Hi there, Darol Tuttle here host of the Boom X Show. And boy, do we have a lot to talk about today. Once again, I opened office hours up this week at BoomX Academy and was asked some amazing questions and I answer them. Questions like what is the trust as compared to a business entity? How can I create a trust to protect my assets against unreimbursed medical expenses?
How can I use a trust to avoid estate tax, capital gains tax and how can I use it to help my family? Yes. All of these questions will be answered as best I can in today's episode. I hope you enjoy it. We have a lot to talk about it. Let's get started.
Welcome, BoomXers. Let's throw out the old playbook. It's time to tear down the traditional way of looking at your life and money. And leverage the laws of money to our advantage. That's right. There are laws of money and those who learn and leverage the laws of money win. And sometimes win big. Stay tuned as asset protection attorney Darol Tuttle, educator, and leader of the BoomX nation shows us how. Beginners, investors, entrepreneurs, fellow attorneys, are you ready? Are you ready
Let's arm this bomb. Now, here's the BoomX Show the laws of money.
Welcome to the BoomX Show laws of money podcast. I'm your host, Darol Tuttle. And we are live in office hours with our students of the BoomX Academy who will now begin to grill me with amazing questions on topics related to estate planning, long-term care planning and retirement planning, Medicaid planning, tax planning, so that they can have a successful retirement, build and protect family wealth for generations. That's the goal.
Bob, what is your question? Wow, that's pretty good. I didn't come up with a question. I was watching one of your videos and you said a trust is like a corporation. So if I have stock in a corporation, I can get dividends and income. So if I have a trust and that trust generates profit, and I have the trust pay me or my wife.
I'm thinking about to put a rental house into a trust and it's usually generating income. Not always so can I, use that money or does it somehow have to stay on the trust.
Okay. Yeah. Right. Okay. So Bob, thank you for that question. It's a great one. And it is generally true that corporations. And by when I say corporations, a business entity, it could be a general partnership. It could be an LLC and S-corp, a C- Corp, a business entity. Business entities of course are used to hold and own business assets, whereas, a trust like we can't use an LLC for an individual that does not have a business purpose, right?
A rental property is a business, it's generating income. It's making a profit. It's no different conceptually than a mom and pop grocery store in which they're trying to make a profit from selling goods. It's no different than a law firm that's providing services, but trying to generate income trying to make fees and make a profit or even Microsoft selling goods. Whereas owning recreational property has no business purpose a beach house, assuming you're not using it for Airbnb when you're not there, but like a beach house for the family is just recreational.
And you are not, let me see if the statements are you're not allowed to, you could form an LLC and transfer recreational property into it. But that does absolutely no good because you're not entitled to any kind of tax deductions if you transfer recreational property into an LLC, try to call it a business so that you can deduct your trips to the ocean that's tax fraud.
And so what entity can we have some kind of similar type construct for personal assets? And the answer is a trust. Trusts are the bread and butter of estate planning and asset protection. Trust own personal assets, LLCs and corporations on business assets. Now the two, when you are doing your personal planning, if you have rental property, then you own a business.
And so it's common to draft for my clients, limited liability companies and trust because LLCs own business assets and trust own personal assets. And what's great about an LLC real estate inside of an LLC changes what you own, as I've indicated in prior office hours. If you own a rental property, you own real estate.
If you transferred it into an LLC, now you own a share in the LLC and that is personal property. And so when we draft your last will and Testament or your trust, then what we say is I bequeath industry or distribute depending on if you're a will-based or trust-based plan my share and ownership in the Bob Keller rental property, LLC how simple is that.
So now the heir just owns the share that you used to share. You can transfer it easily in a trust or in the last will and Testament. Now your question was okay. So how do we run personal assets inside of a trust? And it sounded to me like what you're after is a legal entity for your personal assets.
That's a money-making machine or a family bank that's funding that you're drawing upon for your retirement, but also trying to protect it against creditors to some extent and have it transfer seamlessly to your spouse and then your heir.
