The interplay between income tax and estate planning offers an attractive financial opportunity. In this episode, Tom speaks with Andrew Howell about creating a better life for you today, and a better life for your family tomorrow.
04:14 – What Is Estate Planning?
08:34 – What Options Are Available To Manage Tax Planning & Estate Planning?
10:59 – What Questions Should You Ask Your Estate Planner?
17:51 – Why Should You Build Flexibility Into Any Estate Plan?
20:59 – What Are The 1st Steps To Take To Protect Your Legacy & Control Your Assets?
Contact special guest Andrew Howell by emailing Andrew here: email@example.com
Announcer: This is The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes.Announcer: This is The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes.
Tom Wheelwright: Welcome to The WealthAbility™ Show where we’re always learning how to make way more money and pay way less taxes.
Tom Wheelwright: Hi, this is Tom Wheelwright, your host, founder and CEO of WealthAbility™.
Tom Wheelwright: So, what if you could reduce your income tax today, and at the same time, leave a legacy for your family? We have a rare opportunity today to look at the inner play between income tax planning and estate planning. This is not just for people who have a lot of … who are expecting to have an estate tax. I mean, you know, these days, you have to have twenty plus million dollars if you’re a married couple when you die before you have any kind of estate tax. So, we’re not focused on that at all. What we’re looking at is, anybody who even has a home. Anybody who has a business. Anybody who has any investments that they would like to leave to their family. There’s this remarkable opportunity to get those assets to your family in the right way, and at the same time, reduce your income tax. So, I look at it as, it’s really how income tax planning and estate planning, they work together to create really a better life for you today, and a better life for your family tomorrow.
Tom Wheelwright: I have a remarkable guest today who is one of the few, frankly, one of the few estate planners. He’s a state planning attorney and one of the few estate planning attorneys I’ve ever met who actually understands income tax, and the role that income tax and estate planning play together. So, I’d like to introduce, good friend of mine. We’ve worked together for years and years and years, and he’s taken care of many of our clients and done a terrific job with them. His name is Andrew Hal. Andrew, welcome.
Andrew Howell: Tom, thank you so much. Now, I just have to live up to that introduction, but I really appreciate it. It’s an honor to be on your podcast.
Tom Wheelwright: Well, thank you Andrew. So, if you would just, to start out, would you give our listeners just a little bit of your background and why we work together.
Andrew Howell: Yes. So, the elevator conversation, right?
Tom Wheelwright: There ya go.
Andrew Howell: So, I always tell people that I’m an estate planning lawyer. I’m a cofounding partner of a firm here in Salt Lake City, Utah called York, Howell & Guymon. We specialize in estate planning and tax work, asset protection. That’s all I’ve ever done for the last 18 years, and I really like it because I get to feel like I’m not a real lawyer. I’m getting to help people sleep well at night, not suing them and making their lives worse. So, any good attorney jokes you know I’m always game for, and feel free to let them fly because I’ll just join in the fun.
Andrew Howell: Yeah, so we specialize in the gamut from husband and wife and two kids who need sort of a basic estate plan to all very sophisticated tax work and estate planning work.
Tom Wheelwright: All right, well thank you, Andrew. So, Andrew’s being very modest. Like he said, what we’ve got is people typically, they have an income tax advisor, a tax advisor, who is typically an accountant and their specialty is income tax and they know how to reduce … they may know how to reduce income tax or helping you with your income tax. And then we have estate planning attorneys who are very good at transferring assets when you die, or transferring assets when you’re living, and they’re very focused on the estate planning. What’s unusual is when you have people who understand both sides of it. And, what most people don’t recognize is that there is a massive interplay between income tax and estate planning. I’m not just talking about estate tax. I’m talking about just estate planning. So, Andrew, how would you, just for our listeners, just basics, when you think of estate planning, how would you summarize? What is estate planning, basically?
