Click play and take the first step towards a more secure tomorrow in today’s episode with Natalie Perry, CPA. Listen in for a thought-provoking discussion on estate planning and its importance in safeguarding your family’s future. This is a conversation you won’t want to miss!

Key takeaways to listen for

• [00:37] What is estate planning, who needs it, and why is it important
• [11:09, 24:08] How does estate planning help your beneficiaries and future generations?
• [15:11] The risks of not having an estate plan
• [20:54] How much does estate planning cost
• [31:01] Why you need to name your kids’ guardians in your will
• [36:22] Ways your estate plan can give to charity and its benefits

Resources mentioned in this episode

• [37:15] IRS

About Natalie Perry, CPA

Natalie is an attorney at Harrison LLP. She helps clients address estate planning and probate legal issues. She graduated in 1995 from DePaul University College of Law and was admitted to practice law in 1995. She represents clients in the Chicago area.

Natalie is a frequent speaker at professional education events for attorneys and accountants. Natalie was elected as a Fellow of the American College of Trust and Estate Counsel (ACTEC) in 2016. She is currently chair of the Communications Committee and an active member of the Business Planning Committee for ACTEC.

Natalie is also a member of the board of directors of the Chicago Estate Planning Council. From 2018 through 2019, Natalie was Chairperson for the Hinsdale Hospital Foundation.

Connect with Natalie

• Website: Harrison LLP
• LinkedIn: Natalie M. Perry CPA JD

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Natalie Perry: 00:00:42

People who own businesses have a little bit higher duty almost to really be thoughtful about their planning and make sure that they're engaging with qualified counsel who can help them walk through those decisions and make sure they got something in place.

Neil Henderson: 00:00:54

Welcome to Truly Passive Income. I'm Neil Henderson.

Clint Harris: 00:00:57

And I'm Clint Harris.

Neil Henderson: 00:00:58

Our guest today is Ms. Natalie Perry. She's an attorney and CPA who specializes in estate planning, business succession, tax planning, and family office services.

Natalie, welcome to Truly Passive Income.

Natalie Perry: 00:01:12

Thank you. I appreciate you having me.

Neil Henderson: 00:01:14

Well, let's start at a high level and say, all right, who needs estate planning and why?

Natalie Perry: 00:01:19

Well, of course I'm going to say everyone. I am an attorney.

But in all seriousness, I mean, really, estate planning is really about setting forth your intentions both with who should be the representative of your estate, how should your property pass, and if you don't have a plan, the state generally has a statute that will say how your assets are distributed. So really, in the true sense, every. Everyone should have some sort of estate plan. Of course, not everyone does, and it's sometimes driven by wealth.

But really, having just a will, even powers of attorney, can be very important to a family in a time of crisis or a death or an illness.

Neil Henderson: 00:01:53

Even so, for maybe people at different various economic levels, what is the bare minimum that you would describe as what someone needs for estate planning?

Natalie Perry: 00:02:03

So I would say for an estate plan done by an attorney or even online, there are some resources online, a will is the basic document that you would need. So under state law, your assets are going to go generally to your spouse and children, which I think some people are surprised by.

But if you have a will, you can say all to my spouse and then to my kids, only if my spouse is deceased.

And then powers of attorney are also really important, and those really are almost more important than a will, because if you're alive but incapacitated, it can be very expensive to try to go to court and obtain guardianship of a person or authorize an individual family member to make medical or financial decisions. And those are very simple state forms that you can often even find online and prepare those.

So those are the components of a truly basic estate plan in terms of.

Clint Harris: 00:02:53

People that are maybe listening to this, that haven't gone through the process of setting that up. Like when in your life, at what age or with certain asset level should you really be thinking about getting started with this?

And after you do, what events happen in your life or, or kind of how often or if it's time based, when should people circle back and review that and look at the plan that they have or what other things need to be added or additional layers to that.

Natalie Perry: 00:03:17

Yeah, that's a good question. We get that one a lot. So I would say the driver is often having children. In some cases it's also getting married.

Maybe you've got extended family that you do or don't want included or to benefit from your financial assets if you were to die. So I think those life events tend to bring people to us.

I don't think there's a hard and fast age, as I said in the beginning, kind of really driven by intent.

We do do estate planning for fairly young people who don't have significant assets yet because they want to name a guardian for their children or they want to make sure that their kids have a trustee, let's say getting into trust later of somebody that can manage their money for their kids if they were to die unexpectedly. So that's really kind of the typical triggers. A divorce may be another trigger.

