Mark: Welcome to Unsuitable on Rea Radio. The unique financial services and business advisory show that challenges your old-school business practices and the traditional business suit culture. You'll hear from industry professionals who think beyond the suit and tie to offer meaningful, modern solutions to help you enhance your company's growth. I'm your host Mark Van Benschoten.
In this episode, “The grim reaper is coming and he wants your money,” we'll be talking about estate planning. I know you weren't counting on listening to a blunt conversation about mortality today, actually, believe it or not, this is a conversation that is not only critical from a personal perspective, it's vital if you have any desire to protect your assets after you're gone.
Dave McCarthy is a principal and office manager with the firm and he's seen a lot since starting his career with Rea in 1987, you're pretty old. Especially when it comes to the importance of actively managing one's estate. Dave knows just how imperative it is to actually sit down and have the big conversations, regardless of how uncomfortable they may be at the time. Glad to have you on the show, Dave, welcome to Unsuitable.
Dave: Good to be here.
Mark: Dave, before we get started, I saw some pictures of you recently on the internet. Are you nervous?
Dave: No, as long as you were not on the dark internet we're okay.
Mark: These were pictures of you camping.
Dave: Oh yes. Rea just had a camp out recently.
Mark: Do you enjoy that?
Dave: Absolutely. I've been camping since probably 1974, whatever, and our family originally started it simply because it was cheap to do and now it's, the whole family enjoys doing it. We pass it on from generation to generation.
Mark: That's really neat. I also know you like to fish. Did you get a chance to fish while you were camping this past time?
Dave: No chance to fish on camp, we did go canoeing, but there wasn't a chance to go fishing. I've got a lot of fishing in already this year.
Mark: That's good to hear. Now you talked about enjoying camping and enjoying fishing, those things sound pleasurable. Do you enjoy having these hard conversations about one's estate planning?
Dave: I actually do simply because of the fact that when we have individuals who haven't had the conversation, it's a tough scenario for them to go through and to try to figure out what happens when somebody did pass away. You talk with those clients, and they're always struggling. If I can do something to make it easier on them, I enjoy having these conversations.
Mark: Do you launch the conversation, do they come to you and say, "Dave, I've got a problem." Can you walk me through a little scenario?
Dave: Sometimes what happens is they'll call and all of a sudden we get into a scenario where they've all of a sudden had to start taking care of a parent or something to that affect. Usually what I will do is I will bring a question when we're sitting down going over their year-end information to say, "Hey, have you taken a look at this? Have you done anything to prepare your estate?" A lot of times it's just something's come up and they have a question or heard something on the radio and they come in and bounce it off of me.
Mark: How did you get interested, I don't know if interested is the right word, but gain your knowledge? Just through experience?
Dave: I think it just came from clients asking questions and then, maybe at first when I was younger, not knowing the answer and knowing I needed to figure it out. Once I started figuring it out I became more and more interested in the subject matter.
Mark: There is a lot of confusion in my world, maybe not in your world, just as to what is estate planning? Is it only for the rich people, an estate over 10 million dollars? How does that work?
Dave: There is scenarios in essence when you have an estate over 10 million dollars you definitely want to do some planning in essence to try to save on estate taxes. Really estate planning is for everybody. The reason being is that when you pass away, whoever your heirs are, they're going to have to deal with the estate. If you do nothing, they in essence will have a lot of hassles and stuff they have to try to work through.
If you plan that through, it makes their job much easier. Whether you have 10 million dollars or 100 thousand dollars, the reality is if you plan it out, it will make things easier on your heirs.
Mark: Unless you're a bastard and you want to make it hard on them anyway?
Dave: I have had clients who have said, "You know what, I'm not going to worry about it, I'm going to be dead, it's their problem." That is an option.
Mark: No. Are you serious?
Dave: I'm serious. I've had that conversation.
Mark: I was going to make a joke there, but I won't. It's interesting. At 100 thousand dollars you still should be doing something. What typical things might that person be doing?
Dave: The simplest thing to do is, for example, a couple of simple things. When you have an IRA, most people have an IRA from their job or whatever. You need to make sure that IRA is listed out and says who the contingent beneficiary is. In essence when you pass away, who's going to be there beneficiary? Usually it's your spouse. If your spouse has already passed away, who's the contingent beneficiary, a lot of times people will make it their kids. Something as simple as that, many people don't have that done and that needs to get done.