Andrew Howell: So, we always call estate planning … it’s the art, and we really do use the word art because no two plans are the same. Your estate plan, Tom, looks different then mine, and you need to be able to work with that planner that can sit down and first find out what are you trying to accomplish? What are the goals of the family? What are you trying to build? What kind of legacy? Are you charitably inclined? Are there special issues with family members? It’s sort of this art of coming in and meeting with the client then being able to accomplish their goals with what they have to have happen with their estate.
Andrew Howell: Now, that involves the technical things like wills, and trusts and all of those types of technical documents, but I also think that estate planning is a lot broader. In my mind, estate planning is also, how are you dealing with your estate while you’re still alive? Okay, not just when you die, but how is the tax efficiency working within your estate? And that’s tax planning. Then how do you make sure this estate you worked so hard to create is protected from this[inaudible 00:05:08] society. So, that brings in asset protection planning as well.
Andrew Howell: I think that, and what I love to do when I’m talking to clients about this because it’s hard to sort of understand how these interplay, is that I like to just give an example. The example I always give is this.
Andrew Howell: Let’s say that, Tom, I decide that I’m going to buy my dream car which is a 1971 Chevelle 450 4SS. I pay $50,000 for this car, and I drive it for a few years and I enjoy it, but I decide I want to get something else. It’s appreciated in value over that time. It’s now worth $75,000. I decide that I’m going to give it to you, right? During my lifetime, to get it out of my estate. I don’t want that asset, whatever it might be. So, I give it to you, right? As you well know, what you do is you know have a $75,000 gift, the fair market value of that car when I gave it to you. You have to take what I paid for that car as your base, $50,000. So, you decide that you sell it the next day because you don’t want this gas guzzler sitting in your driveway. You sell it for $75,000. You have $25,000 in gain. You have to pay capital gains tax on.
Andrew Howell: Now, take that entire scenario, but flip it. Say, okay, what if I don’t give it to you during my lifetime, but instead I leave you this car at my death as an inheritance. An inheritance, now gets the stepped up basis. So, not only do you get this $75,000 car at my death and the estate taxes and so forth have to be factored in on that, but you have a $75,000 basis. There is this step up that occurred because of the transfer of assets at my death to you. You sell it the next day, you have no capital gains tax to pay.
Andrew Howell: So, that’s the hard tight rope that we walk with our clients in terms of what do you need inside of your estate, and how do we plan around that for all of the other things that are outside of this vacuum of taxes? Ultimately, what does the family need? What are the goals of the family? All those things, again, come first, but then just making sure that the next generation, whatever that might be, whether it’s kids, whether it’s a charity, a legacy, whatever it might be, receives those assets in the most efficient way so that they still maintain the most power. They’re still there and we don’t have to chip away a 40% estate tax on those things.
Tom Wheelwright: Exactly. So, here’s the other thing that I think is important, I find with our clients. They still want to be in control. So, they want to make sure that their family gets taken care of when they die. They want the income tax benefits now of, you know, maybe, using their children’s tax brackets. Maybe creating passive income by transferring assets to their children, but they want to control it because they don’t want to give up use of the assets. They don’t want to give up control of the assets. So, what I love about, what, when we worked together, Andrew, is that what we’re typically able to do is transfer those assets in a tax efficient way, so that it gives us the best tax benefit. We might even end up keeping it. We can transfer it. In other words, we may transfer for income tax purposes, but not transfer it for estate purposes. We might transfer it for estate purposes, and not transfer it for income tax purposes. And I think what most people miss, is that there’s so much flexibility in what we can do, as far as transferring assets and retaining control. Would that be fair?