Welcome back before the break I was talking with Bob about trusts and how they can be used and customized for a family to protect both for retirement. Let's pick up where we left off assets for Medicare Medicaid purposes. Sorry. Yeah. Okay. So let's talk about that. Some people have a difficult time understanding the concept of a trust.
They just can't wrap their brain around it. And my analogy to LLCs I think is helpful because it seems like people can understand LLC, but, and when I'm trying to illustrate a trust, I'm like, it's really no different. Like it's a legal entity. You have a piece of paper as a contract and you sign it now with that said.
The way you draft the trust is everything. Because if you draft the trust in a way in which there is a complete transfer of assets to the trust and you no longer exercise control over the trust, then the internal revenue service. The Washington state department of revenue and the Medicaid agency in whatever state you're in is bound by law.
Like they don't get to tax it to you personally anymore. I want to emphasize that if you make a complete transfer of the asset, follow all the rules. And you're not the trustee and you no longer exercise, direct control or indirect control over the asset then. You're that growth in the rate of return and the dividends and income is taxed to the trust, not to you anymore.
Whereas, if you transfer assets to a trust in which you are the trustee, then the IRS and Medicaid agencies and the department of revenue and creditors, all creditors of any type, completely disregard the trust. You still own it. They still can be attached by a judgment, like if. Had a lawsuit against you.
They can still reach all those assets inside of that trust. It's still taxable to you. You still own it because you're still exercising control. Now, those two trusts have completely different purposes. The first trust is the goal of the first trust is to could be to reduce the size of your estate.
Some people get arrogant and self-righteous and illogical about irrevocable trust for Medicaid planning. You're just artificially impoverishing yourself. So you can be eligible for Medicaid benefits. Of course my answer is, yeah, that's it. That's absolutely right. It's exactly the same as the wealthy who are transferring assets out of their estate so they can reduce the size of their state below the credit amount, for example, Washington state or let's pick Oregon cause we always use Washington. Oregon has a $1 million credit meaning at death, Washington. And we're talking about individual states that have an estate tax.
There are 17 states that have either an estate tax or an inheritance tax. So if you're in one of those states, look out, Pennsylvania has an inheritance tax. Oregon has an estate tax. Washington has an estate tax. These states are bad and Washington has a 20% estate tax, but they offer a credit and a credit means look for people who don't have a lot of money, we don't want to impose this tax.
So we have a threshold it's tax-free up to 2 million. If you're at 3 million, And you're 80 years old with leukemia. You're like, okay, wait a minute. I'm looking at my state's gonna take a $200,000 estate tax hit. Oh my goodness. What I'm going to do? That person can make a transfer to an irrevocable trust, no longer exercises control of it.
There's a three-year clawback rule in some states, feds three-year clawbacks. You've got to check and see what the clawback rule is in your jurisdiction and by clawback, I mean, if you make a transfer within that three-year time period, they included in your estate. So you've got to think ahead a little bit, but it is clear that now the trust owns those assets, not the individual has exactly the same for Medicaid.
There's a five-year clawback rule for Medicaid. Look back period. But once that hurdle has been passed, the assets in the trust are no longer eligible. They don't count as an asset for Medicaid purposes, look back period, transfer penalties don't apply. So then the question is okay.
Yeah, but Darol what about availability? What about me? Now, the whole concept of one of these kinds of trusts is to wait, there's a timing element. Like ideally we wait until that time period in which we are no longer buying and selling and trading assets. My observation, I've been staring at account statements for, I've been focused on estate planning for 20 years.
Emphasizing that. So for 20, for two decades, I've been reading account statements and income statements, and people have this notion of what they're going to do in retirement. But my observation is man, when people get older and kind of mid there's early like you're aging, there's a mid range. The early range, the mid range and the late range.