Mark: I've heard some terrible stories about somebody passing away and the moneys held up in probate and there's not enough money to pay for the burial and it's just difficult situation. I assume what you're talking about might alleviate some of that?
Dave: It helps alleviate it. Obviously I like it when people pre-plan their funeral. Ii think that tends to make sense because then people aren't trying to guess what you want to have done. A pre-planned funeral is definitely, at least make people know what your plans are.
Another aspect of it is people are scared by probate. Probate actually can be a good thing because it, in essence, protects the assets in the estate, and makes sure, hopefully, there's money to pay for the funeral and that type of thing.
Mark: I know we're here to talk about estate planning, but plan your burial is an interesting concept. Just in case anybody's listening, I want to be cremated.
Dave: Understood. Everybody, remember that. You're going to go down in flames some day is what you're saying.
Mark: That's the idea. I like to think up not down, thanks, Dave. You trying to tell me something?
Dave: No, I'm just here to help.
Mark: Interesting you say that probate could be helpful. I tend to hear, "Oh, you want to avoid probate at all costs."
Dave: You know that's one of those things that I probably, when I was younger I used to say, "You want to avoid probate at all costs." The reality of it is if you have all of your assets go to individuals so you can avoid probate, who's actually going to pay for the funeral? In that scenario, imagine you have three kids, and everybody gets 1/3rd of everything so you can avoid probate. What if one of those kids decides they don't want to kick in for the funeral? The other two are stuck paying it. In some ways, probate makes sure there's money there to cover those expenses.
Mark: Interesting.
Dave: One of the things that a lot of people don't understand is that when somebody passes away and you go to the funeral director, whoever goes to the funeral home to, in essence, take care of the burial, they're signing on the dotted line that they are actually responsible for the burial. Because the funeral director does not want to have a scenario where he gets stuck saying there's no money in the estate. Whoever actually goes with the funeral director, they, in essence, are agreeing to pay.
Mark: Interesting. Wow, that's kind of scary. I'll make sure I don't take that ride when I have somebody close to me pass away.
Dave: Hence, the reason to plan your estate now.
Mark: Would you say estate planning also goes to, you hear about people having to go into nursing homes, would that be part of, planning for that, Medicaid allowances. Is that part of it?
Dave: I think it is. Some of the things such as, when you do your estate plan it's not only just your will, but at that point you're also doing your living will, which indicates how you want and what your medical stuff is and a health care power of attorney. If something happens and you're not able to work through those scenarios, you may be, in essence, in the hospital and unconscious, so you want to have somebody in charge of your health care power of attorney, that's something that's also important.
Mark: Getting back to maybe a larger estate. I've also heard the terms AB, husband wife things. Is there something you can tell us on those?
Dave: What you're referring to is AB trust or a marital and a family trust, some of those different terms can be interchangeable sometimes. The reality of it is there's been a lot of, with the change in the estate tax rules a couple of years back, that's not quite as important as it used to be in the past. At the same time, you want to have it set up that if you have 10 million dollars, you want to make sure your estate is set up so that you have the ability to divvy up the assets between the husband and wife. Make sure that you're not going to have a scenario where you would have a taxable estate for a federal purpose. Keep in mind in the state of Ohio for example, they no longer have an estate tax. That's something that was taken care of about two or three years ago.
Mark: You and I are the same age by a couple of days ...
Dave: No, you're older than I am.
Mark: I said a couple of days. We're 51 ...
Dave: I'm not 51 yet.
Mark: When this comes out you will be.
Dave: Understood.
Mark: Should we be doing estate planning? I have a will.
Dave: Yeah, the reality is especially if you think about when you're younger. For example, my wife and I, when we were much younger and our kids were much younger, you want to have an estate plan in essence, because of your kids. If something were to happen and my wife and I were in a car accident, we wanted to make sure, in essence, that our kids were taken care of. There's the side of who's going to take care of the kids, and then who's going to take care of the financial well-being of the kids?
Those aren't necessarily the same people. I like to use my mom as an example of this as, right now she has me set up as I have, I'm going to be the executor of her estate. She does that because I have a lot of capabilities on the financial side.
