With this episode, we’ll explore how the periodic Biden plans, Pocahontas, the centered-out east, and Biden’s tax plan impact the giving and gaining of wealth. The wealthiest people in the world borrow to live tax-free. Are you rewarding intellectual sophistication, or are you rewarding someone who sits on his duff and does nothing?

Welcome to our listener-supported podcast, Money Talk. Uncompromised, absolute financial truths behind financial perceptions with hosts, Ed Sutkowski and Chuck LeFebvre. Let’s listen in.

Chuck: This is Chuck.

Ed: I’m Ed.

Chuck: This is Money Talk.

Ed: Today’s topic, the psychological thriller: giving and getting wealth.

Chuck: I’m on the edge of my seat.

Ed: Well, we’re talking about the individual who accumulated a substantial amount of assets. Whether listed securities, farms, farmland, I don’t care what, all kinds of money and is thinking about his descendants. Let’s assume it’s a married individual and loves his spouse. And she’s going to survive mortality-wise, and she’ll take care of this, but at her passing, now the issue is who gets how much money.

Chuck: I’ve got a great solution to this.

Ed: Go ahead with a solution.

Chuck: Just give 40% of it to the government.

Ed: That’s right now. What do you mean by that?

Chuck: Well, I’m referring to the estate tax, which is at a 40% tax rate. And, of course, there’s some exemptions that apply, just a little over $12 million per person right now. That’s $24 million for a married couple. Vast majority of people are able to avoid this completely, but then for folks that are in the category where the tax applies, boy, 40% is a pretty hefty tax rate. It’s something that they really feel.

Ed: Let’s explore the periodic Biden plans, thinking of Pocahontas, the centered out east, and Biden’s tax plan, for example, the current one, and keep having new versions. Everyone with over $100 million will be paying a tax rate, tax of 20% on the amounts in excess of that, such that it’ll tax, not only the income, but the appreciation in the asset.

Chuck: Yea.

Ed: Then the issue is you have this tax pay every year, but you can spread it over nine years. Now the next year the excess, if any, you can spread out over five years, which is really a joy.

Chuck: Yea.

Ed:  Now the issue is we’re going to get the money to pay the tax.

Chuck: Right.

Ed:  You have to sell the asset, an asset, and attract income tax to pay the tax unless you borrow the money.

Chuck: Our favorite thing.

Ed: Our favorite thing is borrowing. That’s a current Biden proposal.

Chuck: Right. Right.

Ed:  Where it’ll go, and we also had proposals to eliminate the tax base to step up at death.

Chuck: You know what they could do with this that would make me feel a lot more sympathetic to it, is they could apply this, not to people with over $100 million, but to people who have over $10 billion. Because it’s really the Jeff Bezos’s tax, isn’t it?

Ed: Yes, it is.

Chuck: The justification for this is because of an incredibly small, like you can count them on your fingers, number of people who have wealth that’s associated with a single business that is a corporation that doesn’t pay any dividends out. They’re, essentially, not paying any, they’re not earning any income. They don’t receive any dividend income. The way they sustain their cash flow is by doing what we just said, they’re borrowing against this wealth that continues to grow each year. They’re, essentially, living tax-free as one of the most wealthy people in the history of the world.

Ed: There’s something wrong with that. Is that right?

Chuck: There’s nothing wrong with that.

Ed: No, wait, that’s evil. There’s something evil.

Chuck: There’s nothing wrong with that but at the same time you can understand why, from a policy standpoint, you would say, “Hey, now wait a minute. I have to pay my fair share of taxes. Why doesn’t that person have to pay any tax at all?” The problem is when you go to implement something like that, then suddenly, well, wait a minute, applying a tax to only five people, we’re not going to pass a whole law just for that. Suddenly, now you’re talking about people that $100 million or more you’ve got, it’s just the complications that you’re saddling an entire swath of the population with.

Ed: Oh, no way. Do you understand how many people this affects?

Chuck: Oh, I know it’s a fairly small number.

Ed: Fairly small is 20,000.

