Leah Woodford 00:00
Welcome, Retire Smart Austin. I’m Leah Woodford with Phil Capriotti Sr today, of Empower Wealth and Tax, and we’re actually continuing last week’s show on trusts, and I’m so excited. We were talking about this in the commercial break. And I loved that there is actually a trust for shopaholics. We’re going to touch on that a little bit later today, but for those of you that have children like mine that like to spend, there is a trust to help you protect.
Philip Capriotti 01:04
Yeah, it’s great. So I have folks come into the office and they’re like, Phil, we had no idea there were so many different types of trusts… we actually talked with our attorney and they recommended, you know, a revocable living trust. And that’s like the most commonly used, but sometimes, not a lot–I don’t, I wouldn’t say many attorneys–I would say sometimes, some attorneys don’t ask enough questions. And I would say that from my own experience. You know. Ask, do you have children with autism. Do you have this I would have. What we do is we have an entire so when you come in for an interview, and what we’re going to do is ask you a series of questions. The very first thing I do with clients when they come in is I tell them, tell me a little about yourself and your family. All I want to do is listen, and I’ll have my assistant there taking notes, and tell me about your children. What are your goals in retirement? What are your goals for your children after you’re gone, when you’re up in heaven? Hopefully we qualify for that. And so by getting folks to talk, by asking questions, it then helps us to determine what types of needs they have, because they don’t even know. That’s what they’re there for. That’s what you, that you come into our office for, for you to understand what is it that you need? Because many folks, you don’t know, we don’t know, we don’t know. So the last two weeks, last week, and again, this week, I wanted to focus on the different types of trusts, because it’s not just one-dimensional. I’ll have folks come in and say, Oh yeah, I’m good. I have a trust.
Leah Woodford 02:48
Sometimes you need more than one trust.
Philip Capriotti 02:49
Well, exactly right, I think I mentioned last week. I have four different types of trusts, and there are different types of trusts that accomplish different objectives. So with that being said, this is designed, folks, just to scratch the surface. What we want to do is we’re giving you enough information to call us up at 888-818-6557, come into the office. You don’t even have to come in. When you call, you’ll set an appointment, and we’ll do a telephone interview with you to help you determine what type, which advisor you need and what service you need, whether it’s taxes, whether it’s legal, whether it’s retirement planning, whether you’re worried about running out of money, any type of service. I mean, all services are offered and they’re complimentary. So again, don’t forget the number 888-818-6557, or you can click the QR code. So today, we’re going to finish up on trusts, and again, we’re going to get right into irrevocable life insurance trusts. So what the heck is that? Is Phil trying to sell us life insurance? No, we’re not trying to sell you life insurance, okay? This is most used when an individual doesn’t have enough tax liquidity, okay.
Leah Woodford 04:10
What do you mean by that, though?
Philip Capriotti 04:11
So what I mean is for those of our clients that own vineyards, that own ranches, that own farms. Many, especially with ranches and farms, okay, you’re, you’re going from crop to crop, at the death, okay? And not so much in Texas, because we don’t have a, we don’t have a state estate tax yet.
Leah Woodford 04:33
Yet.
Philip Capriotti 04:34
But be—Right, exactly.
Leah Woodford 04:35
That could change.
Philip Capriotti 04:36
But what happens is, for the folks that own lots of land, or businesses like my own and other businesses that are worth millions, tens of millions of dollars, what happens is you may exceed the exempt threshold for estate taxes, federal estate taxes. So what an irrevocable life insurance trust, or it’s commonly known as an ILIT, what it does is it provides tax-free revenue directly to the beneficiaries. So for estates that are exposed to federal and state estate taxes, specifically business owners, we want to provide liquidity so we don’t have to get forced into what’s known as a fire sale—you have to sell off assets to pay the estate taxes within a six to nine month period after death. So with that being said, again, it’s not for everyone, but there are quite a few folks that use these things. How is it best applied? So it’s best applied to make sure, and the reason we call it an ILIT, we want to keep this trust outside of our estate. So I want the life insurance proceeds. Let’s assume that we’re expecting an estate tax or, or unfunded liabilities of– let’s just use a number—$2 million. Okay, so we’re going to have a, an ILIT for $2 million. It’s not paid directly to the estate. It’s outside of the estate. That’s why it’s an irrevocable life insurance.
Leah Woodford 06:08
Got it.
Philip Capriotti 06:09
We no longer own that money. It’s not included in our estate, but it’s paid into the trust so that the kids have the liquidity to pay any of the debts without liquidating the estate. This is how this type of trust is used. It’s designed to create tax-free liquidity to your heirs, either for them to have—Give an example. Okay, we have a, I have a company. I’ve built this company over the last 20 plus years. I have five children. Three children are actively in the company. Two children are not—I love all of my children the same. They’re wonderful kids, okay, but the two children that are not running the business, I don’t want this business, this business is going generational.
