MAU 52 | Estate Planning

 

Estate planning is a constantly moving and shifting process, and it’s not just something you should be thinking about once in a while. If you constantly keep everything up to date, in case anything ever happens to you, you can rest safe knowing that your loved ones will definitely be taken care of by the wealth you leave behind. Domenic Rinaldi is joined by Eric Kalnins, a Partner at Handler Thayer, LLP. Domenic and Eric talk about the importance of estate planning, and the particulars that need to be ironed out well in advance. Still don’t think you should be planning your estate as early as now? Perhaps Domenic and Eric’s conversation will convince you otherwise!

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A Good Time For Estate Planning With Eric Kalnins

During this pandemic, we’re all looking for opportunities and ways to mitigate the impacts of this global crisis. One such opportunity right now exists in the estate and tax planning area given the combination of low-interest rates and depressed asset valuations. This is probably a once in a generation opportunity and we have an expert with us now, Eric Kalnins, to explain some of the possibilities. Eric is a partner with the law firm Handler Thayer and specializes in the areas of business structuring, tax, both domestic and international, estate planning and litigation. He is also heavily involved in the firm’s planning group that creates and implements advanced estate planning techniques for high-net-worth clients, including the formation and operation of family offices. Eric, thank you so much for joining me. I’m happy to be talking about opportunities during this challenging time. Welcome.

Thank you, Domenic. It’s great to be with you. What a great intro and you hit it right on the head with regards to now is the time to transfer wealth and plan for asset protection. Thanks for the nice introduction.

I’m excited to dive into this, but before we do that, if you could give the audience a background on yourself and a little bit about the firm so they understand where you’re coming from.

I’m a partner at Handler Thayer LLP in Chicago. I’ve been a partner since 2009. I’ve with the firm since 2004. We’re a boutique firm in downtown Chicago. We’re a little fewer than twenty attorneys. We’ve been working in this space since the early ‘90s. At the forefront of family office type of structures, which entails a lot of the issues that we’re talking about now, whether it’s core estate planning, asset protection on more sophisticated advanced planning techniques, or the high-net-worth and ultra-high net-worth individuals.

I’m seeing daily more and more about why maybe now is a great time if you’ve been putting off estate planning or even if you have an estate plan, to relook at it because there’s a unique opportunity. Maybe explain to the audience why that’s the case and let’s dive into some of the strategies that people could be thinking about deploying right now.

Any time is a good time to do core estate planning but what I noticed at the beginning of this pandemic are people calling in and realizing that they haven’t taken the time to do this yet and they need to get their core estate plans in place. When I say core estate plan, I mean wills, trust, powers of attorney for the business, power of attorneys for healthcare, power of attorney for property, HIPAA authorization, and all of these types of things that people don’t think about too often because they don’t like to think about it. In the usual situation, we’ll have somebody come in and finally wants to get their core estate plan taken care of. It’s the most elongated type of engagement that we even have at our firm because we talked to them about it.

We get the estate planning questionnaire about it out to them. People don’t like to think about death even though they do say that they want to take care of their estate plan in the most efficient manner possible with regards to taxation, asset protection and getting it down to the right people. This pandemic has opened people’s eyes up as far as the opportunity to take this time when you’re hunkered down and trying to put your core state plan in place, protect your assets and get them to the correct people. We’re going to talk about a number of these issues, but it’s opened my eyes to see how people have put off this type of planning. They come in and it takes months to get answers out of them. They finally execute and they say, “That’s so much better than I thought.” You’ve got to get people in the door, get planning about it. That’s the basic model, the foundation for the rest of the items that we’ll be talking about.

Any time is a good time to do estate planning. Click To Tweet

There’s a whole psychology behind why people can’t get their heads wrapped around this and do this work. I had a psychologist some time ago and we talked about this very issue. He said, “People can’t face the finality of their lives and have a hard time moving to this step. His advice interestingly enough was that if people did this much earlier in their lives, that next stage doesn’t seem so certain to them. He thought that if people would start earlier in life, it would be easier to maintain it as they moved forward versus you get to a certain point in your life and you don’t want to do it because you don’t want to face it.

