Chuck: Welcome to Money Talk, I’m Chuck.

Ed: I’m Ed. Today’s topic, Earning the Bread.

Chuck: Or just eating it.

Ed: Yes, let’s talk about that. What we’re trying to get to is how the beneficiaries handle the wealth that’s been received. That’s irrespective of the size. We’re looking at the common denominators that exist when people receive either lifetime gifts, or gifts at death, or a combination of both, whether it’s outright or in trust. This is based upon X number of years of dealing with this situation.

Chuck: Yes. Although, no personal experience, I have to say.

Ed: That’s right.

Chuck: These are purely from observations.

Ed: Yes, because you never want to try the suit on yourself.

Chuck: Right.

Ed: You want to make sure someone else– The typical observation of a client disposing, irrespective of the nature, or extent of the assets is, “Ugh, been a lot of fun accumulating, but it’s a pain in the ass deciding how to give it away.”

Chuck: Yes. I think that is the typical thing that people say who are the generation that’s actually accumulating the wealth, and what I find is, behind that comment is, there’s this sense that when they think about their children and their grandchildren, they’re not quite sure if those folks are maybe going to be good stewards. It’s not always that the concern is that their children or grandchildren can’t handle the money. It’s more like, think about this like the way farmers think about their farm ground. It’s like, “This is not a source of wealth. This is a responsibility, something you have to take care of. Can I find the right person to take care of this property?” Nobody’s good enough, quite often.

Ed: Yes. The issue I’ve faced is that, when I first started, the smaller the estate, the greater the envy, and the big problem is personal property. Chuck, any number of times, I think it’s a non-event, who cares about who gets a chair, who gets the car, but as a matter of fact, quite the contrary.

Chuck: Oh, yes. I think that is particularly true in smaller estates. The quintessential example is the arguments over the cookie jar, right? Not the cookies in the jar, but the cookie jar itself, grandma’s cookie jar. I think there’s even a book about this phenomenon that makes reference to grandma’s cookie jar in the title of the book. Yes, there’s the idea of tangible objects as a proxy for mom and dad’s affection, and that’s what is really being fought over, I think.

Ed: The sibling rivalry is pervasive. I mean, Abel and Cain didn’t really work. That’s been around a long time. If the brothers, using brothers as an example, are in the same business, it’s a great opportunity for lawyers. The margins are on greed, and it’s crazy. They don’t get along or fight about nothing.

Chuck: Right, or everything.

Ed: Or everything.

Chuck: Yes. I think that the quintessential example is, siblings inheriting a business from their parents, and just almost inevitably, that degenerates down into fights among the siblings, and I’m not sure. The workaround is  you leave the business to one sibling. What do you say, in your experience, Ed, does that resolve, or does that prevent the conflict, or does that just turn it into a different form?

Ed: It’s a different form. We have to replace it with other assets equal in value. You get to value religion. What is the value of this business? You have a third-party appraiser, “No, that’s not the right price.”

Chuck: Right.

Ed:  We always get into the issue of the value of something that’s very specific to the family.

Chuck: Right.

Ed: Maybe you’re best off selling it. I just noticed it was a $3.8 billion Subway franchise organization is being sold to a private equity group.  They’re going to expand to China and Europe, but making Subway sandwiches, $3.8 billion, now, that’s crazy.

Chuck: That is.

Ed: There’s no limit on what the entrepreneur can make in this country, which is the astounding part about this. When we see are folks designing widgets, and making gazillions of dollars, yet they have no financial background, and so when they send it to the next generation that may or may not have any financial background, it’s all very emotional.

Chuck: Right.

Ed:  The question is, should the assets be distributed outright? Should it be in trust? If so, who’s the trustee? What are the distribution standards, or a combination? Your experience?

Chuck: First of all, let’s talk about the trust idea. Quite often, that can be a tax-driven decision, particularly when you’re talking about larger estates, and when you’re talking about generation-skipping type arrangements, where you’re worried about the, let’s call it the second generation, in other words, the kids of the client. Maybe there’s enough wealth there that you have to worry once the kids inherit it, that they too will be facing estate tax issues, and so the parent can solve that problem for both their children, and future generations by leaving assets in a trust that has a generation-skipping feature to it.

Ed: Well, make sure that I understand that. What do you mean by generation-skipping?