Andrew Howell: Oh, it’s totally fair. The tool box that we have is very, very deep in what we can implement to accomplish the goal. Again, finding the goals first, and then we can always back into how to create those goals. You know as well as I do, that like in that car example that I gave, I can easily do it where, let’s say I wanted you to have joint use of that car. But I didn’t really want to give it to you, and I still wanted to make sure, hey if you dent it up, I can take it back. So, I can put it in a trust for your benefit. You can be responsible for all the tax obligations of that car. It can still be part of my estate for estate tax reasons, so we go back. I now die. I leave you the car. You’ve gotten all the tax burden during your life time, and then at your death you get this step up basis in that asset as well.
Andrew Howell: I mean, the tools are really kind of … I’ve been, like I said, practicing for 18 years, and it’s just like every year, it seems like, we come out with a new potential strategy that might work. And these are, you know we’re talking about strategies, these are well-proven techniques that fall well within the tax code. I have a tax planning motto when I do stuff for people, which is, “Nobody goes to jail, especially me.” Right? These are well proven …
Tom Wheelwright: You’re very nice. You clearly live in Salt Lake City, because what I say is, my goal in life is to never be anybody’s girlfriend.
Andrew Howell: I like it. That’s better than mine, absolutely.
Tom Wheelwright: So, I think this is … we always do everything … we want everything to be legal and I’s dotted and t’s crossed for sure. You mentioned something earlier, and that is, you know, when you start talking to a client what’s important is that you get a big picture of not just what their assets are and not just what they want to do when they die, but actually the relationship that they have with their family and really the entire family dynamic. Give us just a … ya know, what are some things that people ought to be looking for when they’re speaking to an estate planning or, and, tax advisor? Which, by the way, have to work together, okay. Andrew and I talk all the time. It’s not in isolation. But what are some of the things that people can be looking for when they’re talking to an estate planner or income tax lanner that they ought to be looking for. What kind of questions should be asked and what kind of opportunities are there?
Andrew Howell: Yeah. So, obviously, I always like to tell people, speak with somebody who’s done this, and did you have a good experience with that planner? They need to have certain qualifications. Obviously, you want somebody that’s been at it a few years. This is a very specialized area of the law. I always tell people I know a whole lot about a very little. So, you want somebody that’s got some age, maybe a little bit of gray hair is always a good thing. That’s why I’m happy I have my kids.
Andrew Howell: Another thing that we’re noticing, and these are kind of the topics of the two books that we’ve written, Tom, and you know and are well aware of this. This is sometimes where we go back to, what should you expect upon that first meeting with the planner? What we’re finding is that clients are not getting what they expect because they’re actually demanding something different than what that planner is able to give them. When I say that, I mean, it’s gonna probably be difficult because a lot of planners aren’t really up to speed in kind of what I’m about to go through, which is, generational levels, now, are looking at something much different than say our grandparents generation. Where estate planning in our world really evolved, right? The passage of wealth to the highest degree possible without any consequence or thought put into the purpose of those assets being left for.
Andrew Howell: Again, in our book, Entrusted, we talk about financial wealth being like dynamite. It’s not good or bad, it just is. It can be used for good or bad, but the similarities between dynamite and wealth is that they’re both going to make an impact. The question is, what kind of an impact are they going to make? So many people, with their estate planner, just handing over that lit stick of dynamite to their kids and hoping they don’t blow themselves up.
Andrew Howell: The point of what I’m saying here is, I think the very first conversation with your estate planner, after you’re comfortable with the qualifications and that you know that they can do what they say they’re going to do, is what is the first thing they ask you? If the first thing ask you is how much are you worth? You know, what’s your net worth on your balance sheet? That’s a tough one, because then I’m thinking the planner is not caring a whole lot about what you’re trying to build. Right? It’s like, the planner is going to come in and tell you, oh, this is how many two by fours. This is how many sheets of sheet rock you need in order to build that house, but there’s no plan. There’s no blueprint for building that house. I think you’ve got to have the blueprints first, and then we use all of these tools that we’re talking about to get there.
