Smarter Money Matters | True Tales from the Wealthy: Fixing Major Asset Protection Mistakes

Video Transcript:

[Music] Howdy folks. Welcome to yet another edition of Smarter Money Matters with me, the wealth doctor Jeff Camarda, joined by super CFPs Anna and Lou . I think you’re really going to get a lot out of today’s episode, which we’ve entitled True Wealth Tales of the Wealthy, a Money Makeover, Fixing Major Mistakes number one. And we’ll be doing additional case studies like this. This is from an actual fact pattern uh for some folks that actually became clients of Camarda Wealth. Of course, we’ve anonymized the data. Uh but what we thought we’d do is kind of tell you almost like uh on the CFP exam question what the fact pattern is, what we learned in talking to these folks and what the best practices that we recommended in order for them to to correct some mistakes and improve their wealth. So in this episode of True Wealth Tales, we uncover the biggest money mistakes that this particular wealthy couple made and how a money makeover can really help them fix them. So you learn as you go through this very powerful wealth management strategies and financial advisor tips to avoid common money mistakes and help protect your wealth. Uh so let’s begin by telling you a little bit about the uh about the folks of course that would change your names. Anna, do you want to start? Sure. So uh the clients in this case are Kathleen Brown. She’s born on February 12th, 1956. and her husband Thomas Brown. He was born February 21st, 1952 and they reside locally at 123 Side Street. Kathy is a retire she’s retired but she continues to work part-time as a scientific consultant and analyst generating about $70,000 in $1099 income. And she feels like she’s paying as most of us do too much in income taxes. her private practice has uh filed taxes as an S corporation. Uh she’s planning to fully retire at age 70 and start collecting social security benefits at that time. Her husband Thomas is retired uh and actually retired when he reached his full retirement age at age 67 from Social Security and currently is collecting $3,500 a month from Social Security. Uh they have named each other as primary beneficiaries as most couples do with their children Christine and uh and James designated as contingent beneficiaries. Very good. So uh the Browns they also feel that you know between their combined social security income and $2,000 a month that Tom is receiving from you know in his pension that should be enough to you know to kind of last them throughout retirement and and make them live comfortably. They they’ve considered establishing a trust for years, but they haven’t taken this step. And they’re very concerned about protecting their assets from court charging orders and creditors. In addition to retirement and estate planning, this is one of their top priorities. Uh Tom was actually recently involved in a car accident. Oh no. He ran a red light and he t-boned another driver. They had a $1 million umbrella policy, but after the accident, they are concerned that this is maybe not enough protection and want to review other options. And as we get into the case, you’re going to see that’s a very legitimate concern that probably many of you share. Uh so the Browns maintain a net worth of approximately $3 million according to them. Uh Kathy’s investment portfolio consists of a brokerage account uh that’s valued at 70,000 with a major bank. She’s got a traditional IRA at a major brokerage firm worth half a million. A Roth IRA at another brokerage valued at 300,000. A husband Thomas has two brokerage accounts, one that was inherited from his parents worth about 1.2 million at another money manager and another at the same money manager that’s valued at $350,000. Very good. So, and then they own a primary residence that is jointly titled and that’s worth about 700,000. Uh they just recently last month they paid off their mortgage. So congratulations to them on that. Um they’re currently working with a CPA for their taxes and they were very happy with that arrangement. Uh and they they found us actually through smart advisor um that they which is an advisor referral service. Correct. They read an article uh online that that talked about fiduciary advisors and they realized that the adviser they’re currently working with uh may have been what Jeff calls a two-head adviser. So I’m sure he’ll expand on that. um uh you know we kind of continue and that’s enough of a pack batter. So let let’s get what I mean by two advisors which is a term that I came up with my academic research basically means that our the United States investment industry is really segregated into two distinct industries. Number one are broker dealers um whose uh basic business function is to uh um is to sell product on a commission or markup basis like a car dealer. Broker dealer same basic concept. The others are fiduciary advisors like Kamarda that are regulated by a different regulated by a different congressional act and we the fee only advisors like us don’t make anything off investment recommendations. We just charge a fee like an attorney would in order to render advice without having any particular interest in a particular investment other than it’s best for the client. Um so when the when we have so we have a lot of advisors a significant percentage of advisors have both licenses. They have commission brokerage licenses one hat and they have fiduciary um fee licenses the other hat. So if they have both licenses we call them two hat advisors which can be kind of confusing and misleading for a lot of consumers. So the first thing that that we noticed is they have a number of brokerage accounts um that are um many of them are one is with a actually two are with a fiduciary advisor but the others are with two hat advisors. Right. Correct. So where there are