Chuck: What I mean by that is that, each generation does not have outright ownership of the property that’s held in the trust. They’ll receive the benefit of it during their lifetime, but they don’t have the ability individually to dispose of it, to sell it, or whatever. For instance, I say, I’m going to leave my business in trust for the benefit of my child, who shall receive the income during her lifetime. Then, after she dies, it goes on to her children who survive her. My estate plan doesn’t literally skip a generation, because I’m leaving a beneficial interest to my child, but what I’m doing is, I’m extending control over the disposition of that asset beyond a single generation. We use the term “generation-skipping” for arrangements like that, and the tax code treats them in certain ways. You can set up a trust like that in a way that when my child dies, then her estate does not have to worry about the taxable value of that asset. It can pass on to the next generation, or be held in trust without being subject to estate tax a second time. Quite often, I’ve observed this, where it’s not unusual at all for the beneficiaries of trust like that to not really understand that the property is, in fact, held in trust, and not as their own trust. We’ll just colloquially refer to it as my property, my business, my farm, my whatever, even if it’s under the ownership and control of a trustee.

Ed: Now, let me make sure that I’m understanding this. Let’s make it easy. We have a $1 million in investible funds, and the trust that I provide for my six children, I’m a very prolific guy– Make it five. You got a $1 million, so each gets $200,000, and I provide in the trust, without regard to income, each of them get 5% of the value per year.

Chuck: Okay.

Ed: There’s no trustee discretion?

Chuck: Right.

Ed: You know you’re going to get a payment based upon the 12/31 value of 5% of that for the next year.

Chuck: Right.

Ed: End of story. Now, child one’s a ghost, it goes to that child’s children. Now, that child’s children die, on down. Put it another way, a generation-skipping trust may last in perpetuity

Chuck: Yes.

Ed: Forever, so long as there’s a descendant of the ancestor.

Chuck: Correct, so far.

Ed: If you have five kids, I mean, the number of descendants, the number of sub-trusts, it can be absolutely amazing. What’s the impact on these beneficiaries? They know they’re getting 5% a year. What are they going to do, Chuck?

Chuck: Well, yes, that’s what I mean is, the interesting thing about it is that, in their minds, they’re not getting 5% a year. In their minds, they’re getting this farm, and they believe that. We’ve seen this, where they’ll start spending money, as if they had the entire farm at their disposal. Sometimes they can put the trustee in a really uncomfortable position where the trustee is constantly having to explain to them that “No, no, this isn’t actually your farm, or your property, or your bank account. You simply get an income stream.”

Ed: The solution don’t have a farm. Make sure you have marketable securities. You have the S&P 500 EF, and others you have something that’s readily divisible. Each trust, sub-trust, you’ve got one trust at the ancestor level, split it into X number of trust depending on the number of children. Each trust can have, for example, a different trustee, different investment philosophy. Then, as it drains down, so long as there’s a descendant, boy, that’s a long time.

Chuck: Right. Well, and I have recently put together a trust like this for somebody, where they wanted the trust to be able to last in perpetuity, and one of the features in there, is to allow individual descendants to buy or sell their interest in the trust among each other. It has to stay in the family, but among the beneficiaries of this trust, Tom can sell his interest to Betsy. If Tom’s somebody who wants to– He just wants a chunk of money, he doesn’t want an income stream, then Betsy can pay him, and he can walk away with cash, and then he’s no longer a beneficiary of the trust. What that does is two things. First of all, it provides a mechanism for that person who just can’t seem to live with the idea that he’s merely getting income to be cashed out, essentially. The second thing is, when you have a trust like that, that goes down from generation to generation to generation, sometimes the number of descendants that now are receiving interest, it can get a little out of hand. This allows some voluntary pairing of the branches of the tree, so to speak, so that the people who really want to stay involved and have, in this particular case, it’s a family farm, people who really want to be receiving the beneficial income, or the income off of this farm, rather than off doing their own things. They have a mechanism to stay beneficiaries of the trust, and buying the other people out, and hopefully, keeping this a little bit more narrow, as the generations pass by.

Ed: Chuck, I think I understand all that, but I’ve got a larger question. Why go about accumulating this wealth, when you’re faced with these issues?

Chuck: Right.

Ed:  You’re destroying the journey, to the extent that you’re creating a high water bottle for this descendant, a descendant that maybe they’re impairing the ability of that descendant to earn the bread himself.

Chuck: Well, I think that that is a serious concern that a lot of our clients have about the impact of these trusts. Of course, the solution to that readily presents itself, which is that, you simply limit the amount that you’re leaving to family members, and you find non-family members, and typically, this occurs in the form of charities, or perhaps, set up a private foundation to receive the rest of the wealth. Boy, that’s unpalatable too, to a lot of people.

Ed: Yes, Chuck, I have to tell you, I’ve worked with folks early on that didn’t have a lot of money, and they seem to be happier than the folks with a lot of money. That, “Oh, what do I do with this, Ed?” “Well, give it to my dog, Jack.” The point is, you’re really doing some harm creating some liabilities on the descendants if it’s in trust forever, and what about multiple marriages? What about insolvency? What about spendthrifts? This idea of disposing of wealth, I must tell you, it’s a facet of the practice I never appreciated.

