Touchstone Talks: Ep. 8 - Protecting What You’ve Built: Estate Planning Insights for Business Owners

They had

said that.

It actually

is not every. Day.

That I.

Meet. Him.

Maybe it.

Means we.

May be.

Okay.

And he is.

Back.

And we.

May be.

In the.

maximize

what they're getting,
when they sell and exit their business.

So how does a trust help with that?

What? Maybe let's even back up a step.

What is a trust move?

And so, what is a trust?

It's we're going to be here for 15 hours.
I think that's great.

The I don't think we have 15 out here
so quickly.

You know, generally
we have two types of trusts a trust.

That is what I'll call it
a death trust, a testamentary trust

which is a revocable trust
or an irrevocable trust,

which generally involves
some sort of gifting.

So in a, in a trust, we have a creator.

We often call him
the grantor of the trust.

We have a trustee,
the person who's going to become

the new owner of whatever assets
and be in charge of things

like investments and distributions,
and you have beneficiaries.

So you get to define
who the beneficiaries are.

Is it a spouse? Is it kids? Is a charity.

And then you have property that you have
to put in, which is in our case,

kind of a business owner,
you know, interest in a business.

So what advantages are there
to put my business in a trust.

So from it, it
all, it all depends on the client's goals.

Right.

If we're working with a business owner

and we're simply organizing their affairs,
owning their business in a revocable

trust, can help avoid probate at death
and kind of make quick,

order of who owns the asset
not having to worry about a court.

Court intervention
on the on the planning side,

kind of,
planning for taxes or estate taxes side.

The the advantage is often
putting a business

into trust early
when the value is much lower.

So we use less what we would call gift
tax exemption, and then letting the value

grow over time, which can grow outside
of somebody's taxable estate.

Other advantages,

though, are, you know,
you're planning for a beneficiary

by doing it in a trust
rather than simply giving it to them.

You get some asset protection
or some divorcing spouse protection.

You might have a beneficiary
with special needs where when it drafted

in a certain way,
or you may just have a spendthrift

beneficiary, one
who can't control their spending

and we want to lock it up in a trust
could happen.

That happens most of the time.

I had one, business owner

whose mother had put
the trust, had set up a trust

for the three brothers and,

a way that was unknown,

heritable to the spouse.

He was able to dissolve the trust.

Is there another reason
you would want to dissolve the trust?

Like, obviously that was a personal choice
that he felt.

Yeah.

That was unfair to his family.

So he dissolved his trust.

But that

was kind of I didn't realize
you could dissolve a trust.

So yeah.

So it depends. Right.

What a great lawyer be. It depends.

So I was talking with the client
yesterday.

He was like he's
not he's not sure what he wants to do yet.

Right? And it's like, well,
we have to make our trust flexible.

In Connecticut,
a trust can last for 800 years.

Yeah, that's an interesting time.

For a long time. Why isn't it a thousand?

Why isn't it 360?

Why isn't it forever?

You know, it used to be about 100.

Used to be
what we would call lives in being.

Right. That makes sense to me. Yeah.

So anyone who went to property in law
school would would remember that.

But so Connecticut's expanded it.

800 seems to be long enough for anybody.

Eight generations theoretically.

Yeah.

Yeah, I think Thanksgiving,
the first Thanksgiving was less

than 400 years ago, in fact.
Check me on that.

But so, yeah.

So our irrevocable trusts, all right,
that we've created that you put that

they can often be tweaked on the edges.

Okay.

Depending on the terms of the trust,
you may be able to dissolve them.

Right.

You have trusts have distribution
terms in them.

Sometimes parents say
give everything to a child at age 30.

Right. If we've they're working with me.

They've heard that we like lifetime
trusts.

They last for their lifetime.

We like some asset protection terms,
so we don't kick it out at specific times.

Parents rarely plan

for in-laws to inherit, right?

Yeah.

So it's not unusual.

And that's what we tell, spouses
often is.

It's not unusual
that you were not included.

The kids, your kids would be included.

And then it's kind of,
it might be on the your spouse, you know,

if you need more liquidity,
life insurance or other ways.

But sometimes
trust don't make sense anymore.

You know, the the current estate
tax exemption that people are planning

for is next
year is going to be $15 million a person.

It's a big number.

That's a big number.

So if you have a
if you have a trust with $5 million,

or an asset with 5 million or 10 million

something under that,
and your estate isn't taxable

and you don't have the creditor concerns
or the divorcing spouse concerns,

some people will try to dissolve them.