You want to make it part of your lifestyle is the best way to look at it. We have a lot of successful clients, high-net-worth, ultra-high net worth and most of them have started and made their money through closely-held businesses. That’s what they know. They know their business. They know their industry and that’s how they move forward. What we try to do at Handler Thayer is recreate that business aspect on their personal side and turn their personal assets, their lifestyle, their family into a business. Something usually clicks within their mind and say, “This is a lot like running my business. This makes sense to me.”

What we try to do in a lot of circumstances is take a snapshot of their current estate plan if they even have one, where all the assets are. It’s usually a jumbled mess and put them on some schematic one page so they can see everything floating around out there. What we tried to do is say, “In a perfect world, here are some of the recommendations on the next schematic that we would make where you have potentially all the trust owning the entities, which those entity shares are held by the trust, which are part of a family limited liability company. Maybe a family office above that. Maybe a family foundation off to the side, grants, asset protection trust, all these types of things so you can see it on one page and then it starts to flow. That’s usually what people understand on the business side, “Here’s how my business flows, why doesn’t my personal life flow like that too?”

That’s where we come in and try to provide that type of opportunity so that they keep up on their estate plan as opposed to throwing some documents in the drawer. What I always want to stay away from on the planning side is this idea that somehow estate planning is something you drop on some papers and throw it in a drawer or a vault. That’s not an estate plan. It’s something that’s constantly moving. It’s something that you have to picture within your mind. It’s great to have this type of structure too because then it works much more easily with your advisors, whether it’s life insurance, investment, advising, all the types of things that are out there. People can see this snapshot and have a much better idea of where that person’s going and how they want to get to their goal.

As I started off in the interview, I talked about during this global crisis, there’s so much bad news and there are many clients and businesses out there that are hurting. It’s nice to see that there’s a real opportunity in front of people. This is one area where there’s an opportunity for people to protect wealth and protect the next generation. Why don’t we dive into that and talk about it a little bit?

The best place to look and start here is I started practicing law in 1999. Back in 1999, the federal estate tax exemption was $675,000. That’s not a whole lot. If you had a reasonably nice house, you’re potentially within the federal estate tax amount and paying federal estate tax. Since then, it’s grown up to $1 million. In the 2000s, it’s about $3.5 million. Around 2010, it went down to zero for that one year, which is an interesting time period. They then did something that not many estate planning practitioners expected. It jumps up to $5 million. Trump’s tax plan, the TCJA in 2018 jumped up from $5.45 million to $11.2 million per spouse.

In 2020, each spouse can pass away with $11.58 million per spouse. If you use the benefit of each spouse, you’re talking $23 million before you even have to worry about the federal estate tax. That’s a synopsis of how things have changed in many years. When we say that this is a real opportunity, we’re not saying that to get business. It’s changed drastically over the years. The interesting thing is pursuant to the Trump Tax Initiative from 2018, there was a sunset on that. At the end of 2025, these will potentially all go away. What does it go back to? Does it go back to $1 million? Does it stay at $11 million per spouse? That’s why we’re looking to get people out there to take this opportunity to get their estate planning taken care of.

MAU 52 | Estate Planning

Estate Planning: The pandemic has opened people’s eyes up to the opportunity to put a core estate plan in place, protect their assets, and get them to the correct people.

 

Otherwise, you’re throwing away millions upon millions of dollars in potential estate planning credits on the estate tax exemption side that we may never get back. We have about five years. When this first started, it seemed like the end of 2025 was so far away, but it’s right around the corner. We’re trying to use some of these advanced planning techniques as well as basic planning techniques to let people know that it’s time to start transferring and you can do it not just on the estate tax side, but also the income tax planning side and asset protection side.

That’s a tremendous timeline. That illustrates for people what this opportunity looks like and how you need to think about this long and hard and make sure that you’ve got your estate in order, no pun intended. We’ve also got at the same time this situation as a result of the global crisis and the pandemic where we’ve seen asset values come down. We’re in this low-interest-rate environment and that also has added fuel to the fire on all of this.

