Generational Wealth Strategies Every Real Estate Investor Must Know – With Estate Attorney Julie Martiniello

Christian: [0:01] Hello, hello, and welcome to another episode of the Awesome in Seattle podcast. This is your host, Christian Awesome, and today I have some amazing guests with me. On one side, I have my beautiful wife and co-star today, Shannon Awesome.

Shannon: [0:14] Hello, hello.

Christian: [0:15] And on my right, I have another beautiful woman who is here, not my wife, but she's an attorney at Dimension Law, Julie Martiniello.

Julie: [0:25] Yes. Hello. I'm happy to be here.

Shannon: [0:27] We are super excited to have you, Julie. Today, we are gonna talk about estate planning and generational wealth, how to transfer your wealth properly. I know as real estate investors, we have three kids, we're always thinking about, all right, we're working so hard to get all these properties, and then how are we actually giving these to our kids? Or how is your family gonna give you the properties they own and not have a huge tax burden? So that's kind of what we're talking about today. If you're trying to build a portfolio or if you already have one, this is a good episode for you. Or if you just have bought your first house, should listen in and find out what you should do to keep that in the family and keep it, hopefully, not a lot of taxes.

Christian: [1:05] Exactly.

Shannon: [1:06] We like

Christian: [1:06] that. I mean, if you're in real estate, you're probably always focused on the current, like the cashflow, the future appreciation, sometimes tax benefits and leverage, but what happens if you suddenly pass away, or if your assets aren't structured in a way that maximizes taxes and minimizes generational wealth? And that's why-

Shannon: [1:25] Yeah, we wanna talk to Julie. So Julie- Yeah … tell us about your background. What do you do, and how did you get started in estate planning?

Julie: [1:33] Yeah, that's a great question. I kind of always wanted to do estate planning. It's the main reason I went to law school, and I met my business partner there. So we co-own Dimension Law Group. Awesome. We went to Seattle U. Awesome. So we're in… I'm on the Seattle podcast and, you know- Yes … from Seattle. Been here my whole life. And our firm does a lot of real estate law, estate planning, land use, all of that fun stuff. And so most of our clients are real estate investors. So on the estate planning side, we get to bring that knowledge of taxes and all that fun stuff. So I'm really excited to talk about this. It's really what I'm passionate about, and helping families kind of pass things along without the government having too much involvement.

Speaker 4: [2:19] Mm-hmm.

Shannon: [2:19] Yes. And Julie's amazing. We've talked to her numerous times about our own estate planning- Yes … so we know her depth of knowledge, and, uh, we wanted to share it with everybody. Okay, so why should investors care about having estate planning?

Julie: [2:32] Yeah. Investors, um, I mean, everyone should care about estate planning because whether you think you have an estate or not, you do. And your default if you don't do anything is what the government's written down, right? Mo- And most of my clients don't like the government involved in their affairs. But for real estate investors in particular, there are really big tax implications if you don't plan properly. So we're not just talking about, "Oh, well, this is where my assets go." We wanna do more planning because we have taxes, both estate taxes, capital gains taxes, and then also these are investments that you've spent time building, and that if you're wanting to pass them on to your children or your family, really using the right tools to do that to avoid fighting complications and additional taxes. Mm.

Speaker 4: [3:24] Okay.

Christian: [3:24] What are the three main areas that people need to focus on and the s- kind of the three strategies that people use to do this?

Julie: [3:31] Yeah, for most of my real estate clients, and, and I'll do my caveat that I am an attorney, but- Mm-hmm … every single person's situation's so differently. So everything I say here today in terms of strategies may or may not work for you. You would have to, you know, i- get your, get real legal advice for your specific situation. But a lot of my real estate clients' trusts are gonna be a big portion of what we're doing in terms of con- you know, passing things on with control, and maximizing tax strategies. Mm-hmm. And then using other tax strategies involving gifting, step-up in basis, 1031 exchanges, and, and weighing those against the estate tax issues that we run across. And then for my clients who really have businesses that they're passing down to their family, setting up, like, family partnerships or family limited liability companies i- is one of my favorite strategies for passing on generational real estate wealth.

Christian: [4:34] Awesome. So I'm hearing trusts- Tax efficient transfers, like 1031 exchange, gifting exchange or strategies. Mm-hmm. And then the third one is family entities, family partnerships- Yeah … whatever. Those are the three things. Yeah. Okay, let's break that down. And first, let's talk about trusts. Yeah. 'Cause I know I've heard irrevocable trusts- Mm-hmm … I've heard revocable, I've heard, I think, family tru- I don't even know all the things. So let's, let's go over those and explain those so that people can understand better.

