Each and every week in the BoomX Academy office hours, BoomX academy family leaders gather and ask me questions on various topics related to retirement planning, estate planning, even long-term care planning. In this episode I'll answer one of those questions, which is quite simply how do I protect my children from a first marriage and also provide for that support, education, maintenance, and health of my surviving spouse.
A product of a second marriage, listen in and get a feel for office hours at BoomX academy as I answer this important question,
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Welcome back to the Boom X show laws of money podcast. In the academy, we hold office hours each and every week for those who are family leaders. This is a great opportunity for students in the courses, listeners of the BoomX show and family members who want to grow their family wealth, but also protect it, protect it for their family, build family wealth for the generations.
Some of the questions are technical. Some of them are complicated and some of them are just sharing stories and anecdotes and even tips among students on returning. This week in office hours. I was asked a great question. It's a question I hear often. The question is simply how do I provide for my children from a first marriage when I also want to provide for my surviving spouse from a second or third marriage? Let's jump into the conversation as family leader in office hours this week, Bob asked me how to solve this problem.
What these trusts are a value when they take care of your surviving spouse, when she has dementia. And I don't know when you plan on dying, you let me know, but a couple of decades into the future. And what's that? What, wait, what is your
I'm hoping it's not immediately, although, I like to be prepared. Well, yeah. And then how many kids do you have? Oh yeah. You can pass the wealth onto them outright. In which case they're just going to go down and buy the latest version of the Audi five, the S five that came out. I don't disagree with that, but if you hold it.
One thing you know, so I want I have this rental house, at least don't want that to go to my kids, but right now it's, it's earning an income and I want my wife to be able to have that income. And, once you'd have the expenses to running a rental, but so I'm not sure if I just, there was a good way to set that up so that she doesn't get mad at them and disinherit them or something if I just gave it to her.
Are your kids, did you have a prior marriage or your kids from a different marriage? Yeah. There's only one way to do that. If you want to provide for your second spouse and you want to ensure that she's taken care of, but you want the asset, the estate to ultimately go to your descendants, biological descendants, regardless of marriage.
First marriage and second marriage, whatever it is, then the gift to your wife has to be in trust. Now rental property can be in a trust. It's better to wrap rental property in a limited liability company. In a limited liability company, if you do that the asset is personal property. So what you own at your death is ownership or a share of a company.
It would be analogous to owning 100% of Microsoft stock. You're not passing on to the trust, the Microsoft buildings and the computers and all the employees. What you're passing on is that stock certificate saying I own 100%, it's much easier to transfer a stock certificate in trust than it is a you can do it with the deed, but you know, it's going to generate income.
The disadvantage to a limited liability company is, well, now you've got to file with the state. And file the annual report. It's not that onerous but it is extra work. And you have, you're paying that BNO tax, the state of Washington, which well, because it's a business, but on the other hand if it's rental property, sometimes they slip and fall and bring a lawsuit.
And without that shield, without that asset being inside a limited liability company all of your assets are at risk. If they get a judgment against you as an individual, because the lease agreement was between you and the rentor as compared to your limited liability company and the rentor see the difference?
Then once that judgment is attached, it's attached to you and you have to pay it out of your assets. You can file for bankruptcy in the personal residence would be exempt as would a retirement account, but that's it. And you're making that step to go to a bankruptcy court. And so what I tell clients is look, we're not in this business to lose everything.
We're not even in this business to, like we want to go to bed each night and sleep soundly. So go out and get your umbrella insurance, your general liability, 500 K a million dollar policy. And then just wrap it in a limited liability company. You've got two lines of defense, plus it's just a great way to do it because now you're passing that stock certificate, as I indicated is personal property.
It's weird. Like you can transfer personal property easier than a deed right. So if you set it up that way, you've got asset protection for your kids, because you can just transfer the limited liability company into the trust. And the trust provisions would say, look the income generated by the trust will benefit my wife during her lifetime.
When she passes away, the trust can either terminate or they can just be beneficiaries of the trust making go for another generation. Washington state, all states have a rule called rule against perpetuities. Your state Washington has codified it. So it's a trust can go for 150 years. Now, if you think about it, if that rental property was operating correctly.