I push really hard on those conversations.

But, you know, if it's possible,
sometimes it can be done.

Gotcha.

Whether or not it's a good idea,
only time will tell, right?

Well, you know, our crystal ball doesn't
necessarily give us the

the updated regulations, the crystal ball
or the magic eight ball.

You know, it doesn't. Yeah.

I mean that that estate
tax exemption is at an all time high.

Right? Right. I mean, when I started
practicing it was 2 million.

It was $600,000, five years before that.

Yeah.

So in 25 years, how we crept up to.

Yeah, 15 million,
which changes the planning.

It changes those irrevocable
trust and changes the view of.

Do you want them.

Yeah. So yeah, it's it's.

Yeah. So it makes it possible it.

Well and it makes a case for
why not to establish a trust.

Yeah. Right. Yeah.

My view on the planning side is
you do establish a trust.

You provide your, your

you as a parent can provide protections
to your children

that they cannot provide themselves there.

So taking advantage of that by using a
trust is a is positive planning.

You can it's a continuum of push

and pull on those distribution terms,
in terms of how, you know,

how much control you give a beneficiary,
how much things they can do alone.

And that's
where some of the conversation comes in.

But because I really would like to
I like that asset protection.

Creditor protection.

Oh, I'm sure six spouse protection
I'm sure.

Yeah, yeah.

We, interestingly enough,
have another client

who established his firm within his trust,

and is now divorcing.

So that's seeing the trust

in play in a protective fashion.

Yeah. Has been interesting
for me to watch.

Probably not as interesting
for him to deal with.

Yeah, probably not. Right.

But from the outside, watching it
do what it's supposed to do,

I can provide that layer of protection.

Right.

Pressure,
which in his mind is ensuring that

his son, has

the benefit of his company,
versus the wife that's divorcing.

Yeah. Yeah.
Which makes which makes sense.

So it sounds like it
served its purpose. Exactly.

I think kind of to your that initial
question of the the why, right.

Why is it trust, you know, like there's
a gazillion, maybe not a gazillion,

but there's plenty of reasons of, of why
the trust which is important

kind of in the
what are we doing on the planning side.

But it's also important, you know, ten
years later of what why is the trust here?

You know, because it

if we hit a couple of those wise,
it's great.

It makes sense. Yeah. Makes sense.

When should you talk to somebody
about setting up a trust?

Like, is this, I set my company up
and I did it this way,

and now I can't talk about a trust,
or I do this before I go to sell.

I sell my company, and then I set it up.

Like, what timeline works best?

So if we're talking about planning
kind of to

because we we have a big of let's, let's
narrow it down in the sense

that you're going to have an event
that's going to create the at some point,

you're you have a business that you think
is going to grow in value.

And then and then pop in value. Right.

We all want to pop in back. Yeah.

So absent a pop in value
the earlier the better.

Right. So if you do it
at the very beginning great.

You know you can put,
you know, everyone's putting in $100,000,

you could put a one of, one
of the initial investors could be a trust.

Puts it in there to puts at $100,000.

And then all of the future appreciation

grows inside of the trust outside of the

we'll call it the Grantors estate.

Just bottom.

I used 100
because it's easy to multiply a force.

The, so early.

Better at the beginning is great.

Rarely happens that happens for,
you know, somebody who's done it

before twice, right? Right.
Not even before. Right?

They've done it twice.

So that's the rare person more often
than not on the on

the transaction side, it it should happen

way before a transaction.

Right.

So like what you will talk about
you have a great advisor team right.

And need an account
and a trust in estates.

Lawyer.

Your financial advisor.

Your business advisor in play.

Your trust in the state person early

in that process,
a couple years would be great.

Okay.

On the flip side before.

Right.
So they're let's say they've engaged you.

They're thinking about selling
and they haven't done anything yet.

It's not too late to do it.

And we want to give it away
or give away a portion of the business

before you start
your sales process would be great.

You know, if I could do it a year
ahead of time or two years,

that lower the value
when I do it, the better.

But even if it's, you know, they're like,
okay,

next spring
we're going to start the sales process.

If we look at a gifting process
now that that will be early enough, okay.

It's just not it might wouldn't been as
good as have you done it two years prior.

Right. When is it too late.

Really too late.

That probably you've signed
that contract, right?

You have a letter of intent
or some sort of agreement in place.