Leah Woodford 06:52
Right.
Philip Capriotti 06:53
So for those two children, I have created a ILIT so they don’t have to worry about the liquidity of the estate or selling the companies, or any one of the companies. So with that being said, this is just–and I’ve given you one example of an ILIT and how it’s used. You may have a business, and when the business is, when you pass away, you may need liquidity so your, your heirs, your beneficiaries, do not have to lean for finances from the actual company. It’s an outside source.
Leah Woodford 07:27
So Phil, what happens, though, to those heirs that there wasn’t an ILIT in place, for instance?
Philip Capriotti 07:34
Right, well, then they’re going to have to, in many cases, we’ll see—you know, the children are like, Well, I’m an equal beneficiary. So for instance, you have four kids, and they’re entitled to 25/25/25, that’s the way it’s set up in a will. Well, when the business is involved, many times we don’t have an ILIT set up or even a special trust for this. So I’ve seen, or I’ve seen other situations where you have brother-in-laws that own a business together. One brother-in-law dies, the sister-in-law of the brother-in-law that passed away owns the company too. They were both equal partners. So you set up an ILIT so the remaining partner does not have to sell the business, okay, or go into debt with the business. Keep it outside. Primarily one of the key takeaways of an ILIT is to prevent insurance proceeds to becoming, to becoming taxed as part of the estate. And I want that immediate liquidity for a stated purpose. An ILIT. So if you think that you may or know someone who may need an ILIT again, or you just want to come in for a retirement income plan or a morning star portfolio review. Dial 888-818-6557, click the QR code, answer a few questions, and so we can route you to the right advisor. Let us help you. As always, this is free to thee, but not to me.
Leah Woodford 09:04
Well, and we’ve got to cut to a quick commercial break, but before we go, make sure that you take the Empower Legacy Quiz again. That’s Empower Legacy Quiz, and we’ll be right back.
Philip Capriotti 09:17
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Leah Woodford 10:50
Welcome back to Retire Smart Austin, and we are still talking about trusts, and I’m excited about this next trust that we’re going to be talking about.
Philip Capriotti 11:00
We set these up more frequently than not. And you had mentioned the, the old shopaholic. Here’s the way a spendthrift trust is designed. How is it most used? Okay, first of all, it’s designed to protect beneficiaries, okay, from each other, okay, or from, I should say, from themselves.
Leah Woodford 11:26
I think that’s probably more appropriate.
Philip Capriotti 11:29
We want to protect beneficiaries from themselves and other family members. So it’s designed as a beneficiary protection trust. Where is it used? Well, a bet, a spendthrift trust is used with families with at-risk heirs. You know, I’ll give you an example. I had a client that inherited a bunch of money. Her kids knew that she inherited a bunch of money, and each one of these children were coming with sob stories. I really need a car. I really need this. And basically what happened was she went through almost the entire inheritance within a five year period. She didn’t spend it. Her children spent it.
Leah Woodford 12:14
I can, I can top that, Phil.
Philip Capriotti 12:16
Okay.
Leah Woodford 12:17
I can top that. At 23 years old, my youngest son was in an accident. At 23 years old, I was smart enough to figure out and got an annuity for him, and he was supposed to come into it at the age of 18. And he did, got his first payment, but his half-brother, not my kid, but talked him into going to this company that liquidates, and he went through all of it, he didn’t see any of it. I was heartbroken.
Philip Capriotti 12:47
And this is another reason why we want these things in a trust, and that’s called a GRAT.
Leah Woodford 12:51
I wish I would have known you then.
Philip Capriotti 12:55
Okay. And we’ll, we’ll actually talk about that. But with a spendthrift trust, it’s not sometimes the children, it’s the spouses of the children as well. Yes, you know the, we both know, happy wife, happy life. We—my wife isn’t happy, nobody’s happy. In fact, she put a sign up in the laundry room in our house in Leander. I would drive in, and when you’d come in, and she would have it—when mama’s not happy, nobody’s happy. Before I even walked through the, walked into the living room, and I absolutely, and I took heed to that. But where we want to use a spendthrift trust, folks, is for families that have at-risk heirs, which we just got done discussing. Also families that are divorce prone.
Leah Woodford 13:48
Oh yes.
Philip Capriotti 13:49
Okay, and we don’t want, and also, in addition to that, creditor-exposed beneficiaries. So these are the three areas where we would use, or possibly recommend, a spendthrift trust.
Leah Woodford 14:05
Can you drill down about the creditor exposed?
