Dave Cain: Welcome to unsuitable on Rea Radio, the award winning financial services and businesses advisory podcast that challenges your old school business practices and their traditional business suit culture. Our guests are industry professionals and experts who will challenge you to think beyond the suit and tie, while offering meaningful, modern solutions to help enhance your companies growth and your personal net worth. I’m your host, Dave Cain.
Dave: What would you do if you had $80 million at your disposal? You’d probably buy a few homes. A big boat. Maybe a few cars. Go on some killer trips. Fund some 529 plans. Splurge on the right here, right now kinds of things. But then reality will set in. There will come a time when you look at all that money, and you’ll start to think about it’s long-term value and the impact you can have after you’ve passed away.
Dave: Maybe you’ll leave an inheritance or legacy to your children and grandchildren. Establish a trust. Maybe you’ll donate a large portion to a cause that’s close to your heart. But if you never put your wishes down in writing, you could be leaving a mess for the people you leave behind. As far as that charity you wanted to donate to, without a will or trust, there’s really no guarantee that money will get there.
Dave: As you know, the queen of soul, Aretha Franklin, died last month. After her death, it was revealed that she left behind an $80 million estate and no will or trust. As a result, discussions about estate planning are on the increase and are being had in all circles.
Dave: We could think of nobody better to join us for this conversation than Rea’s very own renowned estate planning legend, Dave McCarthy from Rea’s Medina, Ohio office. When I think of Dave, one work comes to mind: R-E-S-P-E-C-T. Welcome back to unsuitable, Dave. It’s been a while.
Dave McCarthy: It’s good to be here.
Dave: Great. We’re going to talk about some really interesting estate issues. First of all, I think you and I both need to send out a disclaimer. Neither one of us are attorneys. We don’t practice law. We don’t give stock market advice. Any road we travel with estate planning, we always like to have the attorney in the meeting, financial advisor, and the CPA. Maybe a family member. There’s our disclaimer.
Dave M.: Sounds good.
Dave: I think legal is fine right now.
Dave: So estate planning 101. Let’s back this up a little bit. With the new tax act that came into play earlier this year, where are we at with the state planning taxation?
Dave M.: The biggest thing with the new estate planning tax laws that were passed was that it raised the exemption amount to $11 million. If you think about it from an estate planning standpoint, what happens is most people are going to say “Hey. I don’t have to plan anymore because my estate is much lower than the $11 million.”
Dave M.: That’s probably the biggest issues with that new tax plan. What you see, I suspect, is when that came out there was a delay in the estate planning. “Hey. We no longer need to do it.”
Dave M.: I think really where you tend to fall is estate/family unit planning.
Dave: Correct. I like to look at it more as what you’re trying to do is you’re trying to plan what happens after you pass away. It’s not really about the money, necessarily. It’s more about making sure there’s an orderly transfer of your assets to the people you want it to go to. Really, we’re backing way up to estate planning 101 and kind of bypass the last several years. But under the basic estate planning, what are some of my options?
Dave M.: The first thing that you’ve got to look at is, when you say your options, you’re asking what you need to have done, right?
Dave: Correct.
Dave M.: Probably the number one thing that you need to do from an estate plan is have the will drawn up. Keep in mind, I believe that will needs to be done by an attorney. It’s my opinion you shouldn’t go try to write your own will. Every state has different rules. You need to deal with an attorney who understands all those rules to make sure whatever will gets worked up is valid.
Dave: Okay. So will. What about power of attorney? Is that start of the process or revisit the process?
Dave M.: Correct. I think another thing you need to have is a durable power of attorney. That if something happens to you and you become incapacitated and can’t make decisions, you need to have somebody in place who can do that for you. Durable power of attorney handles that.
Dave M.: Another document that you absolutely need to have is a healthcare power of attorney. What that basically does is you have to have somebody in place to make the decisions if you’re incapacitated: to make healthcare decisions. Keep in mind, those two people might be different. Meaning who has your healthcare power of attorney may be completely different than who has your durable power of attorney.
Dave: Give us a feel for how often these documents should be reviewed.
Dave M.: I like to say you need to look at these documents about every two years. You could look at them more often, but if somebody at least pulls them out, glances at them, and says “That’s what we want to have in place,” every two years it makes sense to look at them. The other things is, while you’re looking at them, you need to make sure the people who you’re going to put in charge of this stuff also have some comprehension on what these documents say.