Bob you're in the early range. Like you're still a young man and you're, you've talked about timeshares in Florida. Now is not the time for you to make a transfer because that money is going to be less available to you. It's better to, it's better to wait until like, okay, look, I'm old, man.
I'm tired. Like I'm done. I'm basically done. And at that point what your goal is to create family wealth. You got to think long, long game on creating a vault of money for the family. And just think in terms of assets bear with me as I go back to history a little bit. When I was in law school, one of the best pellet litigators.
He worked for a big firm. And he was like renowned for his advocacy skills. And for some reason he taught property at my law school. Like why a guy like that would teach. I don't know. But and he taught, so that's the first time I heard of the concept of property interest and property rights as compared to property.
And so he would say, oh, like a bundle of sticks this right here, Bob is a can. And it has three pins in it. Now before William the conqueror in 1066, there was just land. After 1066 land divided into parts. And so we can say this is a parcel of land, but this is an easement. We can take the property interest in the right to traverse over land and we can give it to another person and we can even sell it for value.
We can have an interest in land divided up in such a way so this person benefit has the legal right to benefit from the land. But this person is responsible for managing the land. A trust does that the trustee has legal title to the asset. So if we appoint let's suppose you chose an attorney in a law firm to act as your trustee, and he's a stranger to you, but he's not your family member. But he's a skilled attorney and he swore an oath and he is regulated by the Washington state bar association.
Actually he's regulated by the state Supreme court. And so assuming you have faith and trust in that attorney, you can appoint this complete stranger. Who will have legal title to your assets, which think about it. That's scary, right? That's why there's this fiduciary standard and all that means like when you hear financial advisors use it, they're not using the term correctly.
The legal term is somebody that's responsible for somebody else's money. And if there's the slightest breach or negligence or wrong-doing, it's, we're going to make it super easy for them to go to jail basically. And so it's like, wow, there's the force of law. And there will be dire consequences if I don't handle this well fiduciary standard, because you're giving the trustee legal title.
Now the other player in a trust is the beneficiaries. Like those are the people who benefit from the trucks before 1066. This couldn't happen after 1066, William, the conqueror divided property interests up for his own purpose and let loose a big can of worms because lawyers got in there and say like, look okay, so we can create a beneficiary.
And that beneficiary will be, can be your spouse. The beneficiaries can be your children. Now, if I decided I'm 78 years old and I am going to give all of my wealth to my kids outright that's not necessarily irrational, really. If you have an estate tax problem, or a pending Medicaid problem.
You can just give that wealth to your kid. They're going to get it anyway. If there's anything left at the end of your life, th they get it. In fact, in a way they own it more than you do, because you have only three years of life left. Let's say, Bob, I knew like I have a crystal ball and I don't know you're going to die in three years.
That's not fun to think about, but if you were single and had your kids. That's what happens to it affects them more than you. What are you gonna, and so really get right now, you're just the title owner, but your kids have an interest. Your wife has an interest. These are the people that depend on you and who will benefit from all that you do.
And so if you just think about, okay, if we create a family bank and we give the ability for the family to have access to this money. And if the family will do what's right for dad, if he becomes sick, then it works perfectly because family values are different, right? Families are different.
Values are different. Morals are different. Some people believe I will take care of my mom in old age, even if she has to come live with us. I have seen clients quit their jobs. In fact, the amount of money Medicaid has this robot called golden child. And here's how it works. If a parent, if a child lives in a parent's home and provides care for two years, then the parent can transfer the personal residence to the child with no penalty. No. Look back, period. No, spend down no Medicaid land, no penalty.
You know why? Because the law actually acknowledges the sacrifice that these family members are making. There's billions of dollars like the value of children providing care for their parents, calculate it in the billions of dollars in America.
And it's like, wow. And so if you think about. If we're intelligent about the way we use the funds and we give children access to the funds, really what we're doing is we're giving them responsibility to make family decisions that benefits all of the members, because the trustee can distribute money to your child.