Not with you,

not with you has it's you know, he's
going to help sell it, but with a buyer.

Okay.

Because then I can't have
because then value is established.

Yes. Right.

It's that value. Right.

And you're close to liquidity.

So I don't get to take one of the,
one of the places

both that bump in value,
but also something we call a discount.

We can in the, in the valuation,
which is going to be done

by a qualified appraiser,
not by a lawyer, not by me.

I pay you either. Right.

You get that out there
right in the beginning. Yeah.

The there are

lots of qualified appraisers out there,
and we use them to set the value.

They're going to take a discount
for lack of control

and a lack of marketability, because
you're not going to give away 100%, right.

You're not going to give away control.

You're going to give away something less.

But if you're about to sell, you know,
there's no lack of liquidity, right?

Right, right, right.

Say no. No immediate liquidity.
Yeah. Yeah.

So we don't get that discount
which could be big.

It could be, you know, 20 to 35%
depending on the facts.

It could be bigger too,
depending depending on exactly.

But to keep you reasonable in
in that frame.

So the closer you are to a deal,

the less fun
we can have on the on the planning.

So that letter of intent
is really kind of like a, a hard

like, you know, oh, oh, I have it,
but I haven't signed it yet.

Like, then you're just like,
yeah, right. Yeah. Right. Right.

It still can be done.

Plenty of deals.

Have you talk to an owner about,
you know, their expected process.

You know that has you and not all deals
succeed, right.

You can have a letter of intent.

There's still a level
of uncertainty there. But

with from a planning perspective,
like arguing about

that level of uncertainty for a deal
at actually close doesn't do us any good.

No, no, no. Very true. Very true.

You know, we we love to ask.

And sometimes we don't always
get the answers when we get, Oh, yes.

I'm all sat with just one estate,
and then we get to the letter of intent

and they're like, oh,
I never actually established that. Yes.

Or I created the trust.
I never put anything yet.

Yeah, yeah, yeah.

And it's okay.

It's not necessarily the end of the world.

Right.

Like there's still planning
we can do afterwards.

Which which is how like,
you know, like. Yes.

You missed an opportunity
to, like, move more,

but it still doesn't
mean we're done, right? Right? Right.

There still are still
there's still good planning.

Even if you do nothing.

One thing that's going to reduce
the value of your assets

is you get to pay the tax, right?

You're going to pay your tax right
that point.

You pay the taxes on it.

But you're still there's still planning.

We can do after an exit for, for an owner

that that missed the window
to do phenomenal planning and what?

No, sir.

We just
we try not to talk about what they missed.

Fair, fair fair. Right.

I'd say we still tell you that.

We don't tell you all of the good
we could have done that's happened.

You know, I have emails to owners,
you know, every six

months, for years.

And then I get the call that, hey,
we just sign that we just we have a buyer.

What can we do?

Right.

Like we should
we should update your base plan. Yep.

Right.

Well, it's not, you know, it's
right up there with with writing a.

Well, it's
not a fun activity to think about.

Yeah, well, and so waiting the will gives
you death the gift, and giving a trust

and giving it away is often
a, like a lack of a loss of control.

Right? Right. Like.

And that's hard for a nurse owner.

So it's, I do have to say, you know,
so a year ago

we were talking about this, we'd, I would
focus more on the changing tax landscape,

because that was pushing us to talk a lot
about gifting and gifting strategies,

but because the exemptions
moved to 15 million

next year and it's in it's permanent.

We'll see.

We'll see.

But like, it's never gone down.

Right. It's only gone up.

So it's permanent.

And if it if they're going

to change it from permanent, it's
not going to be in the next three years.

Right? Right.

We know that. Yeah. So it's stable now.

So it's stable.

So depending on kind of the enterprise
value that you're,

you're looking at, it
may or may not make sense.

I was talking to someone the other day.

They they they, they think they have
an enterprise value of about $60 million.

They own half. So that puts them at 30.

But they're still in
what I'd call the accumulation phase.

Right.

Right there.

They, they it's all in the business.

So when they go liquid, it's
going to be new to them.

Right.

Which is they're not can go any direction.

Yeah.

But but they don't want to give away

and give away a bunch to kids
or somebody else. Yep.

Because they don't know what it's
going to be like to have it. Right.

And with that increased exemption,
it's a different strategy, you know.

You know, it's well, like,
let's make sure you're set first.

