Advanced Estate Planning Techniques

Introduction

Madison: Hello everyone, and welcome to the 8th episode of “Not Just Numbers, Honest Conversations with a Financial Advisor and Lawyer.” I am Madison Demora and I am here with Mike Garry. Mike is the founder and CEO of Yardley Wealth Management and a financial advisor and estate lawyer. Hey, Mike.

Mike: Hey, Maddie. How are you?

Madison: Good. I’m good. Thanks for asking. So, Mike, what is advanced estate planning and how does it differ from a basic estate plan?

Advanced Estate Planning vs. Basic Estate Planning

Mike: It’s a good question. I bet listeners want to know. The main thing about advanced estate planning, and there are multiple levels to it, is the use of the tax code to get more of your assets to other people or to charities. With basic estate planning, you’re just giving away your stuff, right? So you want to make sure your spouse, your kids, or charities, or whoever you want to give stuff to gets that stuff. And you don’t really take taxes into consideration, but if you think about what you’re doing and you plan for it, you could give away stuff more effectively using the tax code. And it doesn’t have to be a lot of money either. But if you’re thoughtful when you do things, you can use the tax code to your advantage. Remember, you could do whatever you want with your stuff. You can give it to whoever you want, either while you’re alive or when you die. But if you do it in certain ways, you can save you or your heirs real money in taxes, meaning that your heirs or the charities get more money.

Common Advanced Estate Planning Techniques

Madison: Okay, so what are some of the most common advanced estate planning techniques and how do they work?

Mike: Well, there are a lot, like I said, there are a lot of levels. And first, let me say we’re going to simplify everything for this conversation. And this is my lawyer speak right. There are exceptions and qualifications to everything in the tax code. And people have many different circumstances and situations. And advice that’s appropriate for one client might be the opposite of what is right for somebody else. This is not specific advice in this podcast. Turn to your CPA, your attorney, your advisor for that. This conversation is really to raise awareness so people know that there are questions to ask before giving something away. We’re going to start with ones involving cost basis. All right? So one thing that everybody needs to know is that if you give taxable property or investments to someone while you’re alive, they get your cost basis. If you leave it to them when you die, the cost basis gets stepped up to the value at the date of your death. For example, say you bought shares of Amazon a long time ago and you paid $10,000 for them and say those shares are now worth $100,000. If you give those shares to your daughter, yes, she gets that stock, that’s worth $100,000, but it’s not worth $100,000 to her, really, because if she sells the stock, she has a $90,000 gain, and she’ll need to pay taxes on that. And depending on her income, that might be quite a lot, might be up to 24% of it, plus state taxes in some places. For the recipient, cash is usually the best. Because if you give her a check for $100,000, then she gets $100,000. Stock and property come with their cost basis. So there’s a big caveat to this. If you are wealthy enough to owe federal estate taxes at your death, meaning you’re worth more than $13 million, or you and your spouse are worth more than $26 million, and your heirs are going to have to pay estate taxes out of what you leave them, then getting appreciating stock out of your name and gifting to them over your lifetime might make more sense. So when you die, that stock might be worth a million dollars, and your heirs might owe taxes on that instead, which would be far worse. So get that. If you give them the stock and it’s worth $100,000 when you give it to them, then maybe it’ll be worth a million dollars later. They’ll still have the gain. But if you die and give them to them that million dollars, well, if you’re in the 40% estate tax bracket, it will be worth less to them. A better recipient for appreciated stock or property might be a charity. They get the full value without having to pay taxes, and you might get the value of the income tax deduction. Right. So if you give those Amazon shares to a local charity, they get that $100,000. But if you get a tax deduction for it, that might have only cost you $62,000 if you could fully deduct it. And if you sold it and you’re in the highest bracket, it’s only worth $76,000. So that $100,000 gift really only costs you about $14,000. The charity gets $100,000 and doesn’t have to pay tax on it at all. So by these examples, you can see how advanced estate planning really depends on the individual. And it’s something you need a long term plan for. It’s not something you just do, like a one shot.