Chuck: Yes, but that’s still–

Ed: Out of how many millions in the pipeline–

Chuck: I know it’s an incredibly small percentage, but 20,000 people is still, there is a ton of variation in respect to what those individual circumstances actually look like for each of those individuals.

Ed: Right. Nature…

Chuck: They’re not all living the Jeff Bezos lifestyle. Some of these people, you don’t have anyway. That’s a big enough population that there are unintended consequences that are going to apply.

Ed: Chuck, just as you said, you look at the complex of the assets where they earned, where they inherited.

Chuck: Right. Right.

Ed: A combination of earning and inherited, they’re risky. Did you lose some money, and did you make some money? Wait a minute. Are you rewarding intellectual sophistication, or are you rewarding someone who sits on his duff and does nothing?

Chuck: Right.

Ed: It’s the idea. If you’ve got the money, I can take it away, and I will tell you the best way to distribute this money because I’m smarter than you are.

Chuck: Right. Right.

Ed:  If you’re smarter than me, go ahead and start a business. 8% of them fail within five years. Be my guest.!

Chuck: Right. Right.

Ed: Bankruptcy, what’s wrong, take bankruptcy once every six years. No problem.

Chuck: Right.

Ed: I get the biggest kick out of the accumulation process and taxing this because, Mr. Friedman seemed to say that’s not a good thing. But, of course, he’s no longer with us. But the idea is equality of opportunity but also now we have to have equality of result.

Chuck: It’s getting that way.

Ed: I don’t get it. But let’s go back to the idea of the psychological evil of giving away money. I’ve had any number of folks come in and say, these are wonderful. I’m talking about married couples with children. We have a whole different set if we have an unmarried individual with nephews and nieces. The married with children, the individual, and these are older people. Typically, are not possessed of sound Harvard certifications.

Chuck: Right. Right.

Ed: They made the money by their intellectual passion. They worked 12 hours a day, seven days a week, and have accumulated buying farms years and years ago at $300 an acre.

Chuck: Right. Right.

Ed: We know of one of the folks. How many acres did this guy accumulate, Chuck?

Chuck: Oh yes, we’re talking about 6,000, 7,000 acres.

Ed: High school education at best.

Chuck: Right.

Ed: In that constrained with the academic excellence, not constrained with spreadsheets, it just works.

Chuck: Right.

Ed: Makes money, now to give it away. Well, wait a minute. Those 5, 3, 2, whatever children I give them an education.

Chuck: Right. This is a perfect example here, getting back to this policy discussion. Let’s say someone like that did accumulate enough farmland that in total it’s valued at over $100 million. So, this tax suddenly applies. Well, every farmer I’ve met, they don’t think about the farms they own in terms of what they’re worth. They’re just like, it’s only 10,000 acres. Right. It’s only 1,000 acres. It’s only 6,000 acres. The value is meaningless to them because they’re never going to sell it.

Ed: Right.

Chuck: The only thing that matters to them is they have two motivations: one, they want to earn income off the land and, two, this is unlike virtually, the mindset of virtually anyone else in business is that they feel like they’re supporting the land, not the other way around quite often.

Ed: I find that to be true, but also in the entrepreneur, the non-farmer, the thrill of creating jobs. The second question that they ask you, Chuck, is what? What do you do?

Chuck: Right. Right.

Ed: All of a sudden, they’ve created a persona, a value for someone, a qualitative value who can say, “I work for ABC Company and that’s a great employer.”

Chuck: Right.

Ed: That intellectual value, that qualitative value is overwhelming.

Chuck: Right.

Ed: The byproduct is they’re making all this money. Well, what are you going to do all this money?

Chuck: Right. Right.

Ed: I guess I’m earning it.

Chuck: Right. Right.

Ed: I don’t know.

Chuck: Here’s the thing about, let’s say, and I know people who are farmers who have 10,000 acres or more, and they’re going to fall into this category at current values. What does farmland generate in terms of income? About 3%.

Ed: If you’re lucky.

Chuck: Yes.

Ed: That depends upon the value. I see some going for $16,000.

