we’re a firm, so we have our own assets, our own employees. We hold ourselves open to the public and the bottom line is we’re an independent contractor. Now, the IRS has something really good here. There are a lot of people who have mistakenly or inadvertently or for whatever reason, misclassified people that should have been employees as independent contractors.
When the IRS catches up to you and they will, you are going to get hit with an enormous bill. But the IRS has this good program. But in order to do this, you have to meet certain requirements. And one of them is you come forward to the government before the government comes calling. Government comes calling, too late, too bad. And here you pay a tiny little pittance, all is forgiven. And then you just treat people as employees moving from today forward. It is a tremendous program. And anybody that is paying people as independent contractors, it should have been employees and you know who you are.
Chip Franklin:
So a Federal Reserve chair, Jerome Powell, proclaimed that the central bank has an unconditional responsibility to ease inflation and express confidence that’ll be done. I don’t know, let’s bring in Mitch Kramer right now from Fluent Financial back and the founder and CEO and nice enough to join us here to talk a little bit about that. And also, I want us, Steve, as we get into this to try to look at, are there tax remedies that can help us in inflationary times? But first the question, Mitch, is Powell just guessing here, does anybody really know where inflation’s headed and when it will abate?
Mitch Kramer:
It’s a great question. Good to be with you again, Chip. I think we may be reliving the early ’90s and Powell’s going to have to take a page out of Paul Volcker’s book and hopefully, we don’t have a double dip recession like we had in the early ’80s. But they’re going to have to raise rates to kill demand that will cause prices to go down. Because when you have wage growth and rent growth and house price appreciation, those are not transitory inflation items.
Chip Franklin:
But you know what, it’s funny, 6% sounds horrible when we were paying two in a quarter. But 6%, I mean, for buying a new home, that’s not a bad deal. Especially when you look back, we’ve talked about this before into the late ’70s, early ’80s. But I think for most people with they’re paying taxes, Steve, and the taxes don’t change to accommodate the lack of spending power because of inflation. Does Congress, do they look at that or does the IRS or anyone?
Steve Moskowitz:
What congress should do and what they do can oftentimes be very different things. The theory of the tax brackets is as you go up in income, the government takes more and more of it. In theory, you need less to live in the higher amounts. For example, if you’re making $30,000 a year, it’s very different than if you’re making 3 million a year. So your tax rate is a graduated tax rate goes up. And the problem with inflation is that 30,000 guy that’s now making 60,000, his salary is really only buying $30,000 worth of stuff adjusted for inflation. But now, he’s in a higher tax bracket because when the government says, “Well, at 60,000, you don’t need as much as you would at 30,000.” That’s part of the problem with the brackets.
Chip Franklin:
So, there really are no tax strategies at this point to help?
Steve Moskowitz:
Well, there’s always tax strategies, it’s depending what you’re doing. But most of the tax strategies, especially after the Tax Cuts and Jobs Act, businesses had so much more you could do with tax strategies. Individuals had so much less than they can do, that’s part of the problem.
Chip Franklin:
Where should my money be right now to fight inflation? I’ll ask that, Mitch.
Mitch Kramer:
What we’re recommending to our clients right now. I think cash is going to be a very good place because we continue to see the market to melt down. We hope there’s going to be a capitulation event this fall that will signal the end of this bear market and start a new bull. But with our current government policy and what’s going ahead, there’s just not a lot of hope and optimism. So we’re recommending for people that are going to need money in five years or less, be heavy in cash. If you’re younger dollar cost average in you continue saving it in a 401(k)…
Chip Franklin:
Where do you keep that cash? You say heavy in cash, where?
Mitch Kramer:
Well…
Chip Franklin:
Two year CDs or one year CD?
Mitch Kramer:
Yeah, you could ladder some CDs, I bonds are a great investment for people. You can put up to $20,000 in those and they’re paying like 9% interest, that’s a great way. You have to buy them straight from the government, go to treasurydirect.gov to find it. That’s a good place to put money. The money market rates have come up at the banks, as you know, are much more resistant to raise their savings rates. But they’ll raise their borrowing rates immediately when the Fed funds rate goes up.
Chip Franklin:
Steve, when a client comes in and they see that obviously, they’re making the same as they did last year, but obviously their costs have gone up. Are there strategies for small businesses to pay less quarterly and put that money someplace to get more interest?