Annual Gifting Strategy

Madison: Yeah. So could you explain how annual gifting can play a role in advanced estate planning and how it can help reduce estate taxes?

Mike: Sure. So annual gifting is a strategy that allows individuals to transfer assets to their loved ones during their lifetime, potentially reducing their taxable estate. So under current tax laws, individuals can gift up to $18,000 to each recipient without incurring gift taxes or affecting their lifetime gift and estate exemptions. So when I was in law school, they used to say bill Gates could give $18,000 to everybody in America, or $10,000 back then and everybody in America, and there’d be no tax on that.

Madison: That’s interesting. So how does the strategy work in practice?

Mike: Sure. So let’s say you have three children and three grandchildren. You could give $18,000 to each child, $18,000 each grandchild totaling $108,000 in gifts. And by doing so, you effectively remove $108,000 from your taxable estate, reducing your potential estate tax liability. Even if you’re not worth $14 million or you and your spouse aren’t worth $28 million. Most states have inheritance or estate taxes. So Pennsylvania is an inheritance tax of four and a half percent for lineal descendants. So if you give that $108,000 out, it takes $4,860 out of your inheritance tax bill, plus whatever that $108,000 would have grown to at your death. So that’s one of the things that is lost sometimes. If you’re 70 and you give away that $100,000 in Amazon stock and you live another 20 years, what might that be worth at that time? Right. It could be a whole lot of money. And so if you do this, that’s making one gift to six different individuals one time. Think of the effects of compounding it over ten or 20 years. And another side effect is the money probably also helps the kids and grandkids way more at that stage of life than it would at your death. And that’s a topic for another podcast.

Madison: That would be a significant benefit.

Mike: It really is, yeah.

Madison: So are there any additional considerations our listeners should keep in mind when implementing an annual gift.

Mike: Yeah, so there are a few key points to remember. First, you have to know what the annual exclusion amount is as it changes over time now due to inflation adjustments. I bet if you asked a lot of people, they would still think it’s $10,000, which it was for a really long time. Second, you should keep records. You keep accurate records of the made. Even if you don’t need to report annual gifts below the exclusion amount to the IRS. Maintaining a record can be helpful for documentation purposes. And lastly, you should be mindful of the lifetime gift and estate tax exemptions. So the annual exclusion amount is separate from these exemptions. If you exceed the annual exclusion amount in a given year, you’re supposed to file a gift tax return and report the excess gifts and use a portion of your lifetime exemption, which, depending on your situation, again, could be good or bad. I know that sounds crazy, but that’s true and it’s important to consult. I mean, don’t just do this willy nilly, like talk to your attorney and your tax advisor about this and make sure what you’re doing is right and in compliance with the gift tax rules.

Strategies for High Net Worth Individuals

Madison: It’s clear that annual gifts can be a valuable strategy for reducing estate taxes and transferring wealth to loved ones during one’s lifetime. Now, what about individuals who have a high net worth? Are there any specific strategies tailored to their needs?

Mike: Absolutely, Maddie. For high net worth individuals, advanced techniques like family living partnerships or limited liability companies can be quite beneficial. So I say you own four or five different types of businesses, and you manage all those. If you have them in a family limited partnership or an LLC, they can be subject to valuation discounts, and you could make the transfers. You could transfer stuff a little bit more effectively. These used to be really popular 20 years or so ago, but a lot of things are less popular when estate tax exemptions are so much higher. And again, remember, your individual circumstances really matter. This wouldn’t be a good thing to do if you just owned a shore house, or it wouldn’t be a good thing to do if you just had an IRA. This is if you had specific running businesses. Consult with professionals in these areas.

Charitable Giving in Advanced Estate Planning

Madison: What about charitable giving? How can it be incorporated into advanced estate planning?