Mark: Really?
Dave: Yes, absolutely, believe it or not. She's also smart enough to know she doesn't make me the health care power of attorney because she has a comprehension and I'd probably say, "Pull the plug", if she got a splinter. My sister is taking care of that. From that standpoint, you can see there's, you need to plan this stuff out because what happens to your kids when something happens to you, especially when they're younger? It's not necessarily how many assets you have, it's what you want to have happen after you pass away.
Mark: I'm just trying to think of people who wouldn't do this. I think some people would come to the table and say , "I don't have any money." It really sounds like everybody should be doing this.
Dave: I think the reality is they should. Somebody could sit here and say, "Listen, I don't have a lot of money." The fact of the matter is you should have a will. You can in essences, work up your own will on the internet, I don't suggest that, because of the fact that there's a lot of rules that people don't understand and that will may not even be valid because you don't understand the rules in the different states.
An attorney is not going to charge a lot of money just to set up a will. At the same time, you can sit down and have a consultation with them and have a comprehension of these health care power of attorneys and get this stuff set up. The reality is, is it going to cost a little bit of money? Yes, but it will save a lot of money down the road.
Mark: That's a good point. I assume that you have the will, you shouldn't get it, stick it on the shelf. Things change in our lives, you probably should look at it?
Dave: Exactly. The other thing too, is to have a will and have a health care power of attorney stuck in the drawer somewhere, that's not going to do you much good. A lot of times what I suggest is provide the will and the health care power of attorney to your CPA. What happens is, think of it this way, you're out in some other state and your wife and I, who happen to be on vacation ...
Mark: What about my wife?
Dave: Just you and your wife are on ...
Mark: I thought you were going on vacation with my ...
Dave: No, not at all. You and your wife are on vacation, imagine the ability if something happens in a hospital, they may not know that, something may have happened to both of you and somebody else is the health care power of attorney. They may not know where that's at if it's locked up in the hose, where as the reality is if you say that the CPA has this stuff, we can pull it out of the file and fax it to the hospital.
Mark: That's a great point. These are kind of morbid things you're thinking about, but it is, it's going to happen, unfortunately, it's going to happen.
Dave: It's going to happen to all of us.
Mark: Plan for it, to take a little stress off of people, your loved ones in your life and so forth. Since we are a CPA firm we like to deal with numbers, what is the threshold for an estate to actually pay estate taxes?
Dave: What I like to do is I like to keep the number simple. Understand that if somebody passes away with a little over five million dollars, it's slightly higher than that, but let's keep the five million in mind. You pass away with more than five million dollars and you're not married, you're going to have to worry about paying some estate tax.
It's not on the five million, it's on the amount that's over that. Then the reality ends up being you're going to have some expenses that off set that, but it could be somewhere in the neighborhood of 30, 40 percent, that type of thing.
Mark: It's significant once you ...
Dave: Once you crack that five million dollar amount. One of the things that we look at, too is to say, if you're at that amount, then the reality is can you do some things to start gifting money away, so you're below that threshold that you don't have to worry about? That's probably one of the big scenarios.
Remember, once you get over that five million mark, you have to file some forms and stuff with the IRS. To get that done and get that done right, that can be expensive. From that standpoint, to sit here and say, "Keeping under that amount by gifting to your kids," that can make sense. A lot of times too, I'll say to people, "Listen, why hold on to everything? If you don't need the five million to live on, why hold onto it? Why not gift it away to the kids now and enjoy what they're going to do with it?" A lot of times that's a scenario where I really think that people have done that.
One of the folks that I talked to at one point said, "Well, I'm not sure that I want to give them all that money, cause I don't know what they're going to do with it." I said, "Well why don't you give them some now and see what they do with it? Then you'll be able to see, yeah, I like what they did with that, so you might not be as hesitant to give them more when you pass away."
Mark: That's a good way to do it. I don't want to say lead them along, but to give them a little bit, see how they react for your comfort level. Hopefully you can see the enjoyment in their eyes and you may be a little more comfortable to do it.
Dave: Absolutely.
Mark: I assume another you could do is to give to charity.
