Protecting and Preserving Wealth – Estate Part 6 Audio

Speakers: Jon Gay, Bruce Hosler, & Jason Hosler.

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Jon Gay (00:08):

Welcome to Protecting and Preserving Wealth, I am Jon Jag Gay. I’m joined by Bruce and Jason Hosler, of Hosler Wealth Management. Always good to be both with you gentlemen.

Bruce Hosler (00:15):

Great to be with you, Jon.

Jason Hosler (00:16):

Good to see you, Jon.

Jon Gay (00:18):

And today’s the sixth and final portion of our series on Estate and Legacy Planning. We are talking about the two-generation tax-free legacy plan. Bruce, I know this is something that you specialize in at Hosler Wealth Management. We’re going to start at the beginning with the most important question, what is it?

Bruce Hosler (00:35):

So, Jon, in my book, Moving to Tax-Free, a year ago, March 28th of 2024, I introduced the book, and we introduced the two-generation tax-free legacy plan with the introduction of the book. And the first chapter of the book is titled The Most Important Question.

So, let me ask you the most important question: if you look into the future of the United States over the next 10 years, do the tax rates stay the same? Do they go lower, or do they go higher?

Jon Gay (01:05):

Okay, I haven’t read your book yet, but I feel like I’ve got an unfair advantage because I’ve done a number of podcasts with you at this point, Bruce.

So, I think I know the answer here, and that is for reasons you’re about to explain, those taxes are almost certainly going up.

Bruce Hosler (01:18):

And it doesn’t matter for what I’m going to explain, it matters for what you believe, folks. So, our listeners and what your belief window is, is what do you think is going to happen? And Trump is promising that he’s going to get the Tax Cuts and Jobs Act extended, and it looks like there’s a good chance he will.

So, some people may be vacillating right now. Well, I don’t know if they’re going to be higher in 10 years, Bruce, but the issues that I’ll bring to bear for people to see that is the Medicare Trust fund runs out in 2031, the Social Security Trust fund runs out in 2033. And when that happens, everybody receiving Social Security, if they don’t make changes, will likely have to receive a cut in benefits of 23%.

And so, we either have to raise taxes to pay for that or cut benefits. When a politician is put in the spotlight, are they going to raise taxes or cut benefits? I think they’re going to raise taxes. What do you guys think?

Jason Hosler (02:13):

I think they’re going to raise taxes. I mean, look back at the last time Republicans tried to mess with Social Security under George W. Bush, and that was a huge fiasco for the GOP. And you bet that they learned from that lesson. And it seems like Trump is going after the tariffs as a way to try and balance the trade deficits without having to touch the entitlement side of the equation.

Jon Gay (02:35):

Nobody wants to be the politician, regardless of party, that is pulling back Social Security checks from grandma and grandpa or folks that are on fixed incomes or even folks that are more financially secure, you don’t be the person taking money out of their pocket.

Bruce Hosler (02:50):

Absolutely. And because of that, this whole tax-free legacy plan becomes very important for parents that are wanting to leave a tax-free legacy to their children.

Jason Hosler (03:03):

Now, you got to remember, Jon, this strategy is not going to be for everyone. It is best implemented by families that got at least $2 million or more of investible assets to be able to carve off a portion of that inheritance that they’re planning on leaving, and be able to give these benefits to their heirs.

Bruce Hosler (03:23):

It’s not for all of your money folks. When you pass, you have the choice of how you’ll leave it. And so, there’s some dilemmas you face when you’re trying to leave a legacy to your children. And these dilemmas include if you give it away to an irrevocable trust, now you’ve given away the control and actually the ability to use those assets yourself. So, that planning is not very attractive to some people.

Number two, the primary goal that we find many clients are seeking is that the parents want to enjoy the money. They want to enjoy it tax-free themselves if possible. That’s why it’s a two-generation tax-free legacy plan. Mom and dad get to enjoy these tax-free benefits first and then they leave the benefits to the children.

Now, a secondary goal would be to leave the tax-free benefits to their children instead of leaving a big tax bill if mom and dad believe that the taxes are going to be higher. And think about it, when you pass away in your eighties or nineties, how old are your children? They’re in their sixties or maybe seventies, probably in some of their highest earning years. So, now, you’re going to leave them an IRA that’s going to be taxed at this huge rate – that’s very unattractive for many families.

And then finally, the thing that just kind of put the nail in the coffin was the SECURE Act and SECURE Act 2.0 where they have caused the IRA and the Roth IRA to be forced out when you die. And what I mean by forced out is when you die, your children have to distribute that money within 10 years.