Mike: So there’s a lot of different things you could do. Some things like, you could create charitable remainder trust or charitable lead trusts. These are things you could do to support charities where your heirs will get some stuff, you get some benefit back. And again, it’s using the tax code to maximize the value of your gifts. Now, if you’re over 72, you can make a qualified charitable distribution from your IRA. And so the money comes right out of your IRA, and you don’t pay taxes on it. Instead, if you really don’t need the money and you’re charitably inclined, that’s a way to reduce your taxes now and in the future and give to the charity again, like leveraging the tax code to really amplify what you give. And you could also use a donor advised fund. If you have, like, a real big tax year, one year, and it makes sense to give away a lot and you’re charitably inclined, you could open up the donor advice fund, put a lot of money into it, take the deduction for it, and then you have time to make the gifts. It sits in that fund, and you can make the gifts from that fund and collect a little interest on it, or have it invested while you’re still taking the time to figure out exactly which charities you want to help.

Irrevocable Life Insurance Trusts (ILITs)

Madison: Okay. So, before we wrap up, let’s dive into another important aspect of advanced estate planning. Life insurance trust. Mike, can you shed some light on how life insurance trusts can play a significant role in estate planning. Have I heard you say ILIT?

Mike: You have. ILIT is short for Irrevocable Life Insurance Trust. An ILIT or an Irrevocable Life Insurance Trust allows individuals to remove life insurance proceeds from their taxable state to provide liquidity to cover state taxes, debts and other expenses without increasing the tax burden on their beneficiaries. So you create the ILIT, you transfer the life insurance policy into it, or have it buy the life insurance policy, and that keeps those proceeds out of your estate for tax purposes.

Madison: Okay, that’s interesting. Could you explain a bit more about how these trusts work and how they benefit and what they offer?

Mike: Sure. So when a life insurance policy is owned by an individual, the policy’s proceeds are typically included in their taxable estate upon their passing for federal estate tax purposes, not for state inheritance taxes, and the recipient does not ever pay income taxes on it. And we haven’t worried too much about estate taxes because a couple can now pass $26 million without paying them. However, that law expires in a few years, and it’s entirely possible that the estate exemption goes back down to $5 million per person or $10 million for a couple. That number is going to be adjusted for inflation from when the law took effect. So probably 6 million and 12 million. But by transferring ownership of the policy to the trust, the policy proceeds are removed from the taxable estate, and this can help individuals reduce their estate tax liability. For example, let’s say you have a $3 million life insurance policy, and I know many who do, including me. And when you pass, your assets are right up at the estate exemption amount. If that $3 million policy is all above the exemption amount, that’s $1.2 million in taxes that your heirs will owe. And the other thing is that the trust provides other benefits. They can help maintain privacy as the trust operates outside the probate process and keeps the distribution confidential. They also provide flexibility. So if you want to structure it so that your recipients get money doled out over time or to various people, the trust can handle all that, which is very different than just a typical life insurance beneficiary designation, where somebody just gets the whole amount. They can also protect the policy from potential creditors, ensuring that the beneficiaries receive the intended benefits. It can really be a good thing.

Madison: Yeah, it sounds like it. Thank you for the explanation. So are there any specific considerations or requirements individuals should be aware of when setting up a life insurance trust?