Chuck: Right. Right, so then your income that you generate off it is an even lower number than that. You could have an accumulation of farms where the growth and the value of the farms over a year, vastly dwarfs what your income is. Then you’ve got this proposal that says, “Well you have to pay a minimum tax of

Ed: 20%

Chuck:  20% of that growth”, which the tax itself might end up being in this scenario five or six times what your income was. What your actual cash income was over the course of the year. I don’t think there’s anyone who would feel comfortable defending that result.

Ed: Oh, except that it’s wait a minute I don’t have the money you do I’m taking some–

Chuck: Right. You almost have to have not ever met one of these farmers in order to think that way.

Ed: Yes and walk the ground with them for a week

Chuck: Right.

Ed: and the hours that are being spent, and that’s likewise for the entrepreneur the manufacturer of widgets. It’s incredible the amount of the time its devoted husband, wife, children in the business making no money, losing money, borrowing. That process while it’s a bit of a thrill is also how many guys and girls exit that process without a heart attack, without some issue. It’s a penalty to be paid, but why do you do it? Because you’re passionate about it.

Chuck: Right.

Ed: You’re creating, it’s fun to do a balance sheet every year, but it’s also fun to see that Pete’s got a job.

Chuck: Right.

Ed: He’s proud of working for X, Y, Z Co, but then we get to the issue of now this father with all these assets, how much should I give to the kids? Should I give it to him outright? Or should I use trusts? Or what about their spouses, the in-laws? What about the grandchildren? Oh, man! Do we have to talk about all this?

Chuck: Right.

Ed: The other part about it is wait, they never earned it.

Chuck: Right.

Ed: They didn’t work 12 hours a day, seven days a week. How do you feel about, so do you get a bit of, and I hope I’m not overstating a little bit of envy. A little bit of, “Wait a minute I don’t want to deprive them of the opportunity of working 12-hours days, seven days a week. Have you had any of that?

Chuck: Oh, lots of that. Yes, absolutely. I mean I think that’s fairly common. And I have some sympathy for that view. Although I would say that at the same time, sometimes it’s a little overstated in some cases. We’ve both seen these estate plans play out in some cases where exactly there’s an underlying fear that’s not being overtly expressed there but is being expressed between the lines. The fear is, “Well, if I give these kids or grandkids, I just give them a handout, and it’s so much that they never have to work a day in their lives. They’re just basically going to be wealthy bums.” Is that what I want to create? We’ve seen situations where that’s exactly what’s created, but we’ve seen plenty of cases where it’s not.

Ed: Yes. It’s amazing to me to see the entrepreneurs, the children, the descendants who have actively witnessed this process tend not to be spendthrifts. Tend to take on the persona of their ancestors. It’s the distant ones, the Pete that’s the resident of Spokane, Washington, and his father’s an entrepreneur in central Illinois. That distance evokes not a good relationship.

Chuck: Right.

Ed: That is even saying a bad one but the better one is if the kid is watching the father and mother accumulate there and respect the process.

Chuck: Right. Right.

Ed: If it’s not respected, it’s money fungible. I’ll go buy a Porsche or a traded-in for whatever else.

Chuck: Well, that’s why this expression shirttails to shirttails and three generations. When you typically have that where there’s the generation that creates the wealth and then the next generation sort of maintains it and has this respect for it. The third generation is now basically, spends it, and if it’s not enormous. One thing that happens is it keeps getting divided with each generation. Now the third generation is receiving less than was originally passed on, and it just views it as money to spend. Next thing you know, it’s been depleted.

Ed: Yes. This idea, I must admit that I’m more troubled with the distribution process than I ever thought I would be troubled with. When we’re in school, you talk about the taxes and tax basis step up. Like a Biden proposal, Pocahontas. Everyone’s got an idea so they can get reelected. I don’t understand why anyone want to be a politician but that’s for another day.

Chuck: I think it’s so that some other person isn’t the politician is one of the main motivations there.

Ed: I don’t want to go there too much except to say that if the politicians had to start a business, had to borrow the money, make a payroll, and understand what it’s like to lose. I think it’d have a whole different slant on the accumulation in tax process. I think our society, this political environment is interesting, but compared to a totalitarian government I think we got a better deal.