commissions and and maybe some underlying costs and we recommended a portfolio stress test which we think is indicated based on potential exposure to at least one non-fiduciary advisor and some other potential concerns. um as we see quite frequently are more aggressive investment holdings, more risk than they may be comfortable with. Uh which may not be downside controlled if we see another market cataclysm as you know seems to happen you know predictably throughout history and hence we suggest that they may be exposed to significant losses from which they might may not have time to recover particularly at you know an important turning point in their life just as they’re on the cusp of retirement. Kathy’s about, you know, to to to hang it up completely in a couple of years. So, they’re going to need to have these resources rest work for the rest of their life. Now, Lou, I know you made a number of observations about the income tax uh flaws and some ways to improve it. You want to expand on that? Yeah, sure. So, so Kathy currently, like like we said, you know, she continues to work and and she’s uh she’s bringing in about 70,000 a year. Now she has a uh escortp and she’s she’s getting you know she’s but she’s actually taking all the money from the escorp and paying herself as a W2 income the entire 70,000 that she makes in a year. So one of the strategies that that we you know that we notice and we advise on is that she could potentially u pay herself what we call a reasonable earn salary like reasonable wage and um and possibly reduce her FICA tax u that way. Well, definitely. And this is a common error and we see a lot of, you know, be, you know, tax opportunities for improvement. But if you have, if you own an S corporation, you know, you’re required to pay yourself what the IRS uh calls reasonable compensation. So, if I work in an escorp, say the escorp is making $300,000 a year, and I could hire a manager to do what I do in the corporation for $70,000 a year, right? Right. So, we have the $70,000 compensation for what I do in the corporation and then the other $230,000 is profit. Um, so, um, but if I take that entire profit, as Kathy is in this case, as W2 compensation, not only am I paying the income tax and all of that, I’m also paying the payroll taxes, social security and Medicare and some other stuff, which is an additional burden on top of the income taxes. and lose point is just take, you know, a reasonable wage, a reasonable compensation out and the rest of that will be paid to you basically as a dividend from the company that you own, but you won’t be subject to payroll taxes, right? Um, and I think you also mentioned that they were not concerned about estate taxes in their case because their net worth it probably won’t get to the threshold during their lifetimes. I know um Anna you had a lot of observations about asset protection opportunities particularly with the complexity of the inherited account. Would you like to expand on that? Yeah. So in in their case right they have over $1.6 million in taxable accounts um brokerage accounts that are exposed to a creditor or to um you know a lawsuit, right? um the way they’re sitting, you know, if they’re sued, those are accessible accounts to a charging order. So, a simple way that, you know, they could resolve that issue is to establish, you know, LLC’s that are charging order protected. So, they would work with a lawyer to set those up properly um to protect those assets in case of a lawsuit. They could also raise their umbrella policy um to maybe two to three million higher limit to protect as well. Um, on top of that, you know, with with, uh, Thomas’, you know, 1.2 million that he inherited from his parents, um, you know, there are some concerns there with that being a marital asset, um, or not being a marital asset in case of divorce, meaning it came from his parents, not from their marriage. Um, so there could be some value in in, you know, having a separate LLC for those funds as well. Yeah. So, keeping that separate, you know, they’re probably not concerned about divorce risk at this point in their lives, but you never know. you got to ask them and you know if if you inherit money um or have it before the marriage in most states that’s not considered to be marital property so it’s off the table for a divorce split but if he were to put that and join names with his wife then it becomes marital property he’s basically making gift of half of it to her um but the LLC thing it’s also you got to be really careful you know asset protection is something we think is really really important and the point that underscore the point she was making some accounts IRA as and 401ks are typically protected. Your home is protected strongly in Florida and and varying protection in other states. Uh but non-qualified accounts, it’s taxable accounts, accounts that are just in your name are typically not protected. So, if somebody sues you and they get a judgment for $10 million and you have a $2 million umbrella and the umbrella pays, and it may not, but say it does in this example, but you hit a football player who’s now out going to be out millions of dollars, the judge says you’ve harmed them 10 million, you’re still on the hook for the other $8 million. And if it’s $2 million in brokerage accounts or non-qualified accounts um that are not otherwise protected, you just kind of low hanging fruit, pay up. Um, and Anna’s recommendation of using properly structured LLC’s and they got to be properly structured. You know, we see a lot of LLC’s that, you know, weren’t done, you know, to what the law requires and they’re really useless as asset protection vehicles, but properly structured LLC’s make assets within them pretty much bulletproof. You know, they said they charging order protected judges the charging order, but it’s protected from the charging order