And to your question about updating, I tell my clients really every three to five years you ought to pull it out if you've done an estate plan and kind of think through who did I put in charge of my kids, who's in charge of my money? Am I still friends with these people?

Has my brother or sister in law gotten divorced now they're a different person or they got married and I don't care for that spouse. Or I think that spouse might get the hand in the pot or something, make some things happen that I might not like.

Also, I think if you move to a different state, change of residence, that can impact your documents, divorce, of course, of the person who did the estate plan or a husband and wife, you would definitely want to update. And then sometimes people tend to name their parents when they're younger, doing their planning, like as guardians or as trustees.

So if your parents become older or incapacitated themselves and you want to update to get some newer people in there.

Neil Henderson: 00:05:04

So the triggers for starting and updating you would describe as, you know, major life events like marriage, divorce, new children, and like you're saying, updating approaching, you know, different tax thresholds and things like that. And as you said, if you had originally assigned your will to aging parents, you know, just updating it periodically like that.

Natalie Perry: 00:05:25

Right. And I didn't bring up the tax threshold, but that is a good point.

The exemptions from estate tax are quite high right now and some states have their own estate tax.

So if you happen to live in a state, I'm not sure whether North Carolina does, but in Illinois, where I practice, there is an estate tax exemption of only 4 million, which is about a third of the federal exemption. So we have to do some special planning and people moving to Illinois from another state may not be aware.

So that's something you'd also want to find out whether your state limit is different than the federal in terms of.

Clint Harris: 00:05:58

Some of the different situations that you cover in the creative strategies that you use.

I'm looking at the list here, and it's everything from just to talk about, kind of give people an idea of what you're helping them accomplish is navigating estate tax, gift tax, generational skipping transfer tax, safeguarding wealth, obviously, but business succession plans, especially with affluent families, even people that have aspirations of doing things philanthropically, obviously maximizing income tax, family foundations. Is there other things there that you also offer or that work on?

And what are some of the different creative strategies and tools that you use to help navigate some of those more complex issues?

Natalie Perry: 00:06:36

Yeah, we tend to work with clients on all ranges of wealth planning. So some just may want to set up the plan, have those fiduciaries in place, like the trustee executor.

Others, like you said, may want to start making gifts. Maybe they're in a position where they're not going to need all of the money that they have on their balance sheet.

And, and sometimes a financial advisor even say to them, hey, you know, if you die tomorrow, you're going to have a large estate tax. You should look at reducing that in some efficient ways. So we've got a whole arsenal of techniques that we could use for clients.

I'd say one of the, maybe more common ones in the real estate area especially might be creating a partnership or a holding company for various properties.

So if they've got a number of pieces of real estate that are investment properties, we might put them in an llc, maybe multiple LLC with a holding company at the top, and then have the client make gifts of that holding company interest.

So say they set it up 50, 50 husband and wife, and then maybe we're going to reduce their interest either on a yearly basis or make a bigger gift in a given year. So we take them from 50% down to 25%, for example, and we would get an appraisal and we would take a discount on that interest.

So the IRS generally allows us to take some kind of minority interest or lack of marketability discount on that type of gift. So what we've done in that scenario is take, let's say that partnership was worth $10 million.

If we're making a gift of 25%, that would be 2.5 million. Right?

But if we can apply a discount because of this entity structure that you or I aren't going to want to into this family's entity, you know, and become partners with these people, we don't know.

So we're able to decrease the value of that gift by even up to 30%, depending on the circumstances of the deal and the terms of the operating agreement or partnership agreement. And that way, instead of giving two and a half million, the client's giving, let's say a million and a half or a million.

So we've really shrunk that value. So we call that kind of a leveraged gift. Rather than saying to a client, hey, why don't you give $2 million to your kids?

Okay, you've given $2 million, the kids can invest it, and the appreciation on that gift is going to be outside of their estate. But you haven't really gotten any kind of leverage on that gift because it was worth 2 million.

You gave 2 million, you used 2 million of your exemption. Now, whereas in our partnership scenario, if we give an interest in an entity, we can shrink down that value.

So instead of giving two and a half million, I think I said was my original value, I've shrunk the value that gift for tax purposes. So even though the kids have really received the full value of the property, the IRS allows us to take that discount.

So I think that can be a really effective strategy for people with a lot of businesses or entities, depending on the terms, of course.

Neil Henderson: 00:09:35

What are the heirs dealing with when, let's say they get an inheritance of a million and a half dollars? I mean, it's a step up in basis. So they're not usually. Are they subject to, and this may be. This is very much a depends question.