Mike: Yeah. So again, make sure you go to a lawyer to do this, and some considerations include you want to choose the right trustees because they’re going to be overseeing the trust and managing the policy proceeds. Ensuring the trust is properly funded with the life insurance policy, and that they comply with somewhat complex IRS rules and regulations. And you have to consider the potential gift tax implications of transferring ownership of the policy. For it to work, you need to live for three years past the date you transfer ownership to the trust, or it’s pulled back into your estate. And it’s often a best practice to open a checking account in the name of the trust, but the policy premium into it a month before. So you open the trust, you have the policy, you gift the policy to the trust, and then when you open a checking account, also in the name of the trust, you put the money for the policy into that checking account a month before you pay the bill. And then you send the beneficiaries a crummy letter to make it a completed gift. So what a crummy letter is, it’s a letter to the beneficiary saying, “Hey, I moved this $5,000 into this account to pay this insurance policy premium. You are free to take this $5,000. It’s a gift to you.” Now, the beneficiary also should know that they should not take that gift because they have the $3 million coming to them later. And so you talk about it with the people and make sure your beneficiaries understand that, yes, you can technically take this gift, and that’s what allows it to be a completed gift, to get it out of your state for estate tax purposes. And the guy who came up with this, I think his first name was Clifford, but his last name is Crummy. And the joke then is the, ah, crummy powers. The guy’s name should have been, like, fantastic or wonderful instead of crummy. But, yeah, it’s been around for 60 years and it works. And if we get estate tax exemption amounts back down to like five or $6 million from an individual or ten or $12 million for a couple, in a couple of years, as may happen, a lot of people would be doing these again. We used to do a lot of them 20 years ago, back when the estate exemption amount was $600,000 or a million dollars or even $2 million, now $26 million, that they’ve been less important, but they could be on their way back.

Final thoughts

Madison: Yeah, I was going to say, they could be on their way back. Is there anything else you wanted to add?

Mike: No. Maddie, thanks for listening to me drone on and on and on about the tax code and insurance trust.

Madison: It’s valuable information.

Mike: It is valuable information. Sometimes I get on a rant. Sorry if I went on too long there.

Madison: No, this was definitely helpful. It’s good to know.

Interview with Bill Franchi, President and Chief Underwriting Officer at Old Republic Specialty Insurance Underwriters

Introduction and Background

Madison: We are joined here today with Bill Franchi. Bill, how are you doing today?

Bill: I’m doing great, thanks.

Madison: Very nice. Bill, would you like to explain to our listeners what you do for work?

Bill: Sure. Yeah. So I am president and chief underwriting officer of Old Republic Specialty Insurance Underwriters, actually, right here in Yardley, Pa. And I started the company here just a little over eight years ago for Old Republic. I’ve actually been in the insurance industry for 28 years. So I spent 20 years with a couple of larger insurance and reinsurance companies and then had the opportunity to start this up for them.

Mike: What kind of insurance is that, that you do?

Bill: So we do property and casualty, commercial property and casualty insurance. The company actually has two divisions. We have an alternative risk division, and that’s our public entity, nonprofit division, we call it. That’s where we write excess of a loss insurance. So those clients are municipalities, schools, religious institutions, and they actually take risk in that business. So we come in above them on that side, and then we have a second division, our specialty programs division. That’s where we actually give out the underwriting pen. So we work with managing general agents and underwriters, and we actually give them the pen to do the underwriting on our behalf. On all lines of business Property casualty. That includes comp, auto liability, professional liability, general liability.

Madison: Very cool. So the company is in Yardley. Are you from Yardley?

Bill: I’m not. I’m actually from a suburb of Wilkesboro, Pennsylvania, called Plains. Moved into the area in 95 and actually been in Yardley ever since 97.

Madison: That’s awesome. So how’s business going?

Bill: It’s going very well. I mentioned it was just eight years in January. We have 74 associates on our staff now. Over the eight year period, we’ve had really steady growth. The past three years, we’ve averaged mid double digit growth. So, going very well.

Madison: That’s awesome. And that started from the ground, right?

Bill: That’s correct, yeah. Started from the ground up. I got to a point in my career, after 20 years, I decided I needed to change and started looking at trying to start something up. And originally I was thinking of maybe go to the brokerage side, do different things, and thought, you know what, stick to what I know. And ended up putting together a business plan. And Old Republic was kind of one of the first folks on my list because of some past contacts there and because of their business model. Because of the nature of their model.

Business Growth and Challenges

Madison: So did the pandemic affect your business in any way?