Now, if it’s an IRA, you’re going to force them to take it all out in 10 years. What if they wait years one through nine and then in the last year, if you leave a million-dollar IRA, what a tax catastrophe that could potentially be! And even if it’s a Roth IRA, they take it out, but then where do they shelter it? Now, they’re going to have to re-reposition it and it’s going to be taxable.

So, these are issues that families are facing and that’s what the two-generation tax-free legacy plan addresses.

Jason Hosler (05:32):

With that changing landscape of these rules that apply to IRAs and options that people have for leaving a legacy, there’s really just two choices. You can just leave the money to your children outright without any tax or financial planning being applied. So, the kids get it, likely they’re going to be paying a lot of taxes. It may or may not work out well for them depending on the level of planning that you do.

But if you create legacy planning, your other option is to actually use tax planning, financial planning, using potentially living or irrevocable trust. Depending on your individual situation, you can leave some of the inheritance that is asset protected- that’s a tax-free income stream for life and still have the benefit of using it while you are alive during your retirement.

Jon Gay (06:23):

I’m going to put a second qualifier on here. We talked about at the beginning, this is for families with assets $2 million or more.

I think the second qualifier I want to put on is this is for parents who like their kids and actually want to do right by them in the future. Because if you don’t care and you want to let them figure out the taxes and kick that can down to them, so be it.

So, this is for $2 million in assets, plus you want to take care of your kids financially, right?

Bruce Hosler (06:46):

Jon, that is a great insight because we run into people, they love their kids, but they’re like, “Look, I’m leaving them the money, they can afford to pay the taxes on it. I don’t want to be bothered with it, I don’t want to try and control it. Give them the money, their inheritance, let them do that.” And some people feel that way.

Other people are like not only no, but heck no. I worked so hard for that money; I don’t want it going to the government. And I love my kids like you say, and I want to try and take care of them. What were you going to say, Jason?

Jason Hosler (07:19):

Well, I was just going to say it is exactly a spectrum like that. You have people at the one end who want to spend all their money that are not interested in the legacy planning all the way over to the other side, where you have the widow saving her last two dimes to be able to give a better life for her children. And most people fall somewhere in between those extremes on the spectrum.

And so, depending where you are on the spectrum, different parts of the planning come to bear. The thing about the two-generation legacy plan though, Jon, is that for most people on that spectrum, they do have interest in avoiding taxes, in giving asset protection to their children.

So, if you have a sizable portfolio and you know you’re going to leave an inheritance, it makes sense to explore this concept because however much of your portfolio you want to have asset protected as a tax-free income stream, you can adjust that dial up and down depending on your particular situation.

Bruce Hosler (08:17):

Jason, that’s really important. And I want to point this out to our listeners. Folks, this is not for all of your money. There is going to be a large portion of your money that you are going to leave outright, let’s say as a beneficiary of life insurance or a beneficiary of an IRA or a Roth IRA.

This is where we’re going to carve off maybe 25, 30, 40% of the money that you want to leave and do some specific planning with this for your children. What am I talking about, that kind of planning? Well, we’re talking about leaving a stream of income, not a lump sum.

So, this big chunk of money, you’re going to leave that as a lump sum and the kids can go buy a house or go on a vacation or buy a car, do whatever. We’re talking about providing a life preserver for your children that will last their entire life.

Jon Gay (09:15):

I know the four key words here as part of this plan that you deal with at Hosler Wealth Management are tax-free income stream. That is the important point, right?

Bruce Hosler (09:25):

Very important. Let’s talk about that. So, tax-free means no taxes for federal taxes, no taxes for state taxes, no capital gains taxes. And very importantly now, right now, Social Security can be taxed. And that is calculated based on provisional income, which includes one half of your Social Security benefits. But if you have too much money or you make too much money, then your Social Security is taxed.

Now, Trump says he’s going to make that tax-free, maybe that’s not such a thing. But for our definition of tax-free, we want to generate income that is not calculated against your Social Security and makes your Social Security taxable. That qualifies it as tax-free. Now, it has to be an income stream for life.

So, it has to be capable of generating this income every year while you’re alive, and then every year planned for the entire life of your children until they’re a hundred years old. And when they die, then there’s a benefit that either goes to their spouse or your grandchildren that is also tax-free.

So, we have taken this whole move to tax-free, and we’ve applied it to your family for a couple of generations.

Jon Gay (10:38):

Alright, so asset protected. Explain that piece of it.