Chuck: Oh, we certainly do. I would split people. You could almost split them into two categories. There’s people who have great difficulty accumulating assets. The ones that have overcome that difficulty end up having difficulty getting rid of them. Right. It seems like once you’ve achieved the goal of being able to accumulate, then you suddenly, to one degree or another, you start having a bit of that attitude that I described before about these farming families. Where it’s like, “Well, now I sort of have an obligation to these assets and making sure they’re properly curated by somebody after I pass away. Am I finding the right people? Are my children the right people for that? If not, how do I make them the right people?”

Ed: Yes, outright or in trust. In my travels, I’ve only seen two situations where in-laws have been the recipients of gifts from ancestors.

Chuck: It’s extremely unusual.

Ed: Yes. I guess I get it. That doesn’t sound right. Forty years ago, that was the same theory. Even today, it seems that the in-laws are not the subject of annual exclusion gifts.

Chuck: Yes. Also, not only does that apply to in-laws but also close family friends. It’s kind of surprising with the exception of people who really don’t have descendants.

Ed: Right.

Chuck: The inclusion of close family friends, it’s an amazingly rare thing for there to be any kind of substantial gift at all to them.

Ed: Yes.

Chuck: I’m thinking of one person who we both know who passed away, and this $100 million tax would apply to this person. There were a couple of close family friends that were included in the estate plan, and the amounts were measured in $15,000 or $20,000 which, of course, is not a trivial amount of money but in the scale of that estate plan, it was a very, very small number.

Ed: Yes. Let me say this and please challenge me. But I think the accumulation process is simple. It is very easy. By that I mean, those that I’ve encountered that are extremely successful, I mean over X millions of dollars, have a focus, a laser focus on one opportunity.

Chuck: Right.

Ed: One investment I’m going to put all my eggs in that basket. I’m going to watch that basket.

Chuck: Right.

Ed: I’m going to use debt. I’m going to use whatever, but I don’t care about the rest of the world. I don’t read Sports Illustrated. I don’t read the Wall Street Journal. I don’t go to picnics. I don’t have an MBA from Harvard, or from Illinois, or Tuck.

Chuck: Right.

Ed: But all I know is this.

Chuck: Right.

Ed: And those people enjoy enormous success. It’s simple.

Chuck: Right.

Ed: Am I overstating it?

Chuck: No, you’re not. No. That’s what I’ve noticed too. Some of them have MBAs but typically not.

Ed: Yes. I think that the academic aspirations and achievements tend to be a collar. A collar in the sense that, well, if you do this, there’s 100 reasons why you shouldn’t do it because there are all these risks.

Chuck: Right.

Ed: Well, you’re going to fail.

Chuck: Right.

Ed: I don’t care who you are. The idea is not just fail. It’s to endure. It’s to prevail.

Chuck: Well, the other thing is that I think when you talk about business degrees, in general, we’re losing listeners by the minute. When you talk about business degrees, in general, the motivation for getting one of those is in order to have a resume.

Ed: To get a job.

Chuck: So you can work for someone else. That’s not typically the path you take if what you want do is own your own business, start your own business.

Ed: Now remember I have a BA from Wisconsin.

Chuck: Oh gosh. So now not even you are listening to the podcast.

Ed: I’ve tried to abandon it because those days it wasn’t, the quants weren’t prevailing.

Chuck: Right.

Ed: Today, you must be a quant. Well, wait a minute. I can apply these quantitative measures but is it a good investment?

Chuck: Right.

Ed: How many tree counters do I need? Putting it another way, having an idea, having a passion, and having a focus that is insurmountable no one can- I may have the wrong focus. Well, I lost that now, I can learn something. I’ll do something else.

Chuck: Right.

Ed: It’s the flexibility.

Chuck: Right.

Ed: The other part that is really intriguing to me is the executive, will call it the executive license professional: lawyer, doctor, actuary whatever that serves out his time. In other words, no longer president.

Chuck: Right.

Ed: Guess what happens?