because of its nature. And it’s a very powerful asset protection device. Lou, I know that you look at their life insurance situation and what was your conclusion there? So, they’re they’re, you know, up there in age, so to speak. They’re they’re, you know, their retirement age 70. I know. I know. But but, you know, as as we know, life insurance gets more expensive as we as we age, as we get older. And they don’t have a lot in terms of liabilities right now. So, it probably not the best time to be shopping for life insurance at this time. Yeah. Well, I don’t think they need it because if you look at they’ve got they figured their net worth was what? $3 million, you know. So, if one of them and they both have social security, one of them checks out, probably him, you know, sex and gender, excuse me, and age are not on his side. Uh, but there should be plenty of money for the survivor to live on. Correct? you know, and that’s, you know, my my view on life insurance is that if you’ve got, you know, you need to get cheap term insurance during a period where if a bread winner dies, it’s going to have a significant impact on a family, it’s meant to replace that. But once you have enough assets to realize your financial goals, whether it’s one or two of you, you know, probably isn’t a good good idea. Yeah. And we’re not just going to assume that they don’t need it. We’re going to actually Anna and I are going to run a Money Guy Pro um retirement planning to software and and just kind of, you know, put all their expenses and and the money that they have on the side and see how it all Yeah, we do do a rigorous analysis, but on the surface, it doesn’t look like they need any. Correct. Uh from an estate planning standpoint though, by goodness, they need some estate planning, don’t they? Absolutely. Right now, they don’t have any any type of legal documents, estate planning documents in place. Um and like Anna pointed earlier, they have um well quite a bit of money that is a probate that that’s a probable assets. Um so so you would go through probate which is a slow process. It can take you know sometimes years to to get through. It’s expensive. Um I know in Florida it’s you know for a million dollars it’s about 45 you know 40 50,000 uh probate costs that that that you can incur. So um we are we would suggest in order to avoid that to to to kind of uh resolve that issue is to definitely look into a joint trust doing doing a trust and then also doing power you know appropriate uh power of attorney documents to uh powers of attorney documents to um solve that issue as well. Yeah. For for health care surrogate you know to make decisions health decisions if you can’t and living well and like that. So, I’m not sure if I call this, you know, a common money mistake or a bad money habit or something like that, but we find a lot of folks that, you know, they kind of know they need to do estate planning, but they typically don’t get around to it. You know, it’s really relatively simple. They have these guys, these folks have a very simple estate planning problem to solve. And, you know, setting up a joint revocable trust. They can take money uh put money in, take money out. It’s revocable. They could change a trust and really functions kind of as a you know I’ve had one for decades and you really it’s invisible. It’s like having a joint account. They have a checkbooks and a trust name whatever. um uh the uh and then transfer the assets like those non-qualified accounts like those brokerage accounts and you maybe we set up the LLC’s put the brokerage accounts in the LLC has the safe box around it in case it gets sued and then the LLC is owned by the joint trust. Correct. Uh and this avoids probate um and also avoids guardianship which we’ll talk about in a second and does some other pretty cool things too, right? So what if uh you know they get to the point down the road where they’re not able you know to manage their affairs. We’ll talk about guardianship now. You know they can appoint one of their kids as a successor trustee you know to pick out the caregiver and to pay the bills and keep things and make investment decisions and keep things going. Right. Absolutely. No absent that you know but what happens is you may be exposed to guardianship which is a court proceeding which is just it’s it’s you know it’s expensive it’s demeaning it takes a long time it’s really a a stone axe of a planning it’s not even a planning technique it’s just what happens if you don’t do any planning so you you don’t want to expose yourself to guardianship and a joint trust will help you to avoid that and the judge can pick a rand random person to be the guardian right you don’t have to doesn’t have to be someone yeah so you know so if if you know so say that you know poor old daughtering old Dr. Kamardi here hasn’t done any planning and I’m sitting on some assets but I don’t remember my name anymore and this is you know my good son Lou uh and and um Lou wasn’t able to convince me to do any planning. So now Lou has got to take me by the wheelchair and and and set a petition in guardianship court and argue in my presence. And I still hear a few things. Lou, what do you do? Do you mean I don’t know what I’m doing anymore? You know, prove, you know, that I am incompetent. And then the judge will appoint a guardian uh to manage my affairs and to have the checkbook. And it doesn’t have to be my son Lou, the brilliant attorney. It can be the judge’s fishing buddy. the judge has complete discretion in that. Uh so it’s it’s not it’s not a good way to go, right? Uh the trust makes this really really easy. And one of our recommendations is, you know, for a trust to be uh as as as elegant and as efficient as possible that the trust be the primary control device for all your assets. So what does that mean? What else? And there are some things we can’t put