Are they subject to some sort of inheritance tax once they hit a certain level?

Natalie Perry: 00:09:55

Yes. So the tax is at the giver's level. So because the estate and gift tax are transfer taxes, the donor pays that or the person who makes the gift.

So if I give my kids $2 million and it is a taxable gift, the tax comes out of my pocket, not the kid's pocket. The estate tax, though, is on the whole pot of money. So it is kind of paid the kids because it will reduce what they get.

So if I want to make a gift, yeah, I'm paying the tax.

And in most cases, we're going to use exemption first because we've got this very high exemption that the amount for next year is going to be 13,160,000. So that's quite high for a lot of people. Clients generally don't pay gift tax. It's not always the right answer.

Depending on the client, there may be stuff we can do to shrink the value of the estate before they die. But it's paid by the donor, not the kids necessarily. So the kids can receive the full exemption.

So for a married couple, that's going to be about $26 million free of estate tax. So it's only for people over that amount of money that would pay estate tax and that would kind of come off the kid share at death.

Clint Harris: 00:11:08

So speaking of kids, I've got two young sons. I got a four year old and an eight month old.

And this conversation has come up between me and my peers and other investors recently of with people, especially some of our investors that have substantial assets. What kind of planning structure is in place to make sure that there's a responsible transfer of assets that's not enabling kids?

Basically like what structures do you have in place that can establish an estate plan to incentivize kids to be a productive member of society and not just turn out to be an entitled little jerk? That's something that we think about. You plan ahead.

It's not just a transfer of value, it's how do you do that and what are some of the things that you can put in place to try to make sure that you're producing decent humans?

Natalie Perry: 00:11:50

Yeah, so what we often do is have kids money held in trust until they hit what we think is an age of reason. And that age is going to really vary with every family. You know, it might be 30, it might be 40, you know, it might be 50.

Some people really hold the money back. And so what we'll do is leave the kids money in a trust with someone else in control. And really the kids then don't have full access to the money.

They will have access in the sense that if they have a support need or they have reason to access that money, they'll be able to. But the ultimate decision is not in their hands.

So that way we try to kind of protect them from themselves until we think there's a time at which we say, hey, if we as parents haven't done our job, like we can't do anything more, you know, it's hard to really control from the grave for too long. Another thing we sometimes do though are write some incentive terms in the trust, which I think is kind of what you were alluding to.

So maybe this beneficiary shouldn't get money unless they're a productive member of society.

And we might try to define that by they're working, they're making a minimum amount of money, they're in the Peace Corps, you know, whatever behaviors we kind of want to see that can be harder to administer. Because those judgment calls are tough to make. If someone's a teacher, are they making enough money to justify trust distributions?

You know, that's a noble profession, but doesn't pay as much.

So we see those sometimes but really case specific and it takes a little bit more customization when we're putting a trust together to put those in place. But they are useful and for the right family.

If kids have had issues with substance or alcohol, you know, we might put something addressing those kinds of concerns in there like testing or rehabilitation if that's necessary to keep somebody, you know, from harming themselves or something. So with a trust there's really a lot you can do to try to customize it to the family's unique situation.

Neil Henderson: 00:13:49

There's a quote that I love that says the first generation makes the money, the second generation spends the money and the third generation blows the money. And you see it, you know, you see it with a lot of the sort of gilded age, you know, you look at the Biltmores, you got the Biltmore estate.

But as far as I know the Biltmores aren't wealthy family anymore. The Carnegie's, you know, they got a lot of names on their stuff.

But as far as I know there's not a lot of Carnegie's out there that are still very wealthy. Can you think of any families that have maybe off the top of your head.

I won't hold you to it if you don't that have done a good job of sort of maintaining that generational wealth.

Natalie Perry: 00:14:27

Well, I think we've heard in the news a little bit about the Pritzkers and the Pritzkers Trust and how they had. That's a Chicago family that I think owned one of the hotels, hotel chains, I don't recall which one, but yeah, I think that's right. Hyatt.

Yeah, I was going to say Hilton, but I think you're right. I know their families had created trust.

And then I think in fact there was something in the news about some litigation over those trusts maybe five or 10 years ago.

So I don't know them personally and I can't speak to how the kids have turned out or Anything I think in what we see in our practice is the more thoughtful the planning, the better the result.

