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On today’s The Financial Commute episode, Chris Galeski welcomes Wealth Advisor Eric Selter to discuss legacy planning. Eric says he generally finds his own clients falling into one of three categories when it comes to this topic: some want to spend all their money while they’re alive; others would like to help their kids along the way and have a considerable amount of money left over for them after they pass; and some clients are a mix of the two, ensuring they themselves are taken care of while leaving some money for their children. Therefore, Eric says legacy planning is a very personal decision and can vary from person to person.

So how does Eric advise his clients? He says it is important for financial advisors to be facilitators in these situations, encouraging open, intentional conversations among family members about when would be best for the child to receive a portion of their assets if their parents pass away. Chris and Eric agree that, generally, choosing a later age (30 or later) may be wiser, as this allows the child to reach maturity before having to be responsible for such a large sum of money. You can always change the age if you think that child may become more mature earlier or later in life.

Furthermore, Eric suggests that as a child ages and becomes more trustworthy, it is important for the parent to give them at least a general idea of how much money they have, what will happen to their assets after they pass and what the child should expect to be responsible for; otherwise, it may be a shocking and overwhelming experience for the child if they are kept in the dark before their parents’ deaths.  

Finally, Chris and Eric agree that regardless of how much or when they decide to give assets to their loved ones, listeners must develop a trust and will sooner rather than later. While legacy planning may be uncomfortable or daunting to think about, it is extremely important to ensure your money makes the impact you want it to make after you pass.  

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Watch previous episodes from The Financial Commute!

Ep. 21 Does California's New Tax Deadline Apply to You?

Ep. 20 How to Navigate Money Conversations with Your Kids

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Hello, everybody, and thank you for joining us for another episode of The Financial Commute. I'm Chris Galeski, your host, joined by Senior Partner Eric Selter. Eric, thank you for joining us.

It is my pleasure to be here. I've watched a bunch of your podcasts and I'm so excited about what you're doing. I think it's been awesome.

Thank you. You know, if we can, in a condensed version, tell people what's going on in the world, how it affects them and what they can do about it, I think we can empower more investors, so I'm excited.

That's our philosophy.

So we're here to talk about legacy planning, a topic that you have a lot of experience with, not only for yourself but in dealing with clients. So let's talk a little bit about legacy planning, because there's only two things that are certain in life death and taxes.

That is true. And actually the first person that they claim ever said that was Benjamin Franklin. So I did a little research and evidently some actor said it in some play earlier, but it's death and taxes. I do have a third one. I will never be a fashion icon. I'm willing to accept that, but so be it.

But I did see the other day a cartoon that was a picture, I'll call it the Grim Reaper or death, with the staff and the Black Hood. And he's sitting at a desk and this big man is sitting there and up his wall it says, IRS audits. And the caption is, I guess this was inevitable. So it's true. Those are the two things for sure that are inevitable.

So when it comes to, they are inevitable, when it comes to legacy planning, you've had to do this a few times for yourself. You've built and sold a couple of businesses and you also have experience with clients. I mean, tell us a little bit about your story and how you go about with regards to legacy planning.

Well, mine does start back probably 1996 when I had sold my business to a Goldman backed company. And back then tax rates were quite high. And we're looking at saying we're going to lose about half of the money. And that seemed kind of crazy. So we ended up using one planning tool, of which there are many.

The wealth or transfer tax?

Yes, well, the capital gains tax.

Oh capital gains tax.

Capital gains tax was you know, at that time, I think 30 or 35% plus the state tax. Okay. So you were losing almost half. Yeah. And so we made the decision to use a charitable remainder trust or a CRT. Yeah. And that basically allowed us without getting into the weeds, it allowed us to put our stock into the trust and then you don't pay any taxes because it's a charitable trust.

And then we only paid taxes as we took money out. The problem was that if I did that and my wife and I passed away the next day, all that money would go to charity. My children would get nothing. So now we had to start making the decision about our legacy. Do we want our children to have money?

Did we care about that? They were younger at the time, so we made the decision to do that. But then we solved that problem by getting an ILIT, an irrevocable life insurance trust. And we bought life insurance so the kids would get something, God forbid, if we died a little earlier.

Okay so you had kind of like a two step process. And, you know, one, how do we minimize the tax impact of today? But then number two, what are some other options that we can take advantage of so that way we can take care of my kids? So it had to be a little bit more complex.

It did. It needed to. And that's not even the most complex type of plan. Yeah, but I tend to find today that clients are kind of in one of three camps. They're either saying to themselves, I’ve got one client in particular who has always said it, I'd like to be on my deathbed, write my last check to the IRS and have it bounce. That’s what my dad says.