Philip Capriotti 14:09
Yeah, so let’s assume for a moment you have… a perfect example. Okay, my friend Kenny. My friend Kenny was married. He had a plumbing contracting business. Worked hard every single day. This guy, up with the birds and, and he would be, and he’d be home with the moon. Okay? Really worked hard. Well, his wife, wonderful woman, great mother, but she had a problem with credit cards.
Leah Woodford 14:41
Got it.
Philip Capriotti 14:42
She was taking out credit cards without him even knowing. Now, he was, was of the same mindset as me. Okay, if I use a credit card at the end of the month, I pay it off. We don’t run balances. Well, what she was doing is she was going through the money, spending the money, and she would take out one credit card after another after another. Well, it just so happened, this went on for about three years, and it went back into a time where she would take out one credit card and then roll the balance into the other one. So she was really covering her tracks.
Leah Woodford 15:14
Wow.
Philip Capriotti 15:15
Well, eventually got to the point where she was just paying a little over minimum payments. Well, one day he was sick—one of the very few days, I think, that he missed work and he happened to get the mail. Mom was out shopping. Imagine that again, please. I’m not demonizing, demonizing you women out there. I love women, and I love for my wife—I have to force her to go shopping, okay. But at any rate, what it was was a lack of honesty. So, what happened? They got divorced, okay? And this was because she just couldn’t stop, I guess it’s some kind of an addiction. Well, guess what happened? All of the creditors, guess who they went and sued? Him, they went and sued him.
Leah Woodford 16:00
He was the moneyed spouse.
Philip Capriotti 16:01
Right, exactly. So this is a perfect example where we protect against creditors. Or if you die, a situation where you, you die with a lot of debt, one spouse dies with a lot of debt—for most of the time. We don’t see it like that, or don’t apply it that way. I want to apply it is so that my, I want to budget what my child and their spouse spends when I’m gone, based on the proceeds from my estate. They can make as much money as they want and spend it all, but I’m talking about receiving proceeds for what we’ve worked hard, paid taxes and accumulated. We don’t want them to burn through it in that three-to-five-year period. We want them to live to their means. If their means are an additional 50,000 a year or 20,000 a year or 100,000 a year, that’s fine. We don’t want to, we don’t want, we want to pop that million or 2 million or 10 million into the trust. So it’s designed basically for families with at-risk heirs, number one, like we just explained, divorce prone, okay, and creditor-exposed beneficiaries. Basically what it does is control your distributions. It controls them to a level that you want. And many times, what I’ll do is, like with my own situation, I’ll build in an inflation factor, so you might get 50,000 this year and then an extra 3% next year, an extra 3% to keep pace with inflation, but it shields inheritance from lawsuits and creditors.
Leah Woodford 17:34
Oh, I love that.
Philip Capriotti 17:35
Okay, so again, key takeaway, protect your heirs from others, or what I call protect your heirs against unintended beneficiaries. That’s a spendthrift trust. One of the other trusts that I really, really like is called a charitable—it’s a CRT, and that’s the acronym for charitable remainder trust.
Leah Woodford 17:57
I love that.
Philip Capriotti 17:58
We have one of these guys too. When you have children from a second marriage, when you have a situation like that… I was married for 15 years. I had four beautiful children. I am very, very close with my children. I’m very, very fortunate. I got married to the, I met the I met the woman of my dreams the second time around. We have one child. I’m just kind of giving an example. Okay, so there are certain assets that are going directly to my current wife, their income. We live in a beautiful home. I, we have, I’ve gotten her used to a certain standard of living. If I am not there to provide that, the income from the assets are there. Now, I also want to protect her against Don Juan coming along after I’m gone. Okay, wanting to, so I don’t want her to have a big lump sum of money, but I want her to have plenty of annual income, so a charitable remainder trust, the way it works is this, this amount of wealth, okay, she’ll be able to live on those earnings, plus the other revenue sources that we set up. And then when she passes away, it goes to a charity. It goes to a number of charities. So we do Folds of Honor, the veterans, Wounded Warriors. We have the Catholic Charities. So we have a number of different charities. And I want this money to go to the charities. Children are set up in a different way. But for this, I don’t want her to get a lump sum, because as she gets older and so forth, I want to protect her. So a charitable remainder trust is the type of trust that we use in this situation. So it’s basically for retirees with high appreciable assets, philanthropic-minded families, which we are as well. And it’s designed to convert assets into lifetime income. It defers capital gains tax. It also provides charitable deductions. We’re covering all of the bases.
Leah Woodford 20:08
It’s a win-win-win, Phil.
Philip Capriotti 20:09
All across the board.
Leah Woodford 20:10
All across the board.