With the kids versus if you don't have an estate plan now, the kids might be fighting or the kids are million dollars off the bat when somebody dies and they're really not prepared for that. They haven't been talked to about it.

They don't understand, you know, and maybe they're a little angry and you know, a lot of emotions come up when someone dies. It's a really tough time in some families, especially if there is disharmony.

Clint Harris: 00:15:23

You bring up a really interesting point there is that, you know, I was thinking about what are the issues if someone passes or is incapacitated without an estate plan. And obviously I was thinking like dollars and cents.

But in terms of emotions and relationships and stress on the family, I guess there's a lot that can happen there.

So what are the risks of someone not having an estate plan in terms of the overall exposure that they have and the way that it affects them and their kids? I think you're probably better suited to answer that than I am.

So what are the some of the things that people are facing if they don't think ahead for this?

Natalie Perry: 00:15:52

Yeah, so we see it's a little bit more expensive if you don't have an estate plan to administer the assets. Because we're kind of starting from zero. We're going to have state law telling us how the assets go.

But if we have a second marriage or we've got maybe, you know, a family where there were kids from two marriages, you know, those kids might be treated equally even though maybe they shouldn't have been.

And we do see then disharmony, you know, with a spouse who isn't the mother of some of these children and children might resent her or she might resent them for whatever reason.

And then if there is an incapacity, like you'd mentioned, a lot of times the spouse is going to have priority to either make decisions or name someone to make decisions. But it may not be the best person.

You know, maybe she does have some self motivation or he does, or maybe there's money they're trying to get in their own name and things can go awry. Incapacity situation. We also sometimes see caregivers trying to take advantage of people who are incapacitated. And I don't mean to pick on them.

You know, they're usually a really wonderful people and provide a very valuable service.

And by caregiver we could be talking about a daughter, you know, Or a son who's there, the checkbook is there, you know, and all of a sudden, funds have gone astray, you know, because there wasn't a real. Things weren't titled properly. There weren't the proper documents. You know, they're trying to save money or just make things easy on themselves.

And sometimes there are good intentions behind people taking money or applying money somewhere. It's just more complicated and I think more expensive.

And you can end up in court a lot more frequently than you would find with a well thought out estate plan. And I think if we do get to court, the judges like to see, you know, a trust, a will saying who gets what and when.

There isn't those documents to guide the court. You know, the court has to kind of interpret what they might have wanted, take testimony and all that can really.

Neil Henderson: 00:17:45

Increase the cost as the assets go up. Often, so does the contentiousness. You know, I've seen it.

I've been on this earth long enough that I've seen enough fights between families over the stupidest stuff.

You know, literally people just descending on a household and just fighting over dishes, you know, but as you go up in levels, you know, now you're fighting over multimillion dollar assets, things can get really, really ugly really fast. There's a story right here, right now, here in Wilmington, North Carolina, of a family of like 18 that all.

Or there was a older woman who'd owned a house here in Wilmington for 50 years, and she passed away without a will, and it just went to her heirs. Well, there's 18 heirs. How do you unwind that?

People all have different motivations, they all have different financial situations, and it just gets very ugly very fast.

Natalie Perry: 00:18:43

Right. We see a lot of disputes in those situations.

Clint Harris: 00:18:47

Yeah.

That brought up the bigger point of there's a whole portfolio of properties across Wilmington that are split up between a dozen or more heirs that no one can ever agree on anything.

And different investors are trying to buy out different pieces of it, but the end result is typically the properties continue to deteriorate until they get to the point of they're not paying taxes, and eventually they go away and they get sold at auction. So. Been listening to that as well, Neil. It's creating a very unique situation, but it's not always life or death events as well as incapacitation.

You also work with business succession plans and things of that nature. Right. So that's something that maybe I could certainly see in that situation.

If you die without a plan in place, it could cause the business to break up. Or fall apart. So talk to me a little bit about that. Like the typical client, what they're trying to accomplish and how that process works.

Natalie Perry: 00:19:36

Right.

So in the business succession context, one thing I think people don't always think about is that their spouse may not be the best person to continue running the business.

You know, for a variety of reasons, regardless of any self interest or anything we were talking about a minute ago, they just may not have the skills or the acumen to make the right decisions and keep things going. And sometimes the business will have goodwill. So we may want a manager or a key executive, you know, to step in instead of the spouse.

So we would need to address that in an estate plan so that under state law, the spouse doesn't come in and be able to make the decisions. We may want to appoint a separate person to keep running that business.

If there isn't incapacity and if somebody does pass away, we want to preserve that value of that business.