Take each of those points in turn here. The market rates are very low. You saw what the stock market was and what the economy was. The unemployment rate was down to 4% a few months ago and how that’s been destroyed because of this pandemic in the United States and worldwide for that matter. How’s it going to come out? Nobody knows exactly, but the economic positives before this were quite strong and depending on how quickly we come out of this, this is a good opportunity because market rates are low. Some of these planning techniques like grants. Grants retained their annuity trust, class and things like that, selling to an intentionally defective grantor trust for the next generation, or pouring into a dynasty trust for generations to go that’s not subject to estate taxation at the federal level are real opportunities.

Anytime you do this type of planning, when you’re doing a sale to an intentionally defective grantor trust, it’s one of those situations where you’re selling assets to the next generation potentially and you don’t sell them at full price. You don’t want to sell them at 100% of that fair market value. We try to put them in some structure or it’s an LLC or some other type of structure that gets discounts of up to 30%, 35%. Instead of selling $10 million to somebody, you’re down to $6.5 million or $7 million as the starting price. You’re then selling that to them over the course of years.

It’s one of the classic estate tax freeze techniques out there to get wealth to the next generation and get that appreciation that’s going to occur over that time period of 5, 10 years of payments. Even longer to the next generation and getting it out of the matriarch’s and patriarch’s estate. When you say the market values are low, this is a good opportunity, not only to get a discount pursuant to the evaluation of that asset that you’re potentially selling to the next generation or you’re gifting it to the next generation. It doesn’t have to be a sales transaction. Not only are you getting this low market value right now for those assets, but you’re also getting a discount on top of that.

That’s the real opportunity right there. If you’re sending it up as a grantor trust type of situation, whether it’s a grant, whether it’s a sale to intentionally defective grantor trust, that owner can take the opportunity to pay the taxes on whatever is earned over the course of years of this sale or this gift on those assets. Further keep that asset that’s going to the next generation, not even hit by taxes, which most people will say, “That’s an extra gift.” It’s not an extra gift. It’s yet another planning opportunity to get as much value out of your estate to the next generation as possible.

Let’s be illustrative here. If you’ve got a business and the enterprise value was $25 million pre-pandemic, and let’s say it’s taken a hit and that same company’s new valuation post-pandemic is $18 million. You’ve had an asset that’s gone from $25 million to $18 million and now you get the discount on top of that. You’re transferring wealth at a much lower level than you would have before and hopefully the assets are going to come back and re-appreciate and re-appreciate tax-free.

Estate planning is something that’s constantly moving. Click To Tweet

That’s spot on. Going back to your interest rate comment too, interest rates have never been lower. Any of these structures that you’re trying to set up, if you’re selling to somebody, you have to sell it at a reasonable interest rate, whether it’s the applicable federal rate or the 7520 rate dealing with grants. In January, the 7520 rate was 2%. It’s 0.6% in June. The way it’s gone down so much. If you put that asset in a graph gifted to the next generation, you zero it out so that the remainder interest is zero so that you haven’t even made a gift. All you have to do is have that asset that’s contained in that grant. I appreciate more than 0.6% over course of the term of that grant and you’re pushing significant wealth out of the major matriarch’s and patriarch’s level down to the children’s level. That’s not a high rate. That’s not a difficult rate to be right now, which is yet another reason to seriously look into opportunities in transferring assets.

Are these only irrevocable trusts or can they be set up as revocable? Are there options there? Do you have some flexibility in this or are these strictly irrevocable trusts that are being set up?

You have irrevocable. You have revocable. You can make straight-up gifts to the next generation also. For the most part, we try to make these irrevocable so that we get it out of the matriarch’s and patriarch’s estate and give them the least amount of control, which is what the IRS looks at. We’ve been doing this for years, the GRATs and IDGTs. It’s not like these are risky types of transactions as long as you do them correctly. We’ve seen a lot at our firm with regard to these transactions going through and making our clients very happy and making the next generation very happy. There’s also some asset protection component to this too, that is often overlooked. People look at estate planning as getting assets down to the next generation.