Tom Wheelwright: Yeah, I agree. I tell people, the very first conversation we’re going to have, and when we meet with people, you know we’re meeting with them for really anywhere from three to six months to put all this together. The very first meeting, we’re going to spend an hour just me asking questions; just me understanding. Because I want to understand everything. I want to understand … just like you say, don’t want to just understand the assets. I want to understand what their goals are.
Tom Wheelwright: I actually, and I happen to know you’ll agree with this, I want to understand their relationship with their children and what they talk about with their children about money because, you know, one of the things we talk about, and we won’t get to into it because it’s fairly complex, is this beneficiary defective trust, where you actually have a trust, just to give people an overview … this is a trust where the assets are in the trust, but the beneficiary is the one who’s being taxed on it. The reason we might want to do that. There’s a lot of income tax consequence. For example, let’s say we have passive losses from real estate, and we don’t have any passive income and we can’t be a real estate professional. Then, what we may want to do is have the kids own part of the part of the real estate so they get the passive losses, but they also own part of our business, which the business to us is active, but the business to them is passive.
Tom Wheelwright: So, they, on their tax return, they’re going to show some of the income from the business because it’s a pass through entity, like an S Corporation or a partnership, and they’re also gonna show some of the losses from the real estate. Now, the challenge is, that I see, Andrew, that if you don’t have a relationship with your children … now it’s fine with they’re minors, because they’re not going to see that income tax return; but, all of a sudden, they grow up. I know your kids are still young, but mine are all grown up. In fact, I have to laugh because you talk about 18 years. I’ve been doing 18 years like that’s a long time. I mean, that’s like yesterday to me. You know, I’m basically double that.
Andrew Howell: There you go.
Tom Wheelwright: That doesn’t mean you’re half my age, just half my age in career.
Andrew Howell: So, Tom, I’ve been married for 17 years. I’m going to go home and tell my wife that she shouldn’t feel like it’s felt as long to her as it has.
Tom Wheelwright: Well, it may be that you been married 17 years and it feels like 35 years. I mean …
Andrew Howell: That’s exactly what I mean.
Tom Wheelwright: Anyway, so … but what happens is all of a sudden, your kids grow up. And all of a sudden, they’re signing their tax return. You’re not signing anymore. What they see is, oh look! I’ve got money sitting here. I would never do … if what you tell me in that first meeting is that you don’t talk about money with your kids. That’s not something that’s open to discussion. I honestly, even though, it would be good from an income tax standpoint, I don’t want to do that. Because, like Andrew says … like you say Andrew, it’s dynamite.
Andrew Howell: Yeah.
Tom Wheelwright: I’ve actually seen kids’ marriages break up over this income tax plan. I actually had an experience early on in my career where the income tax planner had done a terrific job. Back then, we could do even more, because kids had their own income tax rates, so you know, we could split up the income and get lower tax brackets and all sorts of stuff just by transferring ownership. So, the daughter gets married and she married somebody who’s never had money. She grew up with money, but he’s never had money. He sees their first income tax return and what all of a sudden dawns on him is that he’s married to a trust fund baby, and he’d never known that.
Tom Wheelwright: So, you know, you might have a relationship with your kids, but what about your kids’ spouses? You don’t know what’s going to happen to those kids’ spouses. One of the things that, maybe Andrew talk about just for a minute, is how important it is to build flexibility into these plans because of changes in your life.
Andrew Howell: Without question, you need flexibility. Again, going back to what we were talking about just a little bit earlier where clients are demanding to put more purpose into their trusts and things like that. Setting up what the family really believes in. What their core values are, and using that as our North Star in terms of planning.
Andrew Howell: I always see people trying to be really restrictive. Oh, my kids don’t get anything until they graduate from college. I’m always going, wait a minute, is that really what you wanna do? Because what’s happening there, is they’re elevating a preference to a principle. I know what they’re going for. They want their kids to be educated, because they feel that education will allow them [inaudible] in life and they can be self-sufficient and they want to make it on their own. I think all of us would probably want our kids to be self-sufficient, and make it on their own. That’s a principle that I think is fundamental.