To your point, you know, we don't want a fire sale or we don't want everything to just go down in value during the administration process because we don't have somebody capable in charge of keeping that business going. So there are extra decisions to be made there. We may be dealing with a certain type of business like an S Corp.

If we're going to leave that to a trust, we have to make a special election and be mindful of the S Corp rules in the administration.

So people who own businesses, I think have a little bit of a higher duty almost to really be thoughtful about their planning and make sure that they're engaging with qualified counsel who can help them walk through those decisions and make sure they got something in place.

And those powers of attorney that I mentioned earlier, even those are really important because if you become incapacitated, you really need somebody to quickly kind of step in. And if you have to go to court and pursue guardianship, you know, it can take a few months to even get a court date post Covid.

I think a lot of the courts are backed up. It's extra important to be addressing both the tax and then the succession issues.

Neil Henderson: 00:21:23

What does a typical starting estate plan, let's say a step above a will, but like getting into a trust, like what is that typically going to cost an individual?

Natalie Perry: 00:21:36

I'd say for a married couple, anywhere from maybe 4,000 to like 6 or 7, depending on the complexity, the attorney doing it, kind of the complexity involved. So I think it really varies. I'm in Illinois. We might be a little bit more expensive but generally I think that's probably about right.

And we're going to do wills for each. I was talking about a married couple, wills, trusts, powers of attorney for each of them. We're going to work with them on asset titling.

We want to make sure that we don't have joint accounts with your sister in law or joint accounts with your partner that's not titled in the business or something like that.

Sometimes that asset titling is a critical piece of it too, because if things are joined or someone's named a beneficiary on an account, you know, that can go to that person regardless of what the estate plan says.

So we're really going to drill down and also get into that, which can add a little bit of time, maybe transfer their real estate to their trust if they're going to do that. Because we also want to avoid probate. That's kind of a, you know, a buzzword in estate planning. A lot of people want to avoid probate.

They don't want the court involved in administering their assets. It's not terrible in most states, but the fee can be more. We have to go to court and it's smoother and quicker if we don't have to go that route.

Clint Harris: 00:22:53

I got a multiple part question here, like do you guys have a minimum in terms of net worth for the individuals that you work with? And then on top of that, what's the average size of estate that you're working on?

And then just over the long term, like if somebody comes to you say they have a life event that just happened or they have one that's coming down the road, how much time is it going to take them to work with you guys to just kind of get organized and put everything in place? Is that weeks or months or how does that typically work?

Natalie Perry: 00:23:18

Okay, yeah. So on the minimum, so I'm a little bit more senior.

You know, I've been doing this for 25 years and I tend to work with clients with 10 million and up. And we have some younger lawyers at our firm that handle the smaller stuff that are a little bit less expensive.

So on the timing, I would say it could take a month, you know, all in to do the planning, but it tends to take longer, partly because these are big decisions. People want a little bit of time to think it through, talk to their spouse, you know, maybe talk to the people that they're going to name sometimes.

So I'd say the average time maybe is like six weeks to two to three months, kind of depending on the client. But Certainly it doesn't have to take that long.

If somebody's got a trip planned or a surgery, you know, we might really accelerate the process And I forgot your last question.

Clint Harris: 00:24:07

I'm sorry, you answered it already. That's pretty good. One of the things that I know you guys help with is like generation skipping transfers. That was pretty interesting to me.

And it makes sense, right?

If you've got grandparents that are more interested in skipping over their kids, maybe they don't need it or don't deserve it or whatever and they would want it to go to the grandkids. How does that work that you keep the parents from keeping their hands off of it?

And then that got me thinking about long term vision and like, what are some of the plans that you've seen with, like how long are people planning ahead?

Are people planning multiple generations ahead and putting money into a trust that's going to continue to pay out interest for multiple generations in the future, but it's still retaining enough that it's increasing in value? How forward thinking are some of the clients that you have?

Natalie Perry: 00:24:50

Yeah, I think it really varies with the net worth.

I think personally when we talked about the incentive trust and kind of those kinds of provisions, people are really thinking about their kids and their grandkids and then maybe the grandparents. But it's hard to plan for the kids you haven't met or probably won't meet.

So if we look at just the average of 25 years, you know, it's probably three generations that we're really mostly honed in on. But some people with the higher net worth, you know, those trusts will stay in place a long time.

You know, we're administering some Trusts from the 70s and 80s that are still in place that either people haven't died or now there's multiple trusts because there's grandchildren, maybe great grandchildren. When we're meeting with a client, we're probably talking mostly about their kids and their grandkids. That's about as far out as we're going to go.