Julie: [5:01] Yeah, and tru- I, I get people all the time that say, "I need a trust." And, and the first thing is, "Well, who's telling you this?" Maybe, a lot of times it's Suze Orman. But, you know, also, what kind of a trust? There's two main trusts that we use in, in the estate planning and real estate world. It's a revocable trust and irrevocable. Revocable trusts are where we put your assets into a trust that you own, that you control, and gives you the ultimate flexibility to still do what you wanna do with your assets. And the main purpose that we do a living trust is so that y- we avoid probate when somebody dies. And for those who don't know what a probate is, it, that's when someone dies, you have to go to court and go through a full process to deal with somebody's estate when they die. Mm-hmm. So we wanna avoid probate and keep things private. Revocable living trust is kind of our first tool that we use. Irrevocable trusts are a bit more of an advanced planning strategy that you would do on top of or in addition to a revocable trust. Irrevocable means you can't change it. We set that trust up, it can't be changed. Mm. But the benefit is that what's in that trust does not, is not subject to estate tax. Irrevocable trusts can be used, you know, in certain circumstances. The main issue with them is that you as the person making that trust, in order to get that tax tra- uh, benefit, you don't get to be in control of the asset anymore. Mm. Well, and, and you really don't get a benefit from it. So we use it in certain circumstances, like for spouses when one spouse dies, for life insurance, and then sometimes for real estate.

Christian: [6:51] Hmm. So it kind of sounds like a trade-off between the two, a revocable and an irrevocable. If an investor wants that flexibility, a revocable trust probably makes more sense. Is it, am I right in saying that if they're thinking long-term wealth pre- preservation, then an irrevocable trust combined with, like, a family LLC or something, does that make sense, or?

Julie: [7:12] Yeah. Yeah, with the re- ir- with the revocable trust, you know, I tell my clients, everyone, I, I love r- irrevocable trusts, especially if you have property in multiple states- Mm-hmm … because you don't want to have a probate in multiple states. Multiple states, yeah. Yeah. But yeah, when we're looking at, uh, particularly in the long term, like when one spouse dies, setting up some irrevocable trusts, uh, you know, because tax-wise, it's a better timing to do that. Mm-hmm. We're able to set things up long term for our family with an irrevocable trust. And then when we're bringing family into our rental business now, coupling that with a family LLC allows, you know, the investor to maintain control until they're ready to let go, but to get some tax benefits at the same time.

Shannon: [8:01] So just let me ask a follow-up question on the irrevocable. Mm-hmm. So if you did that, and then you decide, "I actually don't want this asset anymore," you can't, you can't sell it. You're kind of stuck.

Julie: [8:11] Yeah, well, normally with an irrevocable trust, to get that tax benefit other than a spousal trust, right, you can't be in control. So now you have a third-party trustee that you technically aren't supposed to be able to tell them what to do with it. Otherwise- I

Shannon: [8:28] see … Julie: it would be included in your estate. Mm. Now, there are, you know, a lot of times when we're using irrevocable trusts o- on a more simple tax planning basis, we're doing life insurance trusts because believe it or not, life insurance is subject to estate tax when you die. Or it, when I have, like, older individuals, sometimes we'll put their residence into a, what's called a personal residence trust, where they're ready to pass it down to their children. And then between spouses, when one spouse dies- Mm … if we put certain assets into a trust, the surviving spouse can actually manage those assets and use them. Mm. Yep. Okay.

Julie: [9:08] So we call that a bypass trust, and that is one of the best irrevocable tax planning strategies we can do, but you have to do it now. Before the first spouse dies- Oh … you have to get that structured- Mm … so that it's in place for the surviving spouse, and that helps us get essentially double our estate tax exemption when we die, if, when we have a married couple.

Shannon: [9:32] Oh, wow. Interesting. Okay. Well, let's talk about taxes a little bit- Yes … because I mean, this is- Everyone's favorite subject. This is what we … If we can save on it- Yeah … it's our favorite. When we can or not.

Christian: [9:43] Mm-hmm. Mm-hmm.

Shannon: [9:44] Okay, so taxes, huge concern for everybody.

Speaker 4: [9:46] Yeah.