If it’s in a trust and there’s a trustee, that means you’re not only getting wealth to the next generation and hopefully a tax-efficient manner, but those loved ones that you’re providing for can’t necessarily grab those assets and take them. It’s not like a will where “I pass away. Here’s the money. You get to do whatever you want. There are creditors out there that have liens against you. They’re going to get that money.” That’s another important component of the trust side. It’s the asset protection having a trustee said, “I’m not going to make distributions to you right now,” or “I’m going to make distributions directly to payments for your benefit as opposed to giving your liquid cash,” so that creditors out there, or let’s say there’s a drug problem with one of the beneficiaries or some type of other issues. They’re irresponsible in general, to keep those funds in a safe place and make sure they’re being used for the proper purposes.

If there’s a downside to this, what is it? If there’s something that people should be concerned about before they move into this direction, what would your advice be on that side?

I don’t see any downside to estate planning. The real downside is waiting to do it too late and those become the expensive estates and trust administrations that we get involved in where things were not taken care of. Here’s an example. I’ll give you somebody that finally came and did some proper estate planning. He’s an older gentleman in his 70s. I remember him up in Wisconsin. The thing that he had going with him is that towards his older years, he liked to golf. He liked to spend money. Unfortunately, he also liked to pretend he’s an investment advisor and trade a lot of stocks. He is a day trader. He lost a lot of money.

He did have this one very valuable assets of stock in a closely held corporation that was doing quite well that is worth millions of dollars. Unfortunately, he ran through all his liquidity and everything. He passed away after we tried to do some structuring for him and we did do some beneficial structuring that was beneficial. Had he come to me much earlier, we could have taken care of this under much better circumstances. Once he passed away, he had no liquidity. He had a lot of value in his estate but he didn’t have the liquidity.

MAU 52 | Estate Planning

If it’s in a trust and there’s a trustee, you’re not only getting wealth to the next generation in a tax-efficient manner, but the ones you’re providing for can’t just grab the assets and take them.

 

When the estate tax has come around, there was nothing there to pay the estate taxes with unless you sold the assets, which is the exact situation you want to avoid because then what you’re involving yourself is a fire sale. People know it. It’s coming from the estate. They’re going to low bid you. Fortunately, we were able to get a loan from a bank to pay the estate tax after many banks saying no. We use the shares from the corporation’s collateral and within a year and a half, we paid that loan off by taking our time, selling the stock, and creating liquidity for the estate. My point is this is something that we talked about. It has to be a process that you keep track of throughout the year, not once in a while throughout your life. That way, you know that the liquidity is not there. You can come up with some opportunities, maybe some life insurance, maybe some type of other assets, so that the beneficiaries aren’t selling something that they may not want to sell in the first place.

Given what’s going on right now in the world and with many businesses, there are a lot of people out there who had a substantial amount of wealth tied up in their businesses. They’ve seen those businesses get devalued in some cases substantially. For example, I spoke to a manufacturing firm out in California and their business has dropped by 80%. This is not a small business. In some cases, it’s been pretty catastrophic. What’s your advice to the people who have had a substantial amount of their wealth and their businesses and they’ve seen it evaporate? They’re worried about the future. Some people who know it’s going to come back. Maybe this makes perfect sense, but what are you saying to the owners who are not so certain about where the future is for them?

Estate planning isn’t just documentation, taxes, asset protection or anything like that. You then have to get down to the details. For some of our family offices, I have one client that’s in that situation. He’s in manufacturing. It’s a very successful business and unique little niche with 500 employees. He’s running into that situation where he was potentially looking to sell a portion of that business a few months ago at a good price. That arm of the business and everything else is up in the air. He’s a very impressive individual. He’ll get through it. The issue along with that planning is, do you want to sell it after the patriarch or matriarch passes away that’s running the business? If not, who’s going to run that business next? That is what it comes down to because that’s an important decision.