Andrew Howell: The preference, though, of college, to get there, might not always be the right way. Certainly it isn’t the right way for every child. Steve Jobs and Bill Gates would never have been receiving anything because they didn’t graduate from college. So, being too restrictive, I think, is a difficult thing; but also, in terms of building flexibility. Because a lot of the trusts that you and I use for these plannings or plans are what we call irrevocable trusts. That means they can’t be changed. Now, that really used to mean that under old laws where if you created a trust that was irrevocable, it was set in stone. There was no flexibility in it. Most states, in fact, I think all states now, have adopted some form of the uniform trust code which provides much more flexibility in terms of making adjustments and so forth.
Andrew Howell: So, you’ve got to make sure that your planning has the ability to evolve and change, because I promise your life will, right? Tax laws are going to change. Your family dynamics are going to change. Estate tax laws are going to change. This is the reason why I always tell people one of the busiest days of the year for me is the Monday after Thanksgiving because everybody’s been crammed together all as a family for four straight days and now they want to cut each other out of each other’s estate plan. So, it is always something that we want to have that flexibility to come back in and say, hey we want to make some changes.
Tom Wheelwright: That’s great. So, Andrew, if you could give people three tips when it comes to … and again, I want to include both the income tax and the estate planning, but when it comes to estate planning because I think it’s in the estate planning that typically, your colleagues, not you, which is why we’ve got you on the podcast today; but, your colleagues tend to ignore the income tax side. If you could think of two or three things that our listeners really ought to be paying attention to; or, two things that they could actually do that would help them take care of their family when they’re gone. Even if they don’t have much in the way of assets, but really take care of their family, and at the same time, maintain control over their assets and reduce their income tax.
Tom Wheelwright: If you simplified it down, and I suspect you have already. What would you tell people?
Andrew Howell: So, the first thing, of course, and this is me being a little bit biased, but do it. Do your estate planning. Get a will. Get a trust. Get a power of attorney document. Meet with a blood sucking vampire lawyer. Go through that pain and get it in place, because what you’re doing there is you really are taking control of a lot of very important decision making within your planning and your family protection, right? If you have minor children, through that estate planning, that’s where you’re spelling out who’s going to take custody of them. Who will be their guardian. You’re also making sure that the assets pass correctly to a spouse, to children. I’m a big fan of never leaving out right to kids, and we can do a whole other podcast on that.
Andrew Howell: So, what we’ve found is 70% of the population doesn’t do their estate. This is not fun stuff. Talking about death and taxes with the grim reaper lawyer. Nobody wants to do it. So, if you haven’t done it, 70% of the population out there, go and do it.
Andrew Howell: Now, second recommendation. If you have done it, right? The other 30% of the population, make sure it has been updated. What we found … we wrote an article a few years ago for Trusts and Estates Magazine and we did a study of all of our clients. How long had it been since they had actually reviewed their estate plan, if they’d even done it. We found, on average, it was 15 years.
Tom Wheelwright: Oh wow.
Andrew Howell: You can imagine how much changes in your life in 15 years, not to mention just in the vacuum of taxes here. We had a huge tax law change in 2013 on January 2, when they adopted this Tax Payer Relief Act of 2012, and what that did is introduced this new concept of portability. We don’t need to get into that, but it basically means is that if you have an estate less than $22.8M right now, that your trust could very well be operating the wrong way if it was done prior to 2013. So, if you’re planning was done prior to 2013, meet with your lawyer. Have it updated, because there’s a big tax issue there that could come back to bite you.
Andrew Howell: Then, you know, I love the idea of what you were saying a moment ago, which is sort of the third thing. Be clear about what you’re trying to accomplish. There’s so many different ways to do that. I mean, there’s books that talk about it. We have programs. I’m sure you have, you know, for your connections, Tom, a bunch of different programs where families can really decide what it is in terms of not just financial literacy. Like you said before, I think that’s huge because your kids are not going to learn financial literacy in school. Quite honestly, you probably don’t want them to. You need to be in charge of that financial literacy training of your children. I am a big fan of opening the books, right?