You are the most important piece here.

And we don't have to do
like my periodic table of planning, right.

We don't have to do that.

We can we can
we can hit the just simply the base

plan for lots of people
and put that in order.

Well, I think important to remember
kind of a nice.

Yeah.

Which I hadn't thought about the,
the implication of the,

you know, the one big raise. Yeah.

Well,

there should be something good.

Yeah, yeah.

I know, and that's been for especially
for a lot of owners that that has

and the fact that it's not we're,

we're no longer fearing it's
going to go away in January.

Right.

It was going to drop in half in January
and we're not fearing it.

So which isn't great for business owners.

We need pressure.

We need outside pressure points
to get them to get them right often.

All right. That's true.

But it's it's good in the sense that
they're not rushing to do something if it.

Well,

the pressure
can come from different vantage points.

Yeah.

You know knowing that you have a timeline
before

a marketing process, that it is better.

Yes. Can be the pressure.

Which makes sense.

Right.

Like if I've already gotten three offers
with a certain value,

kind of the value set.

Yeah, it's really hard to argue. Right.

But I think it's good.

But in thinking about that, you overlay
that that tax impact.

Right.

Or kind of
what's it to do the person's estate.

And if it's, if it's, you know,
brings in 100 million.

Okay. We're going to do a lot of planning.

If it's 50, it's different.

If it's 20, it's different,
which is so different than what

it was eight years ago
when when the exemptions were.

Yeah, well I guess nine years ago.

But they keep moving. Yeah.

So it it brings it into play.

It just goes back to the why
why are we doing why are we doing.

What are their goals. Yeah.

And which is the again counseling.

Yep. Right. To me that's the fun part.

Well that's good
that you're in the right spot.

That's that's a good
that's a good validation.

Yeah.

So if we're working
with the business owner

and we're at the point of, of,
you know, bringing them to you,

and we have that advantage where we work
with our clients far

in advance, 3 to 5 years.

So talk about what does an

A direct into like I pick up the phone,

I call Mike, what are my next steps?

Who with. So the owners next steps.

Yeah. Yeah. What do you need.

What do they need to kind of think about
before they call you.

And what do they have need to have ready.

Yeah. So,

they should just call.

Right. Okay.

And and
because I'm going to hear the story,

I'm going to ask them questions
about their family.

Their family situation,
you know, first marriage,

second marriage, you know, kids, kids
from different marriages.

Right.
All of that kind of comes into play.

We're obviously we're going
to need their demographic information,

but then they're
and then their asset information do I need

in that initial call that initial,
what are we doing?

I want to remove
remove the hurdles. Right.

So I don't want them to have too much

to think
they need to bring into that conversation.

We want to start the conversation.

Ultimately, yes.

Like we're going to need to know,

you know, their their assets,
their ownership interests.

You know, what sort of LLCs
or business entities are in there.

But we don't always have to get that
from the person right.

Because we like because the best way
to keep that person is can let that person

continue to run the business 100%.

So we're going to hit on the account
and we're going to hit on you.

Anyone that's in the family already
in the, in the, in the, on the team,

to gather some of that information
to make it easier.

So I'd say let's just jump on the call
and walk through it knowing that, yes,

at some point
I'm going to collect information

relating to their their assets
and their information.

But importantly, the family, the kids

hearing the story about the kids.

And then they have to think of the who,
right?

I don't want them to think too much
about the who ahead of time in terms of,

like, who they will pick as trustees
or the fiduciary to help run their estates

if they're not around because it it
it will come up.

Some of that will come
from the conversation.

Oh good of whether or not
the kids can do it, if they make sense.

Is there too much strife
with the family business, with a kid

in the business
or outside of the business?

It's going to lead us
in different directions. And

it's just easier to talk.

Yeah, absolutely, absolutely.

And and to get the information from them
accurately.

Yeah. Is is helpful. Right, right.

Without a
would have somebody else's filter.

Yeah too. Of course. Of course.

Sometimes I have recent phone call
like this.

The spouses hadn't
like ultimately thought about.

And it was a mixed
it was a mixed, who was a second

marriage, children
from the prior marriages.

And they hadn't actually thought
about who was going to get what,

who was going to have it.

I'm like, well,
like so there we had a conversation.

We talked a little bit about trust,
but ultimately

I can't move
until we answer that question.

Yeah, right.

Right.

Like,
but but it gives them a sounding board.

Correct.