Dave: What about in a family unit? Do you have language, or should you have language, a document, that talks about what happens if the parents are deceased: who will take care of the kids?
Dave M.: Yeah. Inside the will you can have the documents to say who you want to have become guardian of the kids. You can also do a separate document that discusses who you want to have guardianship. That’s the same scenario. Somebody who, when you pass away, you would name an executor who would handle the financial side of your estate, that doesn’t necessarily have to be the same person, nor would you want it to be the person, who you’re now going to have guardianship of the kids.
Dave: Do you find that as a issue that’s often overlooked? The medical and power of attorney and the will sometimes is there, but maybe the guardianship isn’t looked at as closely?
Dave M.: The guardianship is hardly ever looked at. The reality ends up being is because people, when they’re in their late 20s and 30s, when they’re having kids, they also feel like they don’t have any money. They don’t feel like they need to have an estate plan in place. Your biggest asset right now are your kids. You need to protect those kids. You need to be the one who makes the decision on who gets to be the guardian.
Dave M.: If you don’t have that scenario, what happens is both husband and wife pass away, then you leave to probate court to make the decision on who is going to be the guardian.
Dave: Action plan. I think this is an action item you just suggested: that our listeners need to look at the guardianship issue within their family unit. I’m sitting here thinking “I don’t have any kids at home, but I sure hope my kids have guardianship taken care of. As a grandparent, I don’t want to raise a two year old.”
Dave M.: That’s right. For all you know, you could also be listed as the guardian. Again, probably the biggest thing when you’re doing estate planning, whether it’s guardianship, whether it’s anything with regards to your estate, you have to have communication with your heirs. With the people you want to take care of things when you pass away, communication is probably the key. You got to have these conversations with these folks.
Dave: So now you’ve listed me as the guardian to take care of the kids, but you haven’t left me any financial resources to do that. You put me in a spot.
Dave M.: That’s correct. You might list in your will or in your separate document who is going to be the guardian. That doesn’t mean that person is necessarily going to accept. You have to have the conversation with them ahead of time to make sure they’re willing to accept. Otherwise, you need to pick somebody else. If you don’t pick somebody else, the courts will then assign somebody.
Dave: Good piece of advice. Again, I would think that that’s often overlooked big time.
Dave: We already talk a little bit about state planning and tax reform. Let’s dive back into that. There is some controversy. I think everybody likes where we’re at now with the 11 million. Is there a sunset on that number?
Dave M.: There is a sunset. When they did a lot of the tax planning act of 2017, what happens is all of these rules sunset. I don’t think we’ll ever get there, to when the sunset happens, because I think as we get closer to that they’ll probably raise it or leave it the way it is. The federal government put a lot of the sunsets in just because they needed it for the budget planning purpose. For the most part, I think these sunsets will never actually happen.
Dave: You and I’ve both heard over the years, talking to our clients in estate planning, there seems to be a concern they want to avoid: probate. Obviously, that’s a heavy legal issue that we would need to bring counsel in. Are you still hearing “I want to avoid probate”?
Dave M.: Yeah. I think most people will mention that they want to avoid probate. They talk about they want to avoid the cost of probate for one. Keep in mind, probate is not a dirty word. What I mean by that is the courts are set up to protect the heirs, to make sure they’re supposed to get what you wanted them to get, or if you didn’t write a will then they’re supposed to make sure, according to the rules of the state, which heirs are supposed to get what.
Dave M.: That being said, to avoid probate, what you’re doing is you’re not making public everything that’s revolving your estate. You mentioned, for example, Aretha Franklin. We all know she has a $80 million estate. The reality is, because of the fact, that has to become public. She didn’t set something up to prevent it from becoming public. So now the entire public knows the fact that, number one, she didn’t do a will. Number two, we know exactly what or very close to what her estate is worth.
Dave: That’s an interesting case. Again, a lot of publicity. A lot of content that’s been delivered. You got to walk through what’s true and what isn’t true. But some of the reading we’ve seen is her advisors continually tried to get her to do a will and trust. They knew the importance of it.
Dave M.: Absolutely. That’s a tough situation. I do have clients … Not at that particular value, but we’re pushing to say we need to get this stuff in place. Never stop pushing is how the professionals need to look at it.