Shannon: [9:47] What are the most effective ways to pass real estate to heirs and avoid this massive tax bill?

Julie: [9:52] Yeah. Yeah. So there's really two main taxes that we're concerned about when, with real estate, and then when somebody dies. One, all real estate investors, or I won't say all, probably everyone that listens to your podcast- … is aware of capital gains tax. Mm-hmm. Mm-hmm. So we have to look and say, "If we sell a property or gift a property now, what does that mean from a capital gains tax perspective?" Versus when somebody dies, there is estate tax, both at the federal level and unfortunately at the Washington State level.

Shannon: [10:27] Oh, really?

Christian: [10:27] And other states have their own as well, right?

Julie: [10:29] Yeah. No- Majority of states don't have estate tax.

Shannon: [10:33] Oh, really?

Julie: [10:34] Hmm. Yeah, but Washington is one of those states- We're so lucky that does. I know. Really? Yeah. ' Speaker: Cause we don't have income tax, maybe that's why. Yeah. There are, I think there are about six states that don't have income or estate tax. Hmm. But most of the time, you know, like California has income tax, but no estate tax.

Christian: [10:52] Got it.

Julie: [10:52] Same with Arizona. It's important, you know, federally right now, the federal exemption before you'll, you'd be subject to estate tax is about almost 14 million.

Speaker 4: [11:03] Mm-hmm.

Julie: [11:03] So as a married couple, you're at 28 million. That's pretty high. Mm-hmm.

Shannon: [11:07] Yeah, that's

Julie: [11:08] a lot. Um, and most people aren't concerned with the federal estate tax. Washington, unfortunately, is only 2.193 million. Wow. Yeah.

Shannon: [11:18] Yeah, I mean, for investors in the Seattle area, that's- Yeah, that's- Yeah … Speaker: that's like a house and a

Julie: [11:22] half. Exactly. A house or

Shannon: [11:23] two.

Julie: [11:24] You're gonna have your primary residence and one investment property. Mm-hmm. And, and the really unfortunate thing with Washington is that you don't get to share it with your spouse, so it's not-

Christian: [11:34] Oh … Julie: like federally, I said you get 28 million. Yeah, 'cause you're adding the 14 together.

Julie: [11:38] Mm-hmm. Yeah. Here, you don't get 4.4 million- Mm … unless we do that spousal tax trip planning that I was talking about. Oh. Yeah. I

Shannon: [11:47] see.

Julie: [11:48] Yeah. Okay. So, and, and, you know, the only good thing about Washington's estate tax is that it starts at a, at a 10% rate. Mm-hmm. So that's not the highest- Yeah … in the world. It does go up to 20%, but, you know, when we're talking about what, what are the strategies that we can, where we can gift our assets or die and give our assets to our children with limited tax, you know, it's, we wanna avoid estate tax, but if we gift an asset to our kids now, they are gonna retain what's called our basis- Mm-hmm our tax basis in the property, and they will have capital gains, very large capital gains tax issues if they sell. So we wanna look at, we'll talk a little bit about the step-up in basis- Mm-hmm … and what that means. And, and what is that? Real estate investors, when you buy a property for $200,000, if you go and sell that property for a million dollars, you will owe capital gains tax on about $800,000, that $800,000 gain. Mm-hmm. Mm-hmm. When you die- Your basis in the property gets a step-up to the date-of-death value. So if, you know, Christian passes away today, any real estate that he owned, we get appraised, and now if his heirs, whether that's Shannon or his children, go and sell the property, they won't have capital gains tax, and the depreciation also gets wiped out. Oh. So you're able- your heirs are then able to get that step-up in basis and sell a property with no capital gains tax.

Christian: [13:30] Mm-hmm.

Shannon: [13:31] Okay.

Christian: [13:31] That's huge.

Julie: [13:32] Yeah. So

Shannon: [13:32] you don't want to transfer things before- Before you die … you pass?

Christian: [13:35] Yeah.