And when that happens, the child can do anything they want to with that money. And it's like you're giving them access to a pot of money to help pay for estate tax if there's any later to reduce the state tax burden, to maybe eliminate the estate tax liability completely or to draw money, to help pay for mom and dad's care.
Now, do you want to do that? When you're 45 buying condos all over the world. And you have your own private jet that you fly around in? Probably not, but when you're thinking about I, I look I'm turning 58 this month. And I'm no spring chicken. And I'm thinking about doing this now for my kids.
Like a family asset. That's not my assets and, make, have my son been be the trustee and get it out of my name because it didn't, I, it doesn't really need to be in my name. It's just, it's not helpful. And I know it's a different mindset because you've been trained, save your money and blah, blah, blah, blah.
But what goes wrong? People hang on to this money and their secret of a bad in the private about it. And then they started having health problems and it just flies out the window. Another thing that happens too is this happens, but it's happened twice among client, my client base in the last five years, dementia is so bad.
People forget that they own assets and it ends up in unclaimed property. And so you get that letter from unclaimed properties like we have a $240,000 mutual fund, like what
I'm like, literally you're like, you're not serious. Yeah, no, And then sounds like a scam. Yeah, I know,
but what happens is the financial Institute. The other one that happened was the life insurance policy. So we did all this work to probate and most of the talking was being done by the second wife and husband had dementia. She had no idea that there was a whole life insurance policy on him.
Like why would she? And he passed away. And so it had not named a beneficiary on life insurance because life insurance usually passes without probate. Because you'd name a beneficiary of the policy. He had named the estate. That means a probate. And because there was like no knowledge of this life insurance policy now we had to do probate.
The good news is the state had $250,000. They didn't think they were going to get, but still. And so this is the first time in history in which people are living this long life expectancy, even as late as the 1930s was only 60, 62 years old, average life expectancy. You don't have problems.
Alzheimer's is the third leading cause of death in your state of Washington, it's the eighth leading cause of death in the United States. The number of people who are dying from Alzheimer's as compared to COVID, there's no comparison. But we don't talk about Alzheimer's as much. There's no cure for it.
Yeah. That's the big eye-opener for me. Unreimbursed medical expenses and realize that it's a mistake. Like I've had clients who the pain to work with because they just had this kind of weird mentality about ownership of assets is it's a very like some cultures are as materialistic as America is.
And they have slightly different attitudes about ownership. America is obsessed with title, like who owns this. And it, if your personality type is such that you developed wealth through saving it. There's four ways to make money. One is you inherited two is you invest or speculate. Three is you own a business and fourth is you work, but you're cheap and you save every nickel and invest right that fourth personality type.
That's the group that gets their clocks cleaned because they're very private about ownership and they're very stingy. And so they won't pay for attorney's fees and they won't think about gifting and they don't, and they don't want their kids to know that they're actually rich. It's so bad.
I've seen, I can remember a spouse crying in my office pissed because they were actually rich. She had no idea when her husband died. She found out that they were rich. But the had been forced to live like misers, that kind of mindset is bad because what'll happen is a broken hip, Alzheimer's all that money is just sitting there, and there's no management model. There's no asset protection model. There's not even estate transfer in place. And by the time you have dementia, it's probably too late to do estate planning. It's hard to watch, man. I tell you that. But did I answer your. No, I'm not sure. I don't think so because so if I put something into the trust it's well, if I'm in my, wife's a beneficiary, then she could get the money.
I'm not gonna help for Medicaid purposes because she has Medicaid counts the wealth of husband and wife, okay. So I'd have to give it to, okay. Okay. Okay. So we're not good for Medicaid or. You could use a spousal lifetime access trust. I've not talked about that kind of trust before, and it's a great topic actually.
Let's spend a few minutes on it. It is possible to create the exact same irrevocable trust that we used for that, that we use for kids. But we transfer that money and the wife or the spouse, depending on who funds it, but in your case, your wife is the beneficiary. And, but it's an irrevocable trust and you have a non-interested trustee, she, and what have we done?