Chuck: Right.

Ed: You see this enormous amount, and typically, the entrepreneur, by the way, you get the corporate executive with stock options and the like and has fixed up the compensation committee to be well compensated, so the executive gets a lot of money, and I mean that, versus the entrepreneur, who doesn’t understand any of this. Why the entrepreneur is making money, is creating jobs, creating value.

Chuck: Well, and quite often, not even thinking of their balance sheet as being a large balance sheet. They’re just thinking of– Again, the best way to express this is to use somebody who’s accumulated wealth in the form of farms as an example, because they’ll think, “Well, I’m not rich. I only have 3,000 acres.” To them, that’s just property. There’s not a dollar amount that’s attached to it. It’s simply a piece of property, and same thing for someone who owns a business. They don’t think of, “Oh, I’ve accumulated X dollars in the form of the value of this business.” They’re just like, “I just have this business.” I think one of the questions to ask, which we can ask our clients this question, but we’ll typically not get an honest answer, because the client often can’t give themselves an honest answer to this question is, it goes back, it’s a form of the question you asked me before, and this is, who’s the real beneficiary of your estate plan? What is your legacy? I think, for many people, especially the entrepreneur, who’s built a business from the ground up, the business itself is the legacy quite often. They don’t want to say that out loud, but that is, it’s become an entity unto itself that, what they really want is for that to be curated after their death. Why accumulate it? They’re taking care of their baby, the baby being the business.

Ed: I commented on the same way, but, yes, a little different slant on this. It seems to me the successful, I’ll call it entrepreneur, and in our practice, I think we can say is focused on the entrepreneur by default, I guess. I’m not a real good corporate savant, so to speak, but those people, their life is this business.

Chuck: Right.

Ed: That’s the second child. For them then to talk about generation-skipping trust, about estate tax, what are you talking about? It makes no sense. I step back and say, “You know what? This transfer tax makes no sense.”

Chuck: Yes.

Ed: Have you thought about it? All these years that we’ve been doing this, does it really make any sense?

Chuck: I understand the sense that it’s supposed to make, but, no. When you really peel back and look closely at it, no, it doesn’t make sense. It’s supposed to be– It addresses a problem that, I don’t think the problem that it’s designed to address, it’s addressing first of all.

Ed: Well, let’s go back. It’s addressing the issue of, let’s not allow significant amounts of wealth to pass them down multiple generations.

Chuck: Right. What they want–

Ed: The common law from England, starting there.

Chuck: It’s– Yes, we don’t want a royalty. We don’t want a feudal system in America.

Ed: Why not?

Chuck: We don’t want people to gain monopolistic fortunes, that type of thing.

Ed: And affect political destiny.

Chuck: Yes.

Ed: That, I think is a– I wouldn’t want to bet on that, but the politicians want no one telling them what to do.

Chuck: That’s the thing, is that, if you look at the period of time from when the estate tax was instituted, to today, can you say– This gets to the first question, which is, has it addressed the problem it was supposed to address? I mean, has it? It certainly appears to me that there’s no significant reduction in the development of dynastic wealth in the United States-

Ed: Chuck–

Chuck: -between the time the estate tax was created and today.

Ed: Absolutely true, you can avoid it.

Chuck: Right.

Ed: The estate tax is a voluntary tax.

Chuck: Right.

Ed: If you have anyone with a little creativity, and an idea that want to pass a lot of this, you can.

Chuck: Yes.

Ed: The revenues are what? 2%?

Chuck: Oh, it’s tiny.

Ed: Yes. Yet the infrastructure of lawyers, accountants-

Chuck: Oh, my–

Ed: -estate planners, it’s a bunch of– What are you talking about here?

Chuck: Yes, so then the flip side is the fact that so many people get ensnared in this thing, where it just makes absolutely no sense at all. When you’re talking about truly a family-owned business, or a farm, an illiquid asset.

Ed: Oh, it doesn’t last beyond two generations, Chuck, I must tell you.

Chuck: Yea.

Ed: As soon as we start going beyond the children, and hitting grandchildren, they know nothing about the farm, know nothing about the business. They want one thing, and that is-

Chuck: Money.

Ed: -now.

Chuck: Yes.

Ed: There’s nothing wrong with that. What I’m saying, “Don’t be deluded, Mr. and Mrs. Client, that you’re not going to live forever.

Chuck: Right.

Ed: You got it? If you think that you’re going to create a legacy that’s going to substitute you– Make you immortal, you know what? You’re wrong.”

Chuck: It’s not going to happen.

Ed: It’s not going to happen.