Yeah, I mean, I get it. I mean, my father, may he rest in peace. Really hated the idea of paying particularly estate taxes. He didn't mind paying income taxes. The next one is that clients, one of my very first clients when I joined Morton Wealth, had basically said, I want to help my kids with something now. I want to get some enjoyment out of it, I want to watch them.

So, for example, one of his kids bought a house. So he bought the landscaping for them. So he said, I'm going to kind of be able to do that and help them along the way, and I'll try to leave them some money later. Yeah. And then, of course, the last one is a little bit of a hybrid where you say, Well, I, I want to make sure I'm taken care of.

But at the same token, I'd love to leave my kids some money. So it just depends. It's a very, very personal choice. And I'm going to say that word probably a number of times during our discussion here, because it's so personal.

Yeah, it is. And there's a Warren Buffett quote, Leave your children enough to where they can do anything, but don't leave them so much that they can do nothing.

Correct.

Something along those lines...

Or they don't do anything at all.

Right. Yeah. And all his billions are basically going to charity. I mean, his kids will run the foundation for it. But I mean, they've made money on their own and he's given them some Berkshire stock. But overall he's saying this money, you guys need to be your own people in the world.

Yeah. And I think being a new father, a couple of kids now, I feel like it's difficult to help make the right decision over the long run. But, you know, we help counsel with a number of clients. Between those three options, how do you sort of navigate that? I mean, where do you go from that?

Well, for us here at Morton Wealth, what we basically need to do is we need to act as facilitators, particularly the advisors need to be a facilitator. Yeah, it's not only do we need to know our clients along those lines, but we need to have those kinds of open discussions about it. Here's an example. You just you just had a new child.

New child or a newborn. Yeah. Congratulations.

Thank you.

And so right now, if you were writing out a trust and a will, at what age would you say if, God forbid, something happened to you and your wife, at what age would you say they should get the money?

Yeah, we actually had to create that when our first daughter was born almost three years ago, and I'd have to double check. But I think it was around age 30 that they first had access to a large lump sum if something were to happen to us. But at age 21, we wanted our daughter or our daughters now, if something were to happen to us at age 21, that they would be co trustees and they would work alongside the trustee. If my wife and I were not there to better understand taxes and how the money is invested and see it grow. So we would have a number of years besides having access to the money for some health, education, maintenance and support, they would get an idea or an understanding about finances. So that's sort of how we wrote into it. Thinking 30 was a decent, decent age.

And I think that's very thoughtful. For example, my son, who had had their first child 20 months ago, my third grandchild for the record, he's just he's finally doing his trust because I kept saying, no, you got to do this. The shoemaker needs to get his children some shoes. Yeah. And so he chose 25 for his son to get a third.

And I said to him, I don't know if I agree with that. Now, again, this is a very personal decision, but I don't know if I agree with that because I had a situation when I was in a previous life in a different business that I owned, where there was a young man that had his parents unfortunately had died very young, and he took the money but bought at least he turned around and he bought a condo with it and he basically blew the rest of the money.

And so now he was always short of money, never had money. So I wonder, is that too young? Again, personal decision. I don't know. You got to know your child.

Yeah. I mean, and that's the tough part. I think I was a pretty good kid growing up. I was always a bit older, I think so for the most part. All right. But I was always more of an older soul. What I mean by that is that at 16 or 18 or 20, I think a lot of people looked at me and might have said, might have, oh, at 25, he would be responsible enough for the inherited money.

I can tell you, at 25 years, no. I mean, that money, I wouldn't have wasted it on things, but I probably wouldn't have thought about it the same way as I do now at 43, or would have at 35 or 30. So I think I mean 25, you're still not sure who you are.

That's right. And the nice thing is, is that you can pick an age now maybe a client I might say, you know, consider picking 30 or 35 and as your child gets older and you all mature, things are dynamic. And so maybe you're going to say, oh, my child is really not responsible at all. Maybe I better make it 50.

Or maybe they are very responsible. Maybe I will make it 25. It's constantly evolving, you know, and again, personal.

So where did they end up?

Well, they actually they're just finishing it. So I think they are going to switch it to 30.

Okay.

But they know they're going to have the choice. But see, now, as I said, it all evolves because I had put in originally when we did our first things, that the kids would get it at 30. Yeah. Now that I'm older and I have three, I'll say independent children. I'm lucky they're all working. They're all you know, they're all taking care of themselves. And I'm a little bit of a hybrid with, we try to like to do things for them now, but know that hopefully we will leave them something later on. What we ended up doing is my current planning is that we ended up going with what's called a heritage trust, and the heritage trust is basically going to be where they're going to able to get the money. They're going to be able to get some, it's going to go into trust. They're going to have some creditor protection from it. They're going to have some generation skipping abilities to it of the taxes that are involved with it. So we saw that as a planning tool now. So again, our philosophy, our reasoning changed as we went along. Yeah. And I'm guessing at this point of my life, they're probably old enough. That wouldn't change again. But you don't know. It's dynamic.