Dave: I agree. I think the message to us as advisors is we need to put both of our hands on the back of our clients that maybe don’t have the time to do this or don’t feel they have the resources to do it and push and push and push.
Dave M.:Absolutely.
Dave: Tax planning. Let’s talk about that. I want to build my estate. I want to leave a legacy. You have some tax planning tips for me that I can put in place now?
Dave M.: Yeah. Basically, if you want to try to do some planning, let’s say your net worth is going to be over the $11 million-
Dave: 10.5. I’m just right under. So I’m in good shape.
Dave M.: You’re just right under. You’re in good shape. You don’t have to anything then.
Dave: I want to go up to 10.9 though. You know me. I like to be right on the edge.
Dave M.: Absolutely. Once your estate gets up to a larger value, I would look at saying you need to possibly look at a trust. What a trust can help you do is it can help you plan after you pass away.
Dave M.: Sometimes, by putting some thing in a trust, you’re able to avoid a lot of the taxation issues that can happen if you just have a will and you own everything. Different trusts can be set up to pull it out of your estate, and therefore save some estate taxes.
Dave: Are you a big advocate of trusts?
Dave M.: I’m a big advocate of having a trust if we have a reason to have a trust. Somebody that has maybe a million dollars or so in assets and they’ve got four kids and that money’s going to go to the kids and the kids are all adults now, I don’t see a scenario where they necessarily have to have a trust.
Dave M.: If they feel like they have a need to dictate after their death what happens to that money then a trust absolutely will work. If they just plan on saying “After I pass away I want to split it up to the kids and have them get the money,” a trust might not be necessary in that point. That’s definitely a conversation you need to have individually with your professional team.
Dave: What about family meetings? You get involved with big family meetings and talk about this stuff?
Dave M.: Yeah. Actually, we’ve done quite a few of these with clients. We’ve had it where we’ve had the family meeting and had all of the kids, all of the kids spouses, everybody in a room, and sat down and had the matriarch and the patriarch of the family say “Here’s what we want to have happen with the assets,” especially when there’s a business involved.
Dave M.: What that does is everybody around the table hears directly from them who they want the business to go to. Who they want the assets to go to. What that does is that prevents any kind of a conflict after the person passes away. Somebody says “He wanted me to have that” or “I was supposed to get that,” the communication in that meeting can really prevent a lot of conflict down the road.
Dave: You mentioned the business owner. I want to talk a little bit about that because, when a business owner passes away, it goes way beyond estate planning. There has to be a plan in place for the continuity of that business. Are we doing better in that area as business owners?
Dave M.: I think we’re doing better. At that same time, there’s a lot of scenarios. You’re going to have a will. You’re going to have a trust. Remember, when you own that business, when that business owner passes away, that person is the one responsible to take care of everything with that business. When they pass away, who is going to run the business? Who is going to make those decisions?
Dave M.: The reality is, inside that business, those decisions also need to be figured out, especially between the date of death and whenever it’s determined what’s going to happen with that business. You need to have a scenario set up so that somebody knows who’s going to step in and run that business, and the fact that they have the control to run that business.
Dave: You got any good news? You’re painting a pretty nasty picture here, but you’re being realistic.
Dave M.: Right. The reality ends up being, when it works good, you never hear about it. When it doesn’t work good, those are the things you remember. Those are the things that you need to try to fix.
Dave: I guess the Aretha Franklin situation is a reminder.
Dave M.: Absolutely.
Dave: I believe Prince passed away as well without a will or whatever: having the proper planning documents. So every now and then we get a reminder. Those are very, very famous people in the news, but we see and hear it from colleagues. From clients. And when it happens, I think you and I both take the pledge: we’re not letting that happen again.
Dave M.: Absolutely. Sometimes the resistance for some folks to do some of this planning is they look at it and say “That’s going to cost a lot of money.”
Dave M.: The reality is it’s a lot cheaper to do the planning ahead of time than wait until after death and have to pay for all of the effects and the professional fees to figure out what to do with everything. So planning is actually cheaper in the long run.
Dave: If not, you’re planning to fail, I believe.
Dave M.: That’s correct. Unfortunately, in Aretha Franklin’s situation, she’s going to have about a $30 million tax bill that she’s got to come up with to pay.