Andrew Howell: Making sure you set clear expectations with kids, and you also do this in an age appropriate way. Meaning, I’m in control, this is all my stuff, but I want you to start getting a taste of what’s going on here. I’ve sort of lived this. My grandpa, who was a big mentor in my life, he would always include my sister and I in family meetings with our accountants and financial advisors and so forth. So, by the time I was 17 or 18 years old, I was speaking the language already. So, I’m a big fan of creating that family interaction and that involvement in determining the financial literacy. What are the weak spots? Where do we need to spend a little bit more time?
Tom Wheelwright: I … I … I think … I think that …
Andrew Howell: Do it and then concentrate on family.
Tom Wheelwright: That’s awesome, Andrew. Thank you for simplifying that.
Tom Wheelwright: I’m gonna add a number four, a little bonus here. And that is, make sure that your income tax planner and your estate planner are talking to each other. Make sure your accountant and your attorney talk to each other, and that they coordinate this, because what I find, and not you Andrew, but most attorneys … is that attorneys are very good with language and very bad with numbers. And accountants are very good with numbers and very bad with language.
Tom Wheelwright: So, this is an opportunity to get both the numbers and the language right, so that it works properly. Your estate plan works from a … you know, from the language standpoint, it protect your assets. It gets them where they’re supposed to go, which is the attorney’s job. Then it also works from a numbers standpoint, because remember when it comes down to it, it’s all about the numbers. What it is, because there’s a dollar value and to your kids, and your family, your legacy, I guarantee that there’s a dollar value in their minds to that legacy.
Tom Wheelwright: So, having that dollar value work properly, like Andrew said. You know, we have this big estate planning exemption, but it could go away. I mean it wasn’t …
Andrew Howell: Yes, it could.
Tom Wheelwright: I mean, I remember very clearly when it was $600,000 and now it’s $22.8M. So …
Andrew Howell: Some of the, and as you know, is a very political issue and Republicans have a tendency to not like the estate tax. Democrats have a tendency to like the estate tax. And the two democrat candidates that we’re sorta watching right now, Bernie Sanders and Biden. Well, Bernie wants a 75% federal estate tax, and Biden came out a couple of weeks ago and said the first thing he would do if he became president was to eliminate the Trump tax reform. So, this is absolutely gonna change, and again, like what you said earlier, this is a moving target and we really need to always make sure that the planning is on top for the client.
Tom Wheelwright: Yah, thanks Andrew. So, Andrew, this has been terrific. Thank you so much. Tell our listeners where they can find … how they can find you.
Andrew Howell: So, the best way is email always. I have this corny email address. It’s firstname.lastname@example.org And that’s Y-O-R-K-H-O-W-E-L-L dot com. And that goes to my paralegals and assistants just to make sure that I don’t miss an email. I’m happy to speak with anybody and I really do appreciate the chance, very much, to be on your podcast, Tom.
Tom Wheelwright: Nah, I appreciate that, Andrew. And everybody remember, that when you can work your income tax planning with your estate planning … this is just a huge deal here. What you can do is you’re going to reduce your income taxes now, and at the same time, you’re going to provide for your family. And because you’re reducing your income tax now, you’re going to have more money to build wealth. So, my experience, with our listeners, most of you, you want to build a legacy for your family. You want to take care of your family. You want to take care of … a lot of times, you have charitable causes you want to take care of them, as well. Reducing income tax, now, is a really major part of that, which is what WealthAbility™ is all about. You know, when you combine this estate planning … your estate planning attorney with the income tax, and your income tax planning accountant … when you put that all together, you’re always going to end up with way more money and way less taxes.
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