Steve Moskowitz:
You got to be real careful with that one because usually, what happens is then they have taxes they can’t pay. There’s all kinds of strategies. Look at why so many businesses have gone overseas for work. And you’ll see now that especially that so many things are remote and physically a lot of things don’t have to move anymore, because you can upload things into the cloud through a secure portal. And then, somebody in some other area of the world where the economics are much different, where what the American company is paying the worker in the foreign country is by our standards very low. But by their standards, they’re fighting for those jobs because they’re making more than they would if they worked in a local company. And everybody benefits from that. Although you have the argument, people say, “Well wait a minute, I lost my job to somebody overseas.”
But then there may be another job. And if you take a look at things economically right now, most employers are crying because there’s a shortage of employees. And take a look at so many restaurants that they’ve had to reduce their hours because they can’t staff it or other businesses. So again, you’d say you, if you’re looking for the individual business, say what can I do? Is there anything you’re doing here that could you do overseas? Is there anything you’re doing here that you could automate? Is there anything here that you could renegotiate? For example, some businesses, you physically have to be there with a restaurant. You physically need a space to sit down and dine. But you might be another business where you had an office and you can have a much smaller office because people are working remotely. It’s a big savings on rent.
Mitch Kramer:
One thing can do, you can install a retirement plan. Half of all businesses don’t even have a qualified retirement plan that will help reduce your tax liability, assume you have the cash flow. And the other part is…
Steve Moskowitz:
I’m always talking about the benefit of that. There’s a super benefit to that
Chip Franklin:
[inaudible 00:23:21] Is that what we’re talking about? Retirement plan?
Mitch Kramer:
No, just your normal defined contribution plans. If you’re looking at a small business, a simple plan or set, if you’re a little bit bigger, 401(K) plan, profit sharing. If you’re a small business owner with very high income, you can look at the cash balance plans. There’s some very unique strategies you can-
Steve Moskowitz:
We do a lot of cash balance plans and most individuals don’t realize you can have multiple pension plans at the same time. And there are people, they can put away hundreds of thousands of dollars and there’s all kinds of benefits. And the first one is you pay less taxes.
Mitch Kramer:
Yeah. We’ve done that for over 20 years For some of our clients who have multiple entities. The key issues is a control group and affiliated service group issues. One last point I make for business owners, a lot of times the income is based on income from the prior year. And if this year significantly less than last year, your quarterly payments, you may be able to reduce what you’re paying in third or fourth quarter or not pay that fourth quarter of cash flow is tight. Now again, talk to your tax advisor, see the attorney before you make that decision.
Steve Moskowitz:
And again, that works both ways because suppose you have a client that made Boku this year. What you can do is have multiple plan year contributions in one calendar year and get a super extra large tax deduction.
Mitch Kramer:
Yes.
Chip Franklin:
My cousin worked for the Coast Guard for 30 years and he said macroeconomics is similar to the way things float in the ocean differently. For example, a human being gets in the water and the currents will take them a certain way. You put in something else approximately the same weight but different sort of buoyancy, it’ll go the other way. And without that sort of knowledge, trying to understand the finances and the taxes and inflation and where it’s headed and the things to look for, it’s a task. I mean, I listen to you-
Steve Moskowitz:
And Chip, there’s something very important there. It’s a task and most small business owners are so busy, they work long hard hours and they take care of themselves last. And oftentimes they just don’t take care of it. And then all of a sudden, just exactly like Mitch said, they don’t have a pension plan, they’re unprepared, maybe they haven’t even paid their taxes and there’s so much that they can do, but they just don’t have time. That’s why we have these other systems, so you make time for yourself.
Mitch Kramer:
Yeah. The critical thing with business owners, you need three professionals on your team. You need a good CPA/tax attorney, a state attorney, and you need a CFP. And you have to have those three people working for you to give you the best possible results.
Steve Moskowitz:
I couldn’t agree more. And one of the things that we also say is some small businesses say, “That’s right, but I don’t have the money to employ those people.” And you say you would have a service like ours where we say, “Okay, we’re your part-time CFO, we’re your part-time desk. We give you everything we need.” But we would need to work there. You don’t have a full-time job for us, but you do have a part-time job for us.
Chip Franklin:
Again, that was just kick ass stuff. Thank you so much, Mitch. I really appreciate your time.
Mitch Kramer:
Sure.
Chip Franklin:
Come back on again with us, please.
Mitch Kramer:
Pleasure. Yes sir. You guys have a great Labor Day.
Chip Franklin:
Be safe. Thank you so much. Wow. So, that’s another addition of Practical Tax with tax attorney, Steve Moskowitz. You can find it at moskowitzllp.com or on YouTube. You guys be well. Thank you, Steve.
Steve Moskowitz:
My pleasure. Thanks, Chip.
Outro:
Thanks for joining us on the Practical Tax podcast with tax attorney Steve Moskowitz. To hear more and view more podcasts, go to moskowitzllp.com/practicaltax.