Do I want to get out of this business and cash out or do I have children or other relatives that are vested in this industry that I want to pass this industry down to? That’s a point that people don’t look into enough, in my opinion. You’ll see a lot of these virtual family offices, single-family offices get into an industry. They’ll use some of their employees and the closely held business as their advisors or their people that are helping them run the family office. That’s called an embedded family office, which is what you want to try to avoid. You want to create a family office that is separate from that. That’s helping your family side as opposed to relying on your employees.

My point is if you don’t have the right people that that business is going to succeed to, and you never know when that’s going to happen. Death is just right around the corner, whether it’s an accident or it’s some type of cancer or anything else. That’s one thing that people aren’t thinking about enough is who are those key employees that I need to keep around so that my son or daughter can run this place? Does my son or daughter want to continue with this business? If they do, how do we keep the liquidity?

Is that matriarch or patriarch of the business the person that everybody looks to? How are those remaining employees going to stick around and say, “I have confidence in the son of this person,” or are they going to think it’s a joke? It reminds me of that movie. Have you seen Tommy Boy? The guy that graduated nine years. Those are doctors usually. In any event, that whole idea is a perfect example of all of a sudden, the patriarch passing away and the business and the whole town is left in peril. I know it’s a fictional movie and everything, but it’s a good little snapshot of, where do you want that business to go?

Let me tell you that fictional movie has a real-life component to it. I did an interview with the daughters of an owner who passed away. The owner did an incredible job of putting their personal affairs in order, but did nothing on the business side and didn’t incorporate any of that planning into his estate and passed away. It wasn’t sudden. He was terminally ill and they knew it for a long time, but still ignored this and left the business in shambles. It didn’t need to be that way at all.

It has to be a process you keep track of throughout the year, not just once in a while. Click To Tweet

It never does. It’s sad to see that. If you look at the four major causes of wealth erosion, number one is a mismanagement. That’s a very broad category. Number two is lawsuits. Three, divorces and four, taxes. You’ve got mismanagement, lawsuits, divorces and taxes. Three of those things right there or at least two, the divorce and taxes. You can do that type of planning, whether it’s a prenup or whether it’s a postnuptial agreement. The taxes are on the estate planning side. Lawsuits are on the asset protection side. Structure your business and your personal life properly. You can at least knock out those three. You then have to deal with whether the business is any good or that it’s being mismanaged.

These are avoidable situations and getting ahead of it and to do it often. There’s no downside as to doing this and taking a look at it.

One thing too I’d want to mention is the aspect of putting some money to decide. It’s the asset protection type of component to it. What if everything goes away? What if a huge catastrophic event occurs and I lose everything? What do I have set up on the side to cover me under those circumstances? In a lot of those situations, we always tell our clients, “No matter how good your business is, do you have some structure set up that if you lose everything else, at least you have something to pull from out there?” That’s not hiding assets. That’s not putting gold in your basement. That’s a structure that works. It’s transparent and it can continue to work without you telling it to work and taking care of not only you but your family and anybody else you want to take care of.

What we’re going through is a perfect example of that. For the people who have money aside, who have kept a good amount of working capital in the business, put money in other places, they’ll probably weather this storm. The people who haven’t are going to have some tough times ahead.

I’m hearing more in the news and seeing more articles on litigation attorneys is ramping up. That’s going to be true because there are going to be bankruptcies. There are going to be contract breaches, whether it’s real estate or operations. There are going to be tax issues. There are going to be people suing because their employer shouldn’t have been asking people to come and work for COVID-19. Who knows? There’s going to be a lot of litigation and if you’re not prepared, whether it’s a domestic trust or an offshore asset protection trust or some things that you can build into your family office, whether in the LLC side, such as charging order protection and trust and things of that nature, you’re potentially going to be left in a bad scenario.