Chuck: This is actually something that, it’s surprising how people– The evidence of that confronts you every day, right? All you have to do is look around, and ask yourself, “What evidence is there of anybody who was alive 150 years ago?”

Ed: Right. It’s not going to happen.

Chuck: That’s a short period of time.

Ed: Yes, and question a wealth. The shock to me, this is speaking for Illinois tax law only. As there’s a course, Continuing Legal Education published by the Illinois Institute, that is caption of Wealth Transfer Planning for 99% of the Population,

Chuck: Right.

Ed: i.e. with those under $4 million.

Chuck: Right.

Ed: Are we saying that 99% of the population in Illinois has wealth of less than $4 million?

Chuck: I find that a little hard to believe, but I don’t know.

Ed: Someone seems to think so, because they published a course on this.

Chuck: Right.

Ed: We know the federal exclusion about round numbers is 20 times 2 or something around $40 million. There’s something wrong with this. The perception is, there’s all this wealth floating around, Chuck.

Chuck: Yes.

Ed: Guess what, it ain’t so.

Chuck: No, it isn’t.

Ed: When you realize, what are the big hitters on the charitable community, $10,000 is a lot. I say, “What? $10,000.”

Chuck: Right.

Ed: I hate to sound like what we’re both doing is silly, but I will tell you, it’s fun.

Chuck: It is fun. I’m not sure if it’s silly, but I think that sometimes it’s misunderstood of exactly how lasting an estate plan is. I think people do– Especially folks who have accumulated a lot of wealth are really hoping for an extension into the future, that’s just simply not realistic.

Ed: When I visited by those, I’ve said to the folks, “You leave really two things, your children, and descendants, but the most rewarding activity that any of us can engage in, is teaching.”

Chuck: Yes.

Ed: Why? Because a little of you, if you’re doing a good job teaching is left with each of those students, and it’s passed on. If you’re seeking immortality, you should be a teacher.

Chuck: That’s a very good point.

Ed: Now, I don’t want you to agree with me, but that seems to be my view, whether it’s teaching your children, teaching your descendants, teaching at the law school level, or whatever, grade school, the greatest reward is to seeing a little kid, “Oh, yes, I understand what you’re talking about.”

Chuck: Well, think of your hypothesis in these terms, if you want to think about a famous figure from as far back in history as you can conjure up, is it somebody other than a teacher?

Ed: No. Socrates.

Chuck: That was exactly my example too.

Ed: Right. Yes.

Chuck: I guess, yes, there is– I mean, it’s–

Ed: All he did was ask questions.

Chuck: Right.

Ed: There’s nothing written by Socrates.

Chuck: Right.

Ed: You have his advocates, Aristotle and Plato, who talked about Socrates, but he was a little bit overweight.

Chuck: That’s the thing, and you can go back, think of other examples, and they’re all essentially teachers.

Ed: That’s right.

Chuck: That’s what lasted. Knowledge lasts.

Ed: Yes.

Chuck: Wealth does not.

Ed: Also, part of you, lasts for multiple generations. We’re really getting to be philosophically-oriented this afternoon.

Chuck: That was unintentional.

Ed: It really wasn’t, but when you think about these things, and the idea is spend some time thinking. Yes, tax is important, and that’s a game. You can avoid the tax. You can get a tax basis step up. You can do some things with your IRA. You can do charitable remainder – You can do all these tools to get to the result, but really the issue is, what do you want to leave behind?

Chuck: Right.

Ed: Do you want– If you really want to leave something behind, you should be a teacher.

Chuck: Yes.

Ed: Then, I don’t necessarily mean a PhD, but you should be teaching your children, your descendants, the next-door neighbor. Pretend you’re Socrates and ask the questions. Self-realization is the way to teach. Am I wrong?

Chuck: I think you’re absolutely right. I think we’ve run out of things to say too.

Ed: Yes, we’ve run full circle from how do you handle the money, to don’t get money. Guess what? We run out of a job, Chuck, what are we going to do next?

Chuck: We will find something.

Ed: Yes. Fear, greed, the government, revenge, there’s always something to do.

Chuck: That’s right.

Ed: Lawyers will always have a place in the world, but anyone bitches, if they’re going to bitch, it’s, “You’re charging too much.”

Chuck: Right. You’re also discounting the fact that very few people will follow our advice.

Ed: Oh, no way. Let alone read what you’ve written.

Chuck: Right.

Ed: Oh, yes. Now, I don’t understand the gobbledygook. Well, it’s not gobbly. I had an accountant say, “This is– What you’ve written is gibberish.” I said, “Gibberish? Wait a minute.” I’m intellectually trained. This is gibberish?” Yes. Okay, fine. With that, I think we better go out and do something else, Chuck. Next topic, next time.

Chuck: Right.

Ed: See you.

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