And we may even provide that the trust can terminate, you know, when the youngest person now hits age 25, because we can't keep the money locked up forever. That's really going to vary by the matter that we're working on. And then keeping the parents, I think you said, hands off of it.

Generation planning is generally done where.

So if I'm the grandparent, I'm going to leave money and trust for my kids and their kids so my kids can use that money in most cases, but they aren't going to. And we're going to educate the family from a tax perspective.

You know, it's the best planning for you to leave that money sit there, use it if you absolutely need it, but really rely on your own assets or your parents probably left you other money too. And then that generation skipping pot of money can go directly to those grandkids without another estate tax. So that is a real benefit.

And when you look at the time value of money, you know, it can really grow and accelerate over time if it's not being spent.

Neil Henderson: 00:26:37

Does the IRS provide a tax incentive for generation skipping? Is there a lower tax, lower basis?

Natalie Perry: 00:26:44

So there is an exemption from generation skipping planning from the generation skipping transfer tax, which is a separate tax in addition to the estate tax. So it's the same concept, meaning that you have the also $13 million exemption from the GST tax, we call it.

So when parents leave money to their kids, they can set aside the first 13 million. Each spouse can as generation skipping exempt.

So that would be a separate trust written with slightly more restrictive terms for that first generation so that it does go to the second without being included in their estates. Under the Internal Revenue Code we have that exemption.

And if the parents were to leave their entire estate to their grandchildren and really truly skip their kids, there would be a separate GST tax if they exceed that $26 million.

Clint Harris: 00:27:39

What about retirement funds like say in a 401k account that's not emptied out yet, you still have money in a retirement account and then someone passes. Is there anything special that has to be done with that money to make sure that it transfers in the right way?

Natalie Perry: 00:27:52

Yes. So generally with those, it depends on the client. We're going to leave that to the spouse and then to the kids.

And we may not use a trust for those assets unless the kids are minors. Because under the new Secure act, that money has to come out within 10 years.

And even if we flow it through a trust, those kids are really going to get that minimum distribution each year in most cases. So it doesn't always benefit the client to leave that money in a trust. And it's subject to income tax as it comes out.

So usually it's a little bit less a dollar. Also, those accounts tend to have lower balances than their more accumulated assets. So oftentimes it's a little simplistic answer.

It's really going to vary by client, but we will tend to just leave those outright to the kids or grandkids unless we've got a substance issue or a asset protection issue where we don't want money in the hands of that child if we need to. We could even equalize there with the ira so they have three kids and one child is kind of problematic.

We might leave that IRA to the two kids who aren't and then balance it out in the trust document to try to equalize so that it's fair. But we don't have money going outright to a beneficiary who really can't handle it.

Neil Henderson: 00:29:08

Well, Natalie, as we touched on before we started, and I think we touched on at the beginning of the podcast, a lot of our audience are dealing with alternative assets like direct ownership of real estate or indirect ownership of real estate through syndications and other private placements and things like that. What sort of estate planning considerations exist for illiquid assets like real estate or private equity?

Natalie Perry: 00:29:32

Yeah, that's a really good point. We want to be thinking about liquidity for clients like that. I think a lifetime or a first spouse's death issue that we see a lot is liquidity.

So if the spouse receives, and I'm going to make a traditional scenario for my example here, but you know, if the spouse isn't working and the spouse receives a lot of illiquid assets that maybe are throwing off some income or some income, but only periodically, how is that person going to continue to live without the income that the spouse who passed away may have been bringing in?

So there maybe we want some life insurance or some type of insurance, you know, that could help offset that liquidity, depending on health concerns or, you know, how expensive that would be. But that might be one way we deal with it. Maybe there's a loan we can put in place to that spouse.

If there's some liquidity we can generate either through like a mortgage or something like that. But we would definitely want to make sure there was funds also to pay expenses.

So if our real estate investor dies and now we've got taxes maybe, or income taxes or state administration expenses, how are we going to pay those? So we would definitely want to be thinking about that.

And probably before the person dies, you know, we want to have a plan for some liquidity to be in place, and maybe there's a way they can liquidate some of their interests on death. We'd want to look at those agreements. You know, what if there is an emergency where somebody really needs some money? Money.

What if there's small children, you know, that we need to pay college for, something like that? I'd say that's one thing.