Chuck: Oh, they don’t have anything to do. Right.

Ed: Right. Everything is repetitive. So, they’re outliving their lives.

Chuck: Right.

Ed: That’s a tragedy and so the idea is to find your passion and make sure the passion prevails, continues notwithstanding your age 65.

Chuck: Right. Right.

Ed: Some accounting firms age 62 and out.

Chuck: Most of them.

Ed: Can you believe that?

Chuck: Most of them have mandatory retirement ages which on one level I can understand.

Ed: Well, how do you understand it? I’m troubled. I don’t understand why we have a 62 and out with an accounting firm.

Chuck: Well, because what they’re doing, I mean think about it. We’ve talked about before how accountants are kind of afraid of their own shadows. They’re very risk averse. Everything is why something won’t work. And so the concern is, well, you don’t want to get into that situation where you’ve got a partner in the firm who’s starting to become senile. You’re having a hard time detecting it. How do you ever get them out? Who’s going to be liable if they make a mistake, and no one’s cross-checking their work. Well, easy solution, mandatory retirement age. No one’s going to get senile while they’re on the job. It’s using a sledgehammer to address a problem that you need a tack hammer to address. It’s a simple rule, and I think it epitomizes the mindset of how accountants operate in many facets.

Ed: We’re talking about and we’re not real friends of large law firms and large accounting firms. The idea is we’re looking for value, a personal relationship. The larger the organization, the smaller the personal relationship, and we’re missing that.

Chuck: Right. Right.

Ed: You’re talking about someone who’s 62, who is just understanding the client.

Chuck: Right.

Ed: I say we got to go back. You got to go home and count chickens. We’ll see you. And I don’t get it.

Chuck: Right.

Ed: You hear about it and the other side about it.

Chuck: You can literally be retired for longer than you were working.

Ed: Yes, I know several situations exactly like that.

Chuck: Right. Right

Ed: The insanity of it is sure the folks on top of the pyramid make all kinds of money. What’s the nature of the money they’re making? It’s ordinary income.

Chuck: Right.

Ed: Sam as the SE tax.

Chuck: Right.

Ed: They put away a 401K contribution.

Chuck: Right.

Ed: It’s upside down.

Chuck: Right.

Ed: They constrain, and they strap all the younger folks with these recurring liabilities.

Chuck: Right.

Ed: Maybe they have a rabbi trust but in part. But if they had an appropriate retirement program, cash balance pension plan, or whatever so the retirement benefits are funded. So, when Pete leaves, “See here’s your share of the receivables and WIP”, end of story.

Chuck: Right.

Ed: Anyway, that gets to this larger issue of how do you pass wealth from one generation to the other? Outright, or in trust with some incentives? Bear in mind that three generations from now, Pete, I hate to tell you this, but no one’s going to know you.

Chuck: Right.

Ed: Be prepared that you’re not immortal.

Chuck: Right.

Ed: I mean everyone’s been pursuing this immortality from the beginning of time. The Gilgamesh…

Chuck: Right.

Ed: We have the Odyssey, everyone’s seeking immortality, you know what? In the physical sense, it ain’t going to happen.

Chuck: You can have a building named after you and three generations from now someone else is going to–

Ed: They’ll tear it down.

Chuck: Someone else will make a contribution and their name’s going to be on the building so you won’t even last.

Ed: You can’t take it with you, but boy oh boy, it’d be nice to try. Well, I think we’ve made a few enemies. We typically make enemies, Chuck, are you watching where you’re going?

Chuck: It’s what we’re about. You mentioned before that laser focus. That’s ours.

Ed: Well, I want to be challenged in all these theories, all these attributes, and come up with statistical information numbers to justify what I’m saying. Go against me whatever, but the point is this approach, these programs, these podcasts are designed to think about the alternatives. In other words, why are you doing this? When are you doing this? But why, why, why?

Chuck: Right.

Ed: If you can’t come up with an answer you know what, Pete, maybe you should be playing baseball.

Chuck: Till next time.

Ed: Next time.

Thank you for listening to Money Talk. Please join us again and do check out our previous money talk topics.