Julie: [13:36] Yeah, I mean- In li- in limited circumstances, if you have a high basis property, you know, that's okay to gift Maybe not that big a deal Not that big a deal Yeah I

Christian: [13:46] usually- You bought it for 900 and it's worth a million now-

Julie: [13:49] Yeah, yeah

Christian: [13:50] you're paying

Julie: [13:50] tax

Christian: [13:50] on a mil-

Julie: [13:51] $100,000 Yeah Not that much Um, you know, cash is usually better to gift because we don't have that capital gains issue. The other thing is, because we're in a community property state, so this is really just for my Washington residents- Mm-hmm … if your real estate is community property, which most of my clients are buying these as married couples- Mm-hmm when one spouse dies, we get a 100% step-up in basis on the full property. Okay. So even if the property was in Christian and Shannon's name, Chri- I always make the husband die first. Christian-

Christian: [14:24] You're gonna die first. I mean, I think that is how it normally goes. It is Like, technically, like- Most- … on average

Julie: [14:29] women outlive men

Shannon: [14:31] You're much older than me,

Christian: [14:31] so- I'm so much older than you You're, like,

Shannon: [14:32] 18 months older,

Julie: [14:33] so Oh, yeah. Yeah, women outlive men, I think it's six or seven years on average. Mm-hmm. Yep. Um, but they, that property will get 100% step-up in basis, and now Shannon can sell the property if she doesn't wanna be an investor anymore, or that's a great time to then start looking at gifting to your children. Yeah. Okay. Because now you've got this great step-up in basis. Mm. You may be over that $2.1 million mark, even with a spousal bypass trust, right? So you may be at $6 million in assets when, you know, when Christian passes. You can gift a $2 million property to your children, and they've got that step-up in basis, and because Washington doesn't track gifts, we're now below that Washington estate tax threshold. Mm-hmm. And so you're, you can die without estate tax- Mm … and with minimal capital gains tax.

Shannon: [15:28] Oh, okay.

Julie: [15:28] Wow. Yeah.

Shannon: [15:29] That's a really smart way to do it.

Julie: [15:30] Yeah. Mm.

Christian: [15:31] My brain's going crazy right now.

Julie: [15:33] I know.

Christian: [15:35] Yeah.

Julie: [15:36] Right? It's a lot of information. I know. It is, yes. So many pieces w- especially with real estate.

Christian: [15:41] Mm-hmm.

Julie: [15:41] It's not as simple as I just gotta get below the 2 million, uh, so my kids don't pay tax. Because of, you know, I have clients that have bought property in Seattle for $75,000. Yeah. And that, that capital gains is just a huge issue. Totally. Mm-hmm. And so we just have so many pieces to work through with real

Christian: [16:02] estate. Yeah. This is why people need to hire Julia. I

Shannon: [16:04] know,

Christian: [16:04] go through all their things. Julia to, to help you, yes, exactly.

Shannon: [16:06] Can I… I'm gonna throw a random question out there- Yeah … for you. We have a lot of properties, and I think a lot of investors do, with partners. Mm-hmm. What happens if your partner dies?

Julie: [16:16] That's a great-

Shannon: [16:17] What do you do?

Julie: [16:17] great question. Yeah. So depending how they're owned, the first… You know, if it's owned in an LLC or as partnership, the first thing we're gonna do is look at that agreement, operating agreement, LLC agreement, partnership agreement- Mm-hmm … to say, what does it say happens when somebody dies? Mm. If we don't have an agreement, we, we default to state laws, which, you know, that person's heirs, whether that's who's named in their will or their trust, or if they don't have a will or trust, the state law, they b- step into their shoes. Okay. So you could end up being partners with your partner's spouse or children, which you may not want Most people in their operating agreements or partnership agreements will have some kind of a buyout provision that will say when one person dies, the surviving LLC members can purchase or, or can pay out the heirs. Mm-hmm. And this is how we calculate what we're paying them out. So you decide ahead of a time. Mm-hmm. Because what you don't wanna be, and I've had this happen, where people's children don't wanna continue the rental- Yep … and they're gonna force a sale, 'cause those kids don't get that ta- uh, capital gains issue, and now you guys are stuck-

Christian: [17:35] Mm-hmm

Julie: [17:35] with capital gains issues.

Christian: [17:37] Selling something that we don't even necessarily want.

Julie: [17:38] Selling that you don't wanna sell. Oh,

Christian: [17:39] yeah.

Julie: [17:40] Yeah. Right. Okay. Which you can do a 1031-

Christian: [17:42] Mm-hmm … Julie: for your portion of the proceeds. Mm-hmm. Got

Julie: [17:45] it. Okay.

Shannon: [17:47] Interesting. Yeah.

Julie: [17:49] Good question.

Christian: [17:49] I think that's a really good segue into our next section, which is 1031 exchanges.

Julie: [17:54] Yeah.