Jason Hosler (10:41):

So, asset protection is something that in a lot of people’s cases, they can’t go and get themselves. If you create a living trust for yourself, that does not provide you asset protection. But when you die and your living trust becomes an irrevocable trust, that trust, as long as it remains in perpetuity, provides certain types of asset protection from bankruptcy, from divorce, from lawsuits, from creditors, from business failures.

Your children cannot go out and buy that kind of asset protection for the inheritance that you’re leaving them – only you can. So, if you’re concerned about that and you want to leave a legacy, you should know that that type of asset protection is only available when parents do the work to provide that to their children. They can’t go out and get that on their own, the way our legal system is set up.

Bruce Hosler (11:37):

So, very importantly here, folks, on asset protection; it’s really good if your kids get overextended and they have to file bankruptcy or they fail at a business or most importantly, if they get in a car accident. But what the parents are really concerned about, Jon is, they worked in scrimped their whole life, and that no-good daughter-in-law that they never liked, she divorces their son and then takes half of his inheritance in a divorce. And they don’t want that to happen.

This can guarantee that they leave their inheritance to their children along their bloodline. The son-in-law or the daughter-in-law that divorced their child cannot steal the inheritance away from their children.

So, it’s asset protected. It’s protected against the potential divorce, and here’s this income stream, if they get in a car accident or something happens and they’re sued and they lose their house and they lose other stuff, they don’t lose this stream of income. So, this is a life preserver, and maybe it’s 30, 40, 50, a hundred thousand dollars a year. They’re providing this stream of income that’s tax-free to their children.

If their children, let’s say it’s 30, 40, $50,000 plus their Social Security that they get on top of it, whatever other retirement, they’re making sure that their children will never be homeless or desolate. They’re putting out a life preserver, as I say, for their children for the rest of their lives in ways that you can do no other way.

Jon Gay (13:08):

I’m really glad you threw son-in-law in at the end there, Bruce, because we all know it’s not just daughters-in-law, it’s sons-in-law too.

Bruce Hosler (13:15):

It’s sons-in-law and daughters-in-law. It goes both ways.

Jon Gay (13:18):

Okay, so as we wrap up here, gentlemen, how do people find out if this type of planning is going to work for them in their specific situation?

Jason Hosler (13:25):

Well, we need to sit down and we need to actually take a look and understand someone’s situation, their portfolio, their goals and dreams, what they’re trying to accomplish while they’re still here in this life and what they want to do for their children.

There is a lot of different disciplines that go into this planning. You have the legal side of it and the trust law. You have tax planning and tax law. You have investments and investment management that goes into it. There are a lot of moving parts, and you have to make sure that they’re all working together in a unified plan.

Jon Gay (14:01):

Very good. And if somebody wants to come talk to the team at Hosler Wealth Management, this is their specialty. This is what you do Bruce; you literally wrote the book on this. How do they find you?

Bruce Hosler (14:10):

I did, yeah. They can reach us at the website at hostlerwm.com. Or certainly down here in Scottsdale, they can reach us at (480)-994-7342, and in Prescott …

Jason Hosler (14:23):

And up in Prescott, you can call us at (928)-778-7666.

Jon Gay (14:28):

And again, the book is Moving to Tax-Free. I’ll put a link to that in our show notes. And gentlemen, we’ll talk again in a couple weeks. This has been a great series on Estate and Legacy Planning. I’d encourage you to check out the first five parts, go back and listen to those as well. Take care guys.

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Bruce Hosler (14:42):

Thank you, Jon.

Jason Hosler (14:42):

Thank you, Jon.

Disclosure (14:43):

Investment advisory services are offered through Mutual Advisors, LLC DBA Hosler Wealth Management, a SEC registered investment adviser. Securities are offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Advisors, LLC and Mutual Securities, Inc. (collectively “Mutual Group”) are affiliated companies. Forward-looking commentary should not be misconstrued as investment or financial advice. The advisor associated with this podcast is not monitored for comments and any comments should be given directly to the office at the contact information specified.

Any tax advice contained in this communication, including any attachments, is not intended or written to be used and cannot be used for the purpose of 1) avoiding federal or state tax penalties,  2) promoting marketing or recommending to another party any transaction or matter addressed herein, and 3) Tax preparation and accounting services are offered independently through Hosler Wealth Management Tax Services. Any tax advice provided by tax professionals under Hosler Wealth Management Tax Services is separate and unrelated to any advisory or security services offered through Mutual Group. The accuracy, completeness, and timeliness of the information contained in this podcast cannot be guaranteed. Mutual Group does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation. Accordingly, Hosler Wealth Management does not warranty, guarantee or make any representations or assume any liability with regard to financial results based on the use of the information in this podcast.