Dave: Yeah, a lot of times what happens is somebody would look at it and say, "Listen, my kids, I've already provided for my kids, they're well set off." You actually have more money than you really want to give to the kids. At that point you can start looking at gifting to charities. The reality is you gift it to charity, you can gift it to them before you pass away or after you pass away. If you do that, you're not going to have to pay any estate tax on the amount that's given to charity.
Again, I'll also suggest, give a lot of those dollars to the charity while you're alive. Then you can see what they're going to do with that money, then in essence, enjoy the actually ability to gift the money.
Mark: Sure. That's a good point. Maybe get a free dinner out of it, too?
Dave: Possibly, yeah. Especially if it's to a university.
Mark: Universities, I'm currently paying two tuition bills, so that's a bad word in my household right now.
Dave: Understood, I'm on the same scenario.
Mark: Little scary, scary thoughts there. On estate planning, and again, people don't want to talk about it, but it sounds like they need to talk about it. Almost to a level that they need to be forced talk about it.
Dave: Yeah, and I think that you need to set down a time to do it. One of the things that I would never suggest to somebody is this isn't something you bring up at a holiday party with the family. You maybe may say, "Hey, we should sit down and have this conversation." It needs to be a separate conversation, other pressures are on during the holiday and that type of stuff and you're at parties. The reality is just say, "Hey, I want to come over and sit down and talk with you."
Sometimes you need to push the parents to do it, because they don't want to have the conversation. The reality is the kids need to do that probably more than the parents. When the parents pass away, the kids are going to be left to try to sort out the mess. Many times, folks don't want people to know their business, but at the same time, they're also going to rely on them to take care of it as soon as they pass away.
Mark: I assume we're talking about families, but gifting or leaving something in the will, doesn't need just to be family members, we talked about charities. It can be to other outside individuals.
Dave: Absolutely. It can be family, friends, it can be neighbors, it can absolutely be anybody.
Mark: No limitations there.
Dave: No.
Mark: Have you had these conversations with your kids?
Dave: Yeah, our kids, we've set down and made it clear to them that they will in essence, both of my kids have a comprehension when their mom and I pass, they will get half of everything we own. They know that, unless they misbehave and then what we'll do is we'll have to have that conversation again sometime.
Mark: My situation is a little unique. I have two older daughters who are 19 and 18 currently, then I have an 11 year old. We're unique about, if Sue and I were to unfortunately pass away, that someone needs to step here and take care of our younger one. We need to update our wills, I guess is what I'm trying to say.
Dave: In a lot of scenarios too, is that the kids are young. Sometimes it's not just the will you need to have, you need to look at a trust. Because one of the things you think about a will is a will will take care of in essence, up to the date of death. Whereas a trust has the ability to go beyond death and so you're able to control things beyond your death. That's one of the things where a trust can really come in and help out. Especially if you've got little kids, you need to take care of them financially.
A lot of times, understand that if you say, "Well we're just going to have the guardian take care of it," a lot of times the probate judge is not going to be comfortable with the guardian having 100 percent of those investments. Unless you want somebody to have to report back to the probate judge every single year, the trust is the way to have it set up so that in essence, they don't have that extra burden of trying to track. It's going to be the judges responsibility that those kids, that they know the kids are taken care of. They would have to have a report filed with the court.
Mark: That's a great point We're running out of time here. Anything else that we should be talking about today?
Dave: I think we've covered just about everything.
Mark: I do have one last question that we try to ask everybody. If you could have one super power, what would it be?
Dave: If I picked a super power, it would probably have to be Superman's power, the power of the yellow sun. Just like the king said, "I want to be like Superman."
Mark: You want to be like Superman.
Dave: Yes.
Mark: That'll be your new nickname at the firm here. Thanks for joining us today, Dave. Thank you to our listeners for tuning in. I hope you found this to be an insightful topic, I know I have. Death can certainly be a difficult conversation to have, but this conversation is not just important, it is vital.
We've included some additional resources about this topic on our website at www. Reacpa.com/podcast. Be sure to check those out. While you're at it, don't forget to subscribe to the podcast on iTunes, so you can never miss a show. Until next time, I'm Mark Van Benschoten for Unsuitable on Rea Radio. Encourage you to loosen up your tie and think outside the box.