And generating income and you had it organized really well. There's not that much, just outsource to a property manager and remember all your annual report with the state. And then you're giving your children this little money-making machine, the trust that can go on during their lifetime and even life of grandkids.
The trust could just continue for them? Right. Yeah. Cause otherwise, well, it's your choice. You can't with a trust, you can control your wealth from the Gregg.
So I'm wondering if you can tell me this, but does the step-up in basis occur on a death bill? Okay. Yep. That's what's awesome about it is especially in a community property state. The section, what is it? 10, 10, 14, the tax code, adjust the tax basis of an asset at the time of death or nine months after the time of death at the option of the personal representative.
So you're choosing the best time. If it's a real estate bubble and values are going up and up and up, and you're choosing the last possible date. On the other hand, if it's cascading down and you choose the date of death, the lock in that new tax basis and that's for all of your assets except for retirement accounts, which are tax deferred.
And if it was community property, let's say how long you been married? Let's see 14 and a half years, I guess.
I'd like to switch gears for just a moment and lay out this truth. The laws of money have requirements. These requirements must be met for those who understand and implement the proven strategies that we cover on the podcast and in the academy.
Good things happen. Let's take a moment and focus on important resources that can help you and your family do just that.
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Welcome back to the Boom X show laws of money podcast. I'm your host, Darol Tuttle. Have you already earned your money? You've already learned how to save and budget and set financial goals. It's in the back of your mind you're wondering, is there something else I should be doing? The answer is yes, there is. But where do you go to get the right answer now paying a lot of money to people who speak money management, mumbo jumbo, or worst of all legalese by attorney.
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Okay. So Bob, let's finish up your questions and make sure you're taking care of. So your question is for the benefit of Mark. Let me summarize your question. What you're after is you want to set up an estate plan in which you are providing for your wife, but protecting the estate assets for the benefit of your descendants, your children from a prior marriage.
Correct. And that has to be done by a trust. Period. Okay. Does it have a special name for that trust or I can tell you what I call it. There's a couple of different ways to do it. If your estate is the size that most Americans, the best one to use is a trust authorized by 42 USC lawyers call it a third-party testamentary supplemental needs trust.
Now, I object to that nomenclature, because it doesn't resonate. What does that mean? It doesn't mean anything. Lawyers know exactly what that is, but let's break it down. It's a trust that's create, resides inside of and is created by your last will and Testament. If you think about it, there are two different ways to create a trust.
One is to create the trust while you're living. Now, you've heard that term revocable living trusts.
Yeah. So revocable living trust. It's just telling you, look, we're creating this stress right now. It's becoming legally effective right now and we're putting assets into it right now while I'm still living. The problem with those trusts are that you're the trustee, you're the beneficiary. You're the grantor.
And therefore it has zero asset protection ability. The IRS completely disregards it, that doesn't help with estate tax at all. It does avoid probate who cares. The second kind of trust is what is called a testamentary trust. And when you hear that term testamentary, what it means is the trust is inside of your last will and Testament it's sitting there dormant.
Like you sign the will, right? Witness notarized. It's a legally effective document, but the trust springs into existence at your death and it's created in a probate. A probate is required. Now, I want to emphasize this. It must be created by a Will and all Wills have to be probated. And that's a requirement of federal law.
Now the federal law that authorizes this trust is the federal law that requires you to create it in your will. So get away from these revocable living trust plans, if you're married, because what you want is that trust. I call that trust the spousal protection trust. I can call it. I can name a trust, anything I want to.
Now in the documents in the protection roadmap, you have the ability to create that last will and Testament with that thing in there. The language actually says, this is spousal protection trust. However, lawyers call it a testamentary third-party supplemental needs trust. And therefore those two terms are interchangeable for my clients and their family spousal protection trusts because it, in folks that mental image of a trust that protects assets for the benefit of the spouse.
What the law says is if you create it and if the trust has the provisions required under 42 USC, then that trust is not counted as an asset for state tax purposes of the spouse does not count as an asset of the spouse for Medicaid purposes. So look back period, transfer penalty, medicaid liens do not apply.