Dave: The other thing we should talk about … It’s not the most enjoyable thing to talk about, but we have clients who have maybe spouses or kids that are ill or have other medical challenges that need to be taken care of way in the future, way past my lifetime and your lifetime. Talk to me a little bit about a planning technique there.
Dave M.: One of the things that you can do is, for example, if you have a child with special needs, you can actually set up a special needs trust. What the trust can do then is it can dictate your wishes on how that child will be taken care of decades after you pass away.
Dave M.: In a situation where somebody has a child with special needs, possibly even another family member that down the road, someday, they might be responsible for, having a special needs trust set up is probably the best way to do something like that: to plan for the future.
Dave: Let me throw a couple questions to you. Again, these are real life examples that you and I have both dealt with or heard from clients or colleagues. As we get older, we kind of forget where we put stuff. We move. Stuff is in a box. Might be in the safety deposit box if we can find the key. Where should a person keep those documents?
Dave M.: Keep them all together, hopefully in some kind of place that’s going to be safe from fire and flood. That’s the main thing. The next step you have to do is make sure the people who you put in charge of this after you pass away, number one, they know where these original documents are. Those can also be kept at the attorney’s office or the CPAs office. They should also have copies of them ahead of time too, so that they know how to plan.
Dave M.: Those are the type of things that you have to make a list too of when you want to give these things away. Who do you want this stuff to go to? As part of the will, you can indicate individual assets: where you want those to go. A lot of times people will also, in the house, tag certain things as to who they want to have.
Dave M.: It makes sense to also take photos. If you say “I want Billy to have grandma’s dresser,” it could be that nobody necessarily knows which dresser was grandma’s. It makes sense to take a picture sometimes of these things to make sure your wishes are followed.
Dave: Let me ask you this: you have tags on your furniture? At home, you and Ann have put tags on your furniture for the kids?
Dave M.: No. Because right now we just got folding chairs and a folding table. The kids said they already don’t want that stuff.
Dave: One of the … chairs?
Dave M.: Yes.
Dave: You brought up a good point. If somebody is in the hospital, emergency medical treatment, they can’t get their hands on those power of attorneys very quickly. They’re under the weather. You brought up a point. Make sure someone else in the family has access. Could be the family attorney who was the author of that. You, maybe as a CPA, in today’s world, electronic filing cabinets are probably one of the more popular places to keep this stuff.
Dave M.: Absolutely. You can also provide that to your doctor’s office. You can provide this information to the hospital long in advance. Through the different hospitals and that type of stuff, they all can put this stuff into your electronic file right at the hospital where your other hospital records are kept.
Dave: There’s this thing we hear: “Oh boy. That stuff is expensive. I can’t afford to do that right now. I’m going to wait.”
Dave: I suspect your response is you can’t afford not to do it.
Dave M.: That’s correct. Again, preparing a will is not really that expensive. The fact of the matter ends up being most attorneys are competent to prepare that will. If you’re not sure of somebody you want to use, talk with your CPA or tax preparer on who can handle that. Call the local bar association. They will be able to point you in the right direction.
Dave M.: But it’s not really that expensive to do some of these documents. From that standpoint, there really is no excuse not to have them.
Dave: Sure. So we talked about estate planning 101. Estate planning and tax reform. Kind of planning to fail. Of course, the examples we talked about were Aretha Franklin and Prince. I would hire you to handle my will and oversee my estate and documents any time. That’s the respect you have within the Rea & Associates family.
Dave M.: That’s good to know.
Dave: Our guest today, again, has been Dave McCarthy, a principal with Rea & Associates located in Medina, Ohio. You’ll see Dave around the state. Traveling to the various Rea offices. Talking about the various topics we talked today. Again, thank you for joining us on today’s episode of unsuitable, Dave.
Dave M.: Thank you.
Dave: Great presentation. Listeners, if you want to learn more about the importance of estate planning then check out our website. We put together a lot of great resources for you to check out. If you’re ready to talk about what you want to happen with your estate after you die, go ahead and give Dave a call. His number is on our website. Check it out.
Dave: In the meantime, if you enjoyed today’s episode, let us know. Like it, comment it, or share it, and don’t forget to check out videos of our podcast on YouTube. Until next time, I’m Dave Cain, encouraging you to loosen up your tie and think outside the box.
Disclaimer: The views expressed on unsuitable and Rea Radio are our own and do no necessarily reflect the views of Rea & Associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.