To see, well what is normally done. Go.

How do I generally think about this?

Which is, which is helpful.

Right. Yeah.

And I try to narrow down to like,
you know, 1 or 2 things for them

to discuss on their own.

That's a good plan, right?

It's a good plan.

Make too much bad. Yeah.

Yeah, absolutely. Absolutely.

That's great.

So when, we have that meeting, right,
we start working on things.

How long does it take to be established?

Okay. It's a great question.

I have an email that I send to
to clients that are, that are,

you know, exploring, working.

And it's like, and there's a sentence
or two in there that is like, you know,

we're going to meet, we're going to talk,
assuming we've come to conclusions.

You give me 2 to 3 weeks to draft
the documents, review them

and get them out to you.

From there, that seems fast.

Yeah. Okay.

It I mean it, but it so but that means
we came to a conclusion, right?

Right. Like, we know what we're doing.

Sometimes it takes three calls
to get to that thing, right?

Sometimes it takes 15 minutes.

You don't, you know, now,

once we know what we're doing,
I don't want to put pen to paper till we.

Until we change it.

Right, right, right.

Like,
I don't mind if you want to pay hourly,

I'll put pen to paper
and then we will revise it 100 times.

Right? Yep.

Generally on planning especially kind of
that foundational planning,

we can do it on, some of it on a flat fee
basis and like good.

That is like, I don't want to start
until we know where we're going.

It makes sense.

So 2 to 3 weeks is a good time
for us to turn it around.

And then it's on you, right?

It's, What's your plan?

How much attention
are you going to pay to it?

I mean, the fact that it's a base
plan for a client, you know, the document,

they get sent to 100 pages
with all sorts of information, right?

I don't really want them to read it yet.

The front of it's a flow chart.

Okay. Right. And then there's a memo.

Depending on that client's
personality type, some read

the whole thing, some like the memo,
some like the flow chart.

I want you to sit on it,
look at it, look through the flow chart.

And then we jump on another call.

We walk through it,
we hit the pivot points.

That's
kind of on the base planning, right?

Okay.

Foundational planning on the owner
planning.

It takes a little more like
the trust is easy.

Once we figure out what you want,
who's going to be the beneficiary?

Who are you going to be? The trustees.
That's easy.

It's the other stuff
that's hard. It's the.

How much are we transferring?

All right,
it's getting your valuation on it.

Yeah.

How do we actually make the transfer
if it's an LLC

and other people have, do
we have to amend the operating agreement?

Yeah.

So you
all the people have to consent to the

to the amendment, you know, like
those other things are harder to predict.

Okay.

If your owner walked in and said,

we're going to start

marketing this in a month,
can we make a gift?

You know, next week?

Like, sure.

Like we can we can help, right?

I mean, this week would be bad because

I'm going to a conference next week,
so it'd be a little harder there.

But yeah, your we quite possible.

Right. It's just it's not ideal. Okay.

And what I say, you know, situations is
you have to listen to me.

Right. Okay.

So your choices are best plan.

You may actually be getting the plan
we would get anyway, right?

Right. But we have less time. Right.

So we have to be flat.
We have to do the best, right?

Use our best practices. We're

gonna make it as flexible as possible
so things can be tweaked later.

Oh, but a good point.

We if you need fast, like we stop, we
still have to give you excellence, right?

Right, right.

Which means you.

If we ever had to move

or it's not going to be as customized
as it would be if you were taking longer.

Right. That makes sense. That makes sense.

It's the push and pull, right?
Yeah. Like of course, of course.

What's more important to me right
now? Exactly.

That's kind of where these things land.

Well, thank you for coming.

I'm going to end with our last question,
which is kind of standard for everybody.

Oh, if you are
not doing this for a career,

what would career

option to look like for you?

That's,

it's money.

And, if money's no option,
I am somewhere coaching something.

No idea what it is.

Like a sport or a sport or any.

I mean, in some ways, not unlike you.

I'm a coach every day, right? Right.

That's kind of how I think of it.

Whether it's working with my my colleagues
and leading the department,

whether it's working with clients,
it's coaching them.

I just exited my last summer of coaching
little kids baseball.

Probably. Congratulations.

Which is neat, but like, I'm
hitting that transition of next summer.

Probably not having
that anymore. And like, what's that void.

So something
using that coaching mentality.

They had

said that.

It actually

is not every.

Day. That I.

Meet. Him.

Maybe it.

Means we.