That trust is completely asset protection trust. Then, you'll have a provision in there that says something like we're not something like it will say upon my spouse's death, then the trust shall terminate and pay, liquidate the assets and pay it out to my two children eqaually.
Or you could say the trust will terminate and pay out assets 50, 50 to two new trusts for the benefit of each child. Because sometimes you don't want to give your kids, if your estate's 2 million bucks and you got two kids and your kids are 35 when. When the time happens here's a check for a million dollars.
So have fun. That's not, you didn't save your money just to have it blown at the Audi dealership the very next day. And you could even keep that spousal protection trust. You could say the trust will terminate when my kids die. The primary beneficiary is my wife during her lifetime.
Then when she passes, the trust is going to continue and 50 50 with the kids, like a pooled supplemental needs trust. And sometimes you have kids have you know, they're disabled or they're struggling with mental health problems or they're struggling with drug addiction. And those trusts are really great because like I said, they're completely Medicaid exempt.
You've heard the term general needs trust as compared to special needs. Special needs means it does not count as an asset for Medicaid purposes. General needs means it will count as an asset for Medicaid purposes. So if you draft that kind of trust for your kids, then guess what if they needed government benefits for drug treatment or mental health treatment or assisted living facility or adult family home based upon disability that trust would have to be spent down.
Okay. So something I don't understand, though, if I'm trying to protect this asset, if I'm going to, you said that it would only go in from a Will when I pass away. But what if I, so how does it protect it while I'm still alive? It doesn't. It does not. Can I put it in the trust, based on the trigger events in my power of attorney?
See, that's what's so awesome about BoomX academy because the nest egg course, I might use this material as a podcast. So let's just talk about it as if we're introducing the concept to a national audience. So when you joined BoomX academy, as a family leader, pay $1 a month and prices are going to go up to $44 a month for 2022.
Those prices do not apply to you by the way but I'm at $44 a month then you have free access to the nest egg course. Now the nest egg course speaks to that question. The asset protection roadmap is a planning for the complete estate plan, but that spousal protection occur at your death.
The nest egg course is trying to solve the problem of protecting assets while you are alive. While you were alive. And it's using a five-year trust. A spousal protection trust is awesome because there's no transfer penalty. The look back period does not apply. Medicaid liens and recovery liens do not apply.
Not now, not ever once it's funded. Now, when we're transferring our money, the five-year lookback period rule, we've got to be careful. And so you make the transfer weight out to five years, five years in one day, the money inside of that trust if you set it up correctly, does not count it as an asset. And at that point, Medicaid liens look back period and chance for penalties no longer apply.
That's how you protect your assets while you're alive. But the thing is it's much harder to figure that out because I mean like a spousal protection. We know when that's created, it's created when you die, right? Like it's going to happen. With the five-year transfer strategy. And once again, the nest egg course, how many videos are in that thing?
It's seven or eight videos. Some of them are 45 minutes, an hour long. And so we go into a lot of detail explaining how it works. I even get granular on the trust provisions. And it's laid out for our purposes in a one hour office hours in a 45 minute podcast. We just have to talk about it the 30,000 foot level.
But the 30,000 foot level, it's a little more difficult because you're like, okay, I'm still young and healthy. And I have a nest egg, like you're only going to transfer that amount of money that you're not dependent upon for non-discretionary like your expenses. And all retireeslike you've been trained, inundated, save, save, save, get this big account.
At some point you're not spending that money and you will never spend that money. I don't care what the Schwab commercials say. That's a nest egg. Now you can either have it sit there and be spent down because of broken hip. Or you can say at some point transfer. I, what I always say everybody's different.
But when you're 75 ish, it's time to make a transfer I think. Because 75, you remember there's three phases of retirement. First phase is the gold watch, golf and all your hobbies. Second phase is sitting around and watching jeopardy. And the third phase is in the nursing home.
And that concludes this episode of the Boom X show laws of money podcast. I'm your host Darol Tuttle. As a reminder, you can go to boomxacademy.com. Membership is absolutely free and best of all, you can enroll in the BoomX show companion course. That's all for now until next time. Remember, yes, you can learn and leverage the laws of money to your advantage.