And then also probably Knowing what those agreements say, the partnership agreements or whatever the agreements are that the person has signed on to what happens when that person dies, it could be that that person gets bled out. There's a formula in the agreements that says you get this much over five years or whatever the formula might be.

And so we would want to know that so that we can plan for that to happen as well.

Clint Harris: 00:31:26

Outside of the financials, like I mentioned, I've got two young boys talk to me about if you pass, say my wife and I were incapacitated or passed, what are some of the thoughts that we need to have about making sure our kids are taken care of and going to the right family member and things of that nature.

Natalie Perry: 00:31:42

You would want to name a guardian for your children. So you'd want to have wills that make sure that you name a guardian for the kids and maybe a couple of them in case one can't act.

I would say that'd be the most important thing. And then probably also planning for incapacity, just in case you did, you were alive but you couldn't work, or whatever you know it was.

Is there a plan in place for that as well? Who would take care of the kids or who would take care of you? Probably the powers of attorney would be the most important thing there.

Clint Harris: 00:32:10

What about if someone doesn't have that established for the person out there right now that doesn't have a will, that doesn't have a guardianship in place for their kids, what's the risk?

Natalie Perry: 00:32:19

So if you pass away without naming a guardian, the court is going to appoint a guardian when you pass away and same if you became incapacitated.

So if you hadn't named a guardian but you couldn't take care of the kids for whatever reason, they probably would call social services, get somebody involved, and that's probably a result most people wouldn't want even in the short term, you know, to have that happen. But that's, I think, likely what would happen, depending on the county, where you live and how they handle those things.

You can even designate a guardian in a one page document that you put together. You can sometimes find those online. There's something called standby guardian.

So that could be a really important thing just to do on a weekend, you know, try to put something in place so that you've set forth your wishes as to what happens with your kids. But of course, I think it's better to call a lawyer and get an estate plan. Even if you start small, get a will, get some really basic stuff in.

Neil Henderson: 00:33:10

Place, place the concept of giving with a warm hand is something that's been in my family for a lot of years.

My mom and dad were sort of like, well, you know, we could leave you a bunch of money, but we'd like to kind of see you enjoy it and be around for, you know, within reason. Obviously, you don't want to just be supporting your kids.

But are there any considerations or concerns or tax implications that people need to be aware of when they're trying to give with a warm hand?

Natalie Perry: 00:33:38

Yes. So when you make gifts during your lifetime, you can give up to $17,000 this year per person.

So as many people as you want without incurring any gift tax or using your exemption. So that's like a free gift. You can also pay for college. If you pay directly to the college, there is no limit on that amount.

So you can pay $100,000 to North Carolina University or University of North Carolina, and that would not be a taxable gift either. You can also pay medical expenses, again, directly to the provider for a beneficiary or someone you want to help.

emption, which, as I said, in: 2024

If you're never going to hit that, you probably aren't as concerned about making $50,000 gifts, $20,000 gifts, whatever it is. And people tend to pay for weddings and things like that. And that isn't really what we're talking about.

If you're actually giving cash or you're giving, like, maybe you have an LLC and you have some real estate in it. You want to give your son, you know, a 50% interest because you want him to get into your business and kind of start learning what you're doing.

You know, that would be the kind of gift that we would want to report. Even though the value of may not be over the exemption, you know, it's still considered a gift because you've relinquished your right to that 50%.

So tax implications is one thing to think about when you're giving during a lifetime.

And then also like how to give, because I think as we've talked about a little bit, maybe giving half of your business to your child when they're still in their twenties even isn't the right answer. You know, maybe it should be in a trust, even if it's a fairly straightforward trust.

You know, trust can be 100 pages and trust can be 20 pages, so we don't always have to use the most complicated structure. But having a trust can really help retain control of those shares.

If you were in a position where you wanted to start including somebody in a business. And I think a lot of times people really are focused on control. You know, you might want to make the gift, but you might still want to have.

And there is some tax codes, which I'm not going to go into, which do limit control and say you can't have too much control, but just for purposes of understanding, it important to be mindful of that. So you got to balance out those things. You know, how to give and how to retain control.

Clint Harris: 00:36:07

This is great. I really appreciate your input. There's so much to unpack here, and so much of it is determined by everybody's individual scenario.

I certainly see the benefit of having someone that you can go to and just, like, lay it on the table, like, here's everything we're dealing with, here's what we've got going on, because it's going to take some pretty complex analysis and creative thinking to navigate some of those issues. So I'd love to be a fly on the wall and listen to some of the conversations that you have with your more successful clients.