Laws change, rules, taxes change, things change.

Absolutely. So for when a client wants to sit down and say, okay, Eric, what have you done? I can run through this gambit of all the different things, but I always say, use me as your facilitator, use Morton Wealth because we've got these wonderful financial planners, use us to be able to talk through the options, not the decisions for you, the options. And once we can do that now you can go to your attorney, and you can do it, we can take it even a step further. There are a lot of times when the clients are wanting to be able to talk to their kids, but they don't know how. And so we'll be the facilitator there. We'll do a family meeting.

We've had a number of those over the years.

Have you done them?

We have, yeah.

And how have you found they went?

You know, I get nervous, you know, facilitating because you're not sure about the dynamics or maybe you don't know all the generations, but by the time you get into the weeds and you start having the conversation, you talk about, you know, the values around money that everybody has from the parents or grandparents or children or grandchildren and people get to kind of share their beliefs and their thoughts.

And then you talk more about the impact that dollars can have on them or future generations or on charity. It's amazing how it brings people together. And so I was always nervous about, okay, how is this going to go? What's going to happen? Because we may not know everybody that's attending for the first time. But I've always really enjoyed it.

And fortunately, we've got, you know, great people to help facilitate these conversations and partnering with you or even Brian Standing, who is an estate planning attorney and very talented at these conversations.

Right. And you get to that kind of family meeting, you've got to know up front, meaning the advisor, do you want to reveal all? Do you want them know how much money you have or do you want to talk in general concepts? And I think it's important in your legacy planning that as your kids get to a certain age and you trust them enough to share what's going to happen. One, they need to kind of get an idea, Hey, when I pass away, this is what you're going to have to deal with.

But two, is how much maybe might be there, because I remember when my parents passed away. Morton Wealth was managing their money and I knew all the information, but my sibling did not. And when I told her, it was like, I'm sorry, what? And it was that kind of discussion. So it was a little overwhelming. So you also don't want to make it a big surprise right down the road.

Yeah, there could be some resentment or something from maybe some one of the other siblings was struggling and they weren't aware. I was listening to a podcast this morning that's based off of a book that Bill Perkins, the hedge fund manager, wrote Die with Zero. And he basically said that money is there's infinite possibilities for money, but when you're born, money's worthless and in your last days, your life money's worthless because you can't do anything with it.

But there's this time in your life where health wellness and money, there's an optimal curve for it. And he says many people wait until they die or pass away to give money to charity or family or friends. Right. And sometimes that's not the best time to do it because, you know, your kids might already be in their seventies and they could have gotten better use out of that because their age or their kids or grandkids at earlier ages.

So just the only reason why I say this is you mentioned three, three choices. I want to not pay anything and bounce my last check. I want to maximize as much as I can or I want to have a hybrid and give some now and some later.

Right.

Don't do what your friends do. Do what you think is right.

Absolutely. Yeah. That's again and I've said it numerous times it's personal and it's also dynamic. How you feel today when somebody first retires, they maybe feel a little bit more nervous about it. I no longer have income coming in. Can I really give my kids some more money right now? I mean, they feel a little until they get...

Hopefully they're going to let us do a cash flow plan and we go through and say, No, you're okay. You can go ahead and do that. But also don't be afraid to face that, you know, it's going to happen. The Grim Reaper. Yeah, the inevitable. Don't be afraid that you're going to have to deal with it.

I actually have a couple of clients that didn't even have trust and wills, and I'm begging them, You've got to have something here to at least take care of it. Right? Right.

Eric, thank you for joining us today. I'll kind of summarize it and help me kind of rephrase it. Okay. The end of the day, it's personal when we're making these wealth transfer decisions, you've got a few options that are available to you in terms of giving now versus giving later versus a hybrid or trying to maximize your life and not give anything at all.

But flexibility is really key. Leverage your resources and your advisors here to help facilitate the conversation. Anything else that you would add?

Yeah, I'm going to say and I'm going to look directly at the camera. Don't be afraid to address it. It is inevitable. So address it. You can be, I think your word was perfect, you can be flexible with it, but go out and make sure you've taken care of it. Because that way when things are in order, it will be better off for your estate, for your children.

And there’s just ways of dealing with almost anything.

Yeah, Thanks, Eric. I appreciate it.

My pleasure.

Disclosure: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice.  You should consult with your financial, legal, and tax professionals before implementing any transactions and/or strategies concerning your finances.

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