It's a simple formula. Really? It's a complete transfer and the trustee has no interest in. If you do that's ideal because IRS and Medicaid are not allowed to change the rules. And the wife is the beneficiary. Now the money that comes and if you lay out exactly what kind of distributions can be made for the wife, and she has no control over that, she has no discretion.
Then the assets inside of it do not count for Medicaid purposes. Do not count for tax purposes and the only amount to the that does count as amount that she receives. Like once she puts it in her checking account, then that money is counted as her asset for Medicaid purposes. It's her asset on the first day of the next month right. Now back in work, because if the money is spent before the first day of the next month, then there's no issue for Medicaid purposes.
And so she could you're in a old folks home and she wants to buy a big screen TV for you. So you can watch the super bowl like a man. And so there could be distributions made for that. And if you structured it correctly that would be fine if that's similar to a supplemental needs trust.
That can work. Yeah. So Medicaid, somebody who's in a nursing home for Medicaid, they're usually in the most basic nursing home, and if you want to get into a more expensive nursing home could you use the money for that to buy a nice apartment instead of a.
I had my mother-in-law in a nursing home with, two people to a room. That was it, Nothing really special going on there. So she went ahead, she got dementia and they had her in, not quite a palace, but pretty nice place. So there's different levels of nursing homes, and I assume the cost is, they're different, but different than what Medicaid would pay and what, my, Okay, I'm going to try to blow your mind if I can pull this off.
Okay. Bear with me. What I've done is I'm going to share with you on this zoom. Let's see if I can do this, so tell me, can you see my map, my computer screen? What do you see that Genworth calculator? I did go there and poke around. Okay good. Now give me okay, so here we go.
Let's do Washington state and let's do Seattle. Is that what you're where are you? Bremerton. Okay, Seattle area. Okay. A semi-private room. These are the average costs. That way you don't have to go call a bunch of nursing homes. The average cost of a semi-private room of a nursing home in Washington state is $10,479 per month.
Now you're saying, oh if you want to spend a lot of money, you can get a private room. That's true. But the difference between twelve thousand twelve thousand two hundred forty three, that's not that much, but if you're running on fumes, it is a lot. Now. So what does Medicaid pay? Oh, what Medicaid we pay, like what their rate is a fraction of that amount.
It's the same room, the same level of care, but Medicaid is paying far less than that like they get a super discount. And that's one of the reasons that morality about Medicaid planning flies out the window, because one of the reasons these rates are so high is because the Medicaid reimbursement rate is so low.
And so for the nursing home to make a private and continue to function, they have to also raise their rates for the room. It's a racket.
It's a hidden tax and more offensive. Your tax dollars financed Medicaid. So the people who are on Medicaid I like theoretically made less income during their entire lives. So they may pay less tax and the tax dollars pay for Medicaid. And therefore they're benefiting from something that they didn't contribute to and pay for it as much when they were in their working years.
And you're paying more it, which causes you to pay more when it's your turn and you funded more of it because you made higher income. And so when you look at it that way, you're like, okay, look, I have a moral and financial responsibility for making a mature choice and comply with the law. And the thing is Congress understands this, like when Congress passed Medicaid, it's only a five-year lookback period for a reason.
The spousal and income rules for eligibility are there for a reason. Medicaid does it wants people to have retirement money, have money to pass on to the next generation and pay for care, right? It's no different than estate tax. If you transfer your money to an irrevocable trust three years before you pass away, you can avoid estate tax and that's legal and there's nothing wrong with it.
Thanks for listening to another episode of the BoomX Show laws of money podcast, where asset protection attorney Darol Tuttle breaks down the complicated rules of estate, retirement, and even long-term care planning, you can listen to past episodes of the BoomX show by going to boomxshow.com or subscribing right from your smart phones podcast player.
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