But, yeah, it's obviously something that's very personal. And obviously, I think it can be complicated, but it can also be pretty simple for the right person that knows what they're doing.

So I appreciate your willingness to share one more question.

Neil Henderson: 00:36:45

And it comes from this quote that says, estate planning is more than just reducing your taxes. It's about caring for. For your family and causes. And we've talked an awful lot about caring for your family on this episode.

But I'm curious of the different ways that you've seen clients take care of the causes that they care about.

Natalie Perry: 00:37:04

Yeah, we haven't really talked about charitable planning, but we do do a fair amount of that. And it can be a small component of someone's estate plan, or it can be a bigger component.

And sometimes we're going to include a charity because we're trying to avoid tax. And because I should preface this with we're not going to give money to charity unless the client really wants to.

You know, the client, of course, has to support those charities and care about their mission. If it works for the client to give some money to charity, it can be a great way for us to minimize or reduce some estate tax.

So if we have somebody worth, let's say, even 30 million just for Simplicity. And I said the exemption was $26 million for a combined couple.

We could put a $4 million gift into the estate plan for a charity, you know, and that's going to zero out our tax. And in a sense, those kids aren't going to get that money anyway because it's going to go to the irs.

And a lot of people would rather go to a charity than to the government. You know, lots of people feel that way.

So it can be a very nice way to work in some charitable benefit into your estate plan without harming your kids or feeling like you're taking away from your K, depending on the family's feelings. And then of course, there's simpler things we can do. You know, put in some cash gifts, you know, $100,000, whatever, $50,000, just really simple.

And we like to include those gifts in retirement plan beneficiary designations.

So as Clint had mentioned, you know, if I do have an ira, say it's got a million dollar balance and I am charitable, my kids are only going to get 600,000 of that IRA because of the, the income tax impact. Maybe I want to give some percent of that IRA to a charity right when I die, because the charity is going to get the full amount.

No tax to the charity, no income tax, I should say, and no estate tax. And my kids would only get 60%. So if I am charitable, it's a nice way to use up that IRA money without having your kids take the income tax haircut.

So we see that and then we see some more sophisticated planning like a charitable lead or charitable remainder trusts. Those are sometimes popular where we can set aside a fixed amount for charity.

There's an annuity paid either during lifetime or during the term of the trust, or at the end of the trust if the charity got the money first. And that can still benefit the family, but ultimately provide a charitable gift.

Those work in opposite ways, so I'm not explaining it very clearly, but there is this concept of a charitable trust with still some benefit to your family, which can be appealing to clients because you get a charitable deduction, but you can still benefit your kids.

And then there are some annuities, private annuities, or charitable annuities people can set up where they put a fixed amount of money aside for a charity and then that can pay back to the individual for some time period. So there's the really complex and there's the really easy. I also want to touch on private foundations.

Some clients really like those, especially the higher net worth. Although since the Onset of the donor advised fund.

We don't see as many private foundations as we used to because people can leave the money to this family donor advised fund that they control the gifts from, but they don't have the administrative costs of running a foundation, which is really like a small business.

Neil Henderson: 00:40:28

Well, listen, it is up to people how they want to will their money to charity and all that. But I'll just kind of point out that, listen, Uncle Sam is a pretty needy charity as well these days. Depending on your politics.

Natalie Perry: 00:40:41

Yes, exactly.

Neil Henderson: 00:40:42

Well, listen, Natalie Perry, this has been so great. We really have learned a lot and I hope our audience has as well.

If our audience wants to reach out to you and find out more about what you're about, what would be the best way for them to do that?

Natalie Perry: 00:40:55

Yeah, you can reach out to me on LinkedIn. I'm on LinkedIn, Natalie Perry.

And you can also check out our website, which is harrisonllp.com that's our firm name and my email address is on there. If you want to look me up and send me a question, I'd be happy to help or try to answer any questions. And yeah, thank you.

I appreciate the opportunity to talk about this stuff. I love it. It's fascinating and it's fun to help clients but still engage in the tax planning. You know, it's a really interesting area of practice.

Neil Henderson: 00:41:25

Well, thanks again for your time, Natalie.

Clint Harris: 00:41:27

Thanks so much, Natalie.

Natalie Perry: 00:41:28

Thank you.

Clint Harris: 00:41:28

Really appreciate it. Okay, have a great day.

Natalie Perry: 00:41:30

You too.

Neil Henderson: 00:41:31

Thank you so much for listening and watching the Truly Passive Income podcast.

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