Bill: Sure. Yeah, it definitely did. From a revenue standpoint, it affected it. If you think about the type of commercial operations we underwrite, we do things like daycares, restaurants. As you can imagine, there was no revenues coming in a restaurant, no kids in a daycare. So we did our part and we returned a lot of premium to folks because they didn’t have those exposures. That was a big impact, certainly on the operation in general. And then also in new business with clients, building relationships is a lot different. It takes a year to two years again, in our business that what I’m dealing with the specialty side, because we give out the underwriting pen, we underwrite the underwriters. So it takes a couple of years in general before COVID to get a relationship going. Through COVID made it a lot more difficult just trying to do it over Zoom when you can’t really sit down with people.

Madison: So are things starting to get back to normal?

Bill: If you saw my travel schedule, yes, you would definitely are.

Madison: Well, that’s good to hear.

Mike: Are you traveling in your business?

Bill: Yes. Yeah, I do a lot of traveling. We’re nationwide, so we’re all over and spend a lot of time on the West Coast of course.

Passion for the Job and Biggest Challenges

Madison: What do you like best about what you’re doing?

Bill: It’s really all about the people at the end of the day. Right. And not just internally, the people, our staff, our associates, but our clients. Dealing with people you really want to work with. That’s something you kind of learn over time in your career a little bit too. It’s just not worth dealing with some folks and you want to try and from a culture standpoint, have the right fit internally and externally with clients. So it’s the people. And I do enjoy the travel, too.

Madison: That’s awesome. With all the success you’ve achieved, what’s the biggest challenge you’re facing or have faced?

Bill: Honestly, it’s probably climate change, really. We’re just trying to deal with that. And on the property side, we have models that we use and they are changing all the time and they need to. But trying to price the business with the complexity of climate consistently changing is difficult, to say the least. I would say that. And the close second is continuing to bring in young talent into the insurance industry has been a challenge for a number of years now. The pandemic didn’t help that a lot more people have retired sooner than they would have. So that’s definitely a concern.

Mike: Is it a challenge managing an organization with 74 associates where people probably work from home sometimes now that they wouldn’t have a few years ago?

Bill: Yeah, no, it definitely is a challenge. It’s different for not only the associates that had to get used to it, that never worked at home before. Right. And being able to separate work from outside of work, but also for managers, how to handle someone working from home was very different for them. I think it probably took a good six months to a year to hit your stride and get used to that. But now, at this point, I don’t see it being an issue. I mean, we’re still three days in, two out, and it works out perfect.

Mike: Great. And the climate change, that’s not going to go away. I guess the models will have to constantly adapt and change, and the pricing will be hard. Right. People have to pay the right amount for insurance. Nobody ever likes it when it gets more expensive. But I think if people thought about the risks or the locations that they’re in and they see that the claims that they’ve paid, maybe they understand, but it’s something no one wants to pay for. It’s like getting a new roof, like, yeah, great, I need one. But it doesn’t really do anything for you. It’s not like buying a new car or computer or something.

Bill: No, definitely not. And you hit around the nose. It’s ever changing. Right. You just look at the last five years and the number of events and how big they’ve been. Water temperatures continue to rise. So you take all those factors and those miles keep changing. It’s hard to keep pace.

Underwriting Explained

Mike: Can you explain something? What does it mean? Underwriting and then underwriting the underwriter. So those are insurance terms, I think I know, but I don’t know if a lot of our listeners understand that.

Bill: Sure. Yeah. So I guess the easiest way to start is just from what an underwriter is. An underwriter is the person that sits there. And let’s take property for an example, and they get all the characteristics of a restaurant or a hotel, whatever the operation is, they’re underwriting the construction, the type of wiring, plumbing, etc. The vegetation around the building. Where does it sit? Is it on the coast in Florida or is it in the middle of Iowa? They get all that information and they go through it and they determine if it’s a risk that they first, want to take or not. Okay. Now, every company is different. Some companies may not want a wood frame building. Other companies do. And then from there, they look at all those characteristics, and then they go and they basically put a premium on it based on those characteristics. In the backgrounds that give them the rates that they then apply to it to be able to charge a premium for that risk. And there’s years and years of lost history, data behind that that goes into putting those rates together to come out with the premium.