in a trust, right, Anna? What what you know what’s one of the obvious ones? Yeah. I mean, you can’t, you know, necessarily put title or retirement account in the trust. Yeah. IAS, you know, you can’t, right? You can’t, but you can have the trust as, you know, a beneficiary, whether they’re primary or contingent on those accounts so that the assets flow into the trust. Um, maybe property that you can’t title in the trust, you can use a pourover will essentially that says if it ends up, you know, in probate that it goes into the trust and then is administered following the trust. and what you know the couple outlined when they did the planning. But let’s stay in that beneficiary thing because that’s a really important point. They have like a lot of folks who a lot of money in their IAS and as she says you can’t if the only way to get the IRA money at the trust is take a fully taxable distribution and put what’s left in the trust. You don’t want to do that if you got a million dollars in an IRA top bracket is going to like 40%. It’ll cost you 400 grand. You don’t want to do it all in one year, you know, but you can using the right beneficiary language and provisions in the trust make the trust the beneficiary of the IRA. So what happens now is anodized got you know prematurely unfortunately the million dollars goes into the trust and it’s then the trust is the mechanism that determines this brother get some his husband get some the kids get some whatever is that’s important to her. So it’s one consistent distribution device. You have that special language of trust. By the way, what is that called? Do you remember that? We call that flex provision. Yeah, flexible spending provisions. And that’s, you know, to we basically extends the uh you know, that that time that that the beneficiary has to take that money out. Um you know, from instead of one year, he stretches it out into into 10-year period. And and then, you know, they can pick and choose if there’s a a beneficial year when maybe they have lower income or or something like that where they can take more money out. they can, you know, they have the flexibility to do that. Yeah. But if you don’t have, you know, if the lawyer doesn’t put that that secret sauce in there and a lot of times, you know, they don’t even, you know, um the then the taxes, you know, are not optimized and they’re all payable at basically when you die when soon as the money goes in the trust, you got to pay tax on a whole million dollars. You can avoid that with the right provisions there and even I think even get a lifetime stretch for the spouse. So use that as um it just simplifies things quite a bit. Um any other points that uh that you guys and we’ve gone through this case, you know, extensively this week. Um any other points that you think are worth mentioning to folks out there? I think one one thing that we we didn’t talk about was their principal residence and u you know how in Florida at least you know there there’s something called Ladybird deed that that can be um sorry I’m sorry. No, no. Basically, it allows it allows your your resident principal residence your home to pass to your beneficiaries outside of probate if you use that deed. Yeah. So, so basically what that means is it’s kind of like putting a beneficiary designation on the house. But we don’t want to go to trouble and at some stage doesn’t make sense uh to title the house directly in the trust. The primary residence investment property I think should be in a trust primary residence in a trust. What the Ladybird deed does is uh is basically functions like a pay on death account. Is like when the last of the couple are gone, it transfers the the house into the trust and a trust manages the disposition without having to go for probate. Correct. It does that. And also it’s Yeah. It’s also beneficial from you know for for folks that are you know that qualify for Medicaid in in the future. um you know their their primary residence would wouldn’t count as assets against you know against their qual qualification for Medicaid. So good. So any other afterthoughts from you Miss Wonderlock? I don’t think so. I think we covered a lot of the the key points we uncovered. Well good and this was you know there’s probably a lot of really good you know financial uh planning and financial advisory tips that you picked up from this one and we have a lot of these cases and then future we’re not going to obviously get boring if we did it every week. Uh but you’ll you’ll get additional um the tales to the the true wealth tales from the wealthy going forward with different fact patterns and some of them will be more complicated. This was a relatively simple case although I’m sure it didn’t sound that way to you guys but that’s you know why we think we’re so good. Uh but really you know continue to watch for wealth creation tips you know to maintain a wealthy lifestyle. Um the we’ll talk about investment uh mistakes to avoid um other you know aspects of personal finance makeovers and lessons from the wealthy that we have learned ourselves and and and advise our clients on and just general solid wealth management advice. Um, and uh, if you have questions, you know, um, we’ll, you know, we we’d encourage you uh, to email them to us or if you even like to, you know, to to be on the show sometime, we’d be happy to to arrange a calling link. Um, but go ahead and email us at smartermoneymatters.com.

Uh, and Megan will put a u an email address in there uh for questions at smartermoneymatters.com or something like that. And we’d be very overjoyed to go ahead and and give your specific questions a very thorough analysis and advice. So that’s it for now, you know, from from Anna and uh and Lou and and me, Jeff Camarda. Thank you so much for watching this this edition of smarter money matters. Until next week and stay wealthy, guys. [Music]