Philip Capriotti 20:11
And again, many folks with these high net worth, and I meet a lot of them, you know, they sold their business, had two or three businesses. They have 30, 40, $50,000 and again, we work with all clients. I don’t care if you have 500,000 or 50,000 or $50 million it doesn’t matter, okay. We can help you in either event. This is why, like I said, we had hired six, seven different fiduciaries.
Leah Woodford 20:35
I love this. We’ve got to cut to a real quick commercial break. We’ll come right back, but make sure that you go to empowerlegacyquiz.com and fill out the form. We’ll be right back.
Philip Capriotti 20:48
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Leah Woodford 22:32
Welcome back, Austin. I’m Leah Woodford, and Phil Capriotti and I are wrapping up our segment on trusts today, and this has just been such a fun show today.
Philip Capriotti 22:42
It really is. You know, we’ve had, we had a ton of calls come in last week—I didn’t realize there were so many different types of trusts, I didn’t realize that a person could need two or three, that each trust serves a different purpose, a different objective, a different set of protections. And so, and again, folks, this is why you really need to pick up the phone. Understand you’re dealing with a diamond company, and I talked about this before. It doesn’t matter if we’re managing your investment assets. That’s the easy part, okay, but we want to help manage, help you manage your family. We want a tax-efficient retirement income. We want to make sure that your portfolios are managed with the proper drawdown, where you’re earning as much as you can, but without a whole lot of market risk. We want to make sure that your taxes are taken care of with our tax department. And most of all, we want to make sure that your assets stay intact, especially for those folks that have accumulated assets through their lifetime that they want to pass on, not just the children, but to, to the grandchildren as well.
Leah Woodford 23:53
Yeah, they’re leaving a legacy. But Phil, one of the things that I wanted to just say is I really love the peace of mind that you, you give your clients, you know, in today’s busy, crazy, chaotic world, they know, when they come to you, that they’re, they’re not only going to be taken care of, but generations after them are going to be taken care of. And it’s so important.
Philip Capriotti 24:15
Yeah, and I, and I really enjoy it, and especially being able to come in and talk to an attorney, talk to a fiduciary without any charge or obligation. See, that was the whole mantra to building this company, especially over the last 10 years, offering these services complimentary, without charging. You know, when we do an estate plan, what we’ll do with a client is we will send them, once they come into the office and we meet and have a conversation, we’ll send them an estate planning questionnaire. I want them to come home with it, with their spouse or loved one, and fill it out. When they fill out that questionnaire and complete it, we have a basic idea of what their needs are, especially after our initial consultation, they send that back. We immediately set up the appointment with our attorney, with our board certified attorney. And depending on what trust you may need or may not need, we’re not going to over, I’m going to say over-sell. I just want to make sure that you’re not under covered. So we give you the information, we provide the professional expertise. You tell us how you want to move forward, if you want to move forward at all. What we’re going to talk about real quick is a charitable lead trust, a CLT. Now this is popular with high-net-worth families. Where is it used? Extremely large estates. We’re talking 20, 50, 100 million and above, with charitable intent, okay? And we want to make sure that we have wealth transfer planning. That’s what the purpose is. How is it best applied? It reduces the gift in estate taxes, and the charity gets income first, heirs later. So in a situation like this, I want the, I want my charities to get money first and then maybe the grandkids or so forth later, heirs later. Charity now, family later, at a much lower cost. Why I want to make it tax efficient. I don’t want to saddle my family with a major tax bill. Again, who’s ever talked about this on TV?
Leah Woodford 26:18
Nobody.
Philip Capriotti 26:19
Your, your situation that you had with your child, and I’m so sorry about that. This would be known as a GRAT, or a grantor retained annuity trust. This is where I put an annuity inside of a trust. And nobody can sell the annuity, okay, for a lump sum. You know, when you see these commercials—it’s your money, you should have it now. Yes, we’ve all seen those, those crazy commercials, okay? And that’s all well and good, but you’re talking about—maybe you have an annuity for a million or $2 million, and they’re offering you pennies on the dollar. You might get 40% as a cash. So not only are you getting pennies on the dollar or dimes on the dollar, okay, but then you open up a situation where it can be blown over a very short period of time. So in a situation like that, we may set up a GRAT, a grantor retained annuity trust. And in a situation like this, I want my heirs or I want my ex or I want my spouse to receive X amount of dollars. I don’t want any Tom, Dick or Harry coming in and telling, and forcing her into selling it. So with that being said, I don’t know what type of trust you need, but if you call 888-818-6557, or you click the QR code and go to legacy, what is it? Legacy quiz?
Leah Woodford 27:39
Empowerlegacyquiz.com. And remember, you don’t get a second chance to retire, so make sure you call Phil and his team. Again, that’s 888-818-6557, or click the QR code at the bottom of the screen. Thanks for watching.