I remember one scenario that I’ve run into a couple of times over the past few years where a client comes to me and they don’t do this type of protection. Everything’s going well. They’re helping people startup businesses. The next thing you know, the SEC, Securities and Exchange Commission, comes in and says, “We’ve been receiving some complaints about your business. Maybe you’re violating some type of SEC-related laws or something.” In any event, the SEC comes in and shuts them down, freezes their accounts, freezes their daughter’s accounts who’s at college to investigate this for the next year. You can see people’s lives get ruined only for the SEC to come back a year later potentially and say, “Sorry, wrong guys. We’re looking at these other guys. Carry on.”

In the meantime, you couldn’t even hire an attorney to represent your interests because all your assets are frozen. You can’t keep your house and your mortgage payments. You can’t keep your business going. I’ve seen that a couple of times and it’s scary to see that type of thing, which is why we highly recommended that people take at least 10%, 15%, maybe 20% of their assets. Set them aside as some protection type of structure to cover those situations so that you’re not moving into your parents’ basement someday.

MAU 52 | Estate Planning

Estate Planning: Estate planning isn’t just documentation, taxes, or asset protection.

 

Eric, this has been tremendous information. I appreciate all of the information. This has been jam-packed, but if we were to put a bow on this, what high-level 2 or 3 thoughts would you leave with the M&A Unplugged community?

GRATs, intentionally defective grantor trust, and family limited liability company structures are imperative. Family limited liability structure allows you to not only get it to the next generation but also to get the discounting necessary. It keeps the power and the control of those assets with the matriarch and patriarch without including it in their estate. The world is becoming more international too. I would recommend people make sure that they’re disclosing any offshore assets. We’re seeing a number of those issues come up with regards to people who don’t report it. The IRS comes in and takes a large chunk of those assets. It’s disclosure issues, tax issues, asset protection. You have to start with that core estate plan so that people understand it. If for no other reason, take care of yourself individually too. Who’s going to make that decision with regards to healthcare decisions if you can’t make those decisions or property? What happens to your business if you pass away? It’s those types of things.

It’s not just a tax or an income issue. It’s who’s going to take over and be responsible, even know what to do in the event that something’s happened. Let’s face it, none of us are getting out of here alive and it’s that idea that we have to plan for not necessarily the unknown because we’re all going to pass away, but plan for the known. Those things that we can check off our list, whether it’s lawsuits, divorces, taxes, and the type of planning that we can put in place to make sure that everything’s going to where people needed to go.

Eric, thank you so much for being here. If people in the M&A Unplugged community wanted to get in touch with you, how could they reach you?

It’s www.HandlerThayer.com. My last name Kalnins is quite uncommon, so by putting that into a Google search it comes up pretty quick, but we’re very accessible. The email address is on my website as well as my background. Thanks, Domenic, for having me here. This is a great conversation and it’s information that we need to get out to everybody out there.

I’d love to have you come back again as things unfold here. We know more about what’s happening and the picture becomes clearer with post-pandemic, hopefully, new world order.

That’s a good way to put it.

Death is just right around the corner, whether it's an accident or not. Click To Tweet

If you would like to learn more about the process of acquiring or selling a business, please visit our website at SunAcquisitions.com or feel free to reach out to me at [email protected]. I look forward to seeing you again in the next episode. Until then, please remember that scaling, acquiring, or selling a business takes time, preparation, and the proper knowledge.

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About Eric Kalnins

MAU 52 | Estate PlanningMr. Kalnins practices primarily in the areas of business structuring, tax (domestic and international), estate planning and litigation with regard to each of the foregoing. He is also experienced in the creation and implementation of advanced estate planning techniques for high net-worth clients including the formation and operation of family limited liability companies and family office structures.
In addition, Mr. Kalnins is actively involved in the firm’s asset protection practice consisting of the planning and implementation of domestic and offshore entities and trusts. Mr. Kalnins is a licensed attorney in Illinois, Wisconsin, Arizona and Ohio, and is also currently a member of the trial bar for the Northern Federal District Court of Illinois and the United States Tax Court. His litigation experience greatly complements the firm’s tax controversy work at all stages of audit, appeals and Tax Court proceedings.

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