Mike: Is it harder to come up with a great premium for a new business or for one that’s been around for a long time?

Bill: It really depends on your own company’s historical data or if there are the insurance service offices, if they have rates for that and data behind it, there’s different associations you can go to for rates versus something brand new. And I’ll use like cannabis. Cannabis is a new evolving. It’s been for the last number of years. There’s no loss history behind that cannabis operation and manufacturing it, of what do you charge for that? What’s the real inherent risk there? So that makes it more difficult when you get a new risk like that. As far as underwriting the underwriter, that’s a challenging part. Right. That’s where the pandemic does hurt a little bit. Right. Because being able to go and sit down with an underwriter in a shop, that’s going to be doing that frontline underwriting for you. Okay. And to be able to understand how risky are they when they look at risks. Are they willing to go stretch things a little further? Because there’s plenty of flexibility in the type of risk underwrite and also in the premium you charge. So it’s understanding them and their backgrounds and getting to know them, and it’s a close relationship to be able to learn the philosophy of each other.

Mike: Okay, I was going to ask, so you said it’s a challenge bringing new people into the insurance industry. So I’m guessing that underwriting, you probably need some people with some pretty good math skills, but overall, in a bigger operation, you probably need all different types of people. Right? All the different social skills, business skills, math skills. But what would you be looking for in a new employee or a younger person bringing into the industry?

Bill: Great question. And all those are important skills, right. With underwriting, you’re almost like a coach. Because you’re going to have some underwriters that are better at the math side or better with the detail orientation. And you’re going to have others that are better externally with the clients. So in some ways, it’s hard to find somebody that’s all those things. So you get somebody that’s good at one and good at the other, and you put them in the right position. You got to kind of have to look at it. Some people are better desk underwriters. Some people are better field underwriters is how I would say it.

Mike: So like a field underwriter would go to that restaurant and take a look at the wiring or talk to the people or look at the parking lot or see the location or something like that.

Bill: Exactly. They come out there with the agent. More so in front of the agent than anything, I would say.

Mike: Okay. When I was in college, my dad used to pay me to take pictures of homes that he insured for State Farm. I’d have to go out there. He didn’t pay me much. I hope he listens to this.

Bill: That’s great.

Advice for Young Professionals and Legacy

Madison: If you could be remembered for one thing, what would it be?

Bill: Yeah, that’s a tough question. Honestly, I would say it’s that I treated people fair and with respect more than anything, both, again, internally with my own people that work for me and my clients. That’s one of the biggest things to me, is just to be fair in my dealings, both business and personal, and treat people the right way. If I could be remembered for that, I’d be happy as can be.

Madison: That is a great answer. So if you could go back and give your 18-year-old self one piece of advice, what would it be?

Bill: Get your master’s degree. Don’t wait. Spend the money. Do whatever you got to do. Get it out of the gate. It’s a lot harder later in life to go back and do those kinds of things. That would be the one thing I think I would tell myself.

Mike: Well, as someone who spent his 20s all in college and grad school, that’s nice to hear, because I’ve wondered if I’ve been regretting that since then.

Bill: Definitely not.

Mike: Well, that’s good.

Conclusion

Madison: We know your time is incredibly valuable, and we greatly appreciate you spending time with us. For those watching and listening and want to learn more, where is the best place for them to learn more about you?

Bill: Yeah, they can go to our website, www.orsiu.com.

Mike: Well, thanks so much for taking the time, Bill. Really appreciate it. Hope everything’s great with old Republic and the folks that work there and really appreciate it.

Bill: You got it. Thanks for having me.

Madison: Thanks so much. For more information on YWM, you could visit our website at yardleywealth.net you can also follow us on socials at Yardley Wealth Management. This podcast has been produced by Madison Demora and Mike Garry with technical and artistic help from Poe Productions.