Christian: [17:55] So I think a lot of our listeners already know what a 1031 is and how they can use that to grow your portfolio. But let's, let's break it down real quick for those that maybe don't know. What, what is, what is a 1031 exchange?

Julie: [18:07] Yeah. 1031 is a way to defer your capital gains tax when you sell a real estate investment property by purchasing a like-kind property.

Shannon: [18:19] Mm-hmm.

Julie: [18:19] Um, or some of my clients who don't wanna continue to fully manage, they'll go and exchange into what's called a Delaware statutory trust. It's more of a hands-off investment.

Shannon: [18:30] Hmm.

Julie: [18:30] Pros and cons there-

Shannon: [18:32] Mm-hmm … ' Julie: cause you, you're handing your money over to- Somebody else … a trustee- Yeah … that's gonna manage it. You know, you're a silent investor now. Hmm. I have never even heard of that.

Christian: [18:41] Yeah.

Julie: [18:42] Oh, yeah. A, a lot of my, um, clients as they're reaching retirement don't wanna continue to manage rentals. Yeah. But they don't wanna- I

Christian: [18:52] don't wanna continue to manage rentals … pay capital I

Speaker 4: [18:54] was about to say, am I reaching retirement?

Christian: [18:56] I think we're close. Yeah, we don't either. We

Speaker 4: [18:58] must be. We must be. I don't

Julie: [18:59] know how to answer. Hey, I wish I was approaching retirement. Um, yeah, so Delaware statutory trusts, I don't know who finagled this with the IRS, but what they are is a trust- Mm-hmm … you know, run by a company that purchases real estate, investment real estate, and they, uh, if, they get qualified to essentially be like-kind properties. So if you sell your rental and you put your money into a Delaware statutory trust, you know, a, a valid Delaware statutory trust, that qualifies for the 1031 exchange rules. Hmm. Again, the issue being that you don't really have any say over what happens, right? Yeah. And a lot of those Delaware statutory, the DSTs, that's what we call them for short- Mm-hmm have a shelf life, you know, of like three to 10 years. You have to really look into the one you're gonna invest in, and at that time they sell. And then you can, you know, 1031 into another one or another- Mm-hmm … rental property. Or something else, yeah. Yeah, but it's a good option for my clients who really wanna be hands-off and are okay trusting, you know, this company to manage their investment.

Christian: [20:17] Hmm. Interesting.

Julie: [20:17] Yeah. I've never heard of that. That was

Christian: [20:18] interesting. Me neither.

Julie: [20:19] Yeah.

Christian: [20:20] So the two things that we just recently talked about, 1031 exchange- Mm-hmm … and the step-up strategy. Yeah. Can you put those things together?

Julie: [20:29] Yes. Yeah.

Shannon: [20:30] Oh.

Julie: [20:30] And, and, and especially wi- with the Delaware statutory trust, my clients will do that. They're ready to retire, they don't wanna sell, and then they hope that sounds bad, they hope they'll die. Oh, no. Well, you know, while they're still owning it because even on a 1031 exchanged property, you still get that step-up in basis when you die.

Christian: [20:51] Hmm. Oh,

Julie: [20:52] wow. So at that time, that new property that you own gets the step-up in basis- To the date of death value. So even if you've done two 1031 exchanges, you still get that full step-up. Mm-hmm. And so then your kids can inherit that new property- Mm-hmm … or your interest in that DST, and be able to sell the asset if they want without capital gains, or they can always choose to retain it. So a lot of my clients, especially like, uh, we talked about Washington's estate tax being so low, they'll 1031 their Washington rental into an Idaho rental.

Christian: [21:28] Mm-hmm.

Julie: [21:29] Oh. Because if it's an out-of-state property, it's not subject to Washington's estate tax.

Christian: [21:34] Interesting.

Julie: [21:35] Smart. And so, and they'll do that until they die. So swap till you drop.

Christian: [21:40] Mm-hmm.

Julie: [21:41] Uh, and then you get that step-up in basis. Yeah. And then your heirs have just more options available.

Christian: [21:48] Mm-hmm.

Julie: [21:48] Yeah.

Shannon: [21:48] So an investor can keep exchanging properties through their life, and then basically just defer that tax.

Julie: [21:56] Yeah.

Christian: [21:56] Until they die.

Shannon: [21:57] Until they die. And then it goes

Christian: [21:57] away, and then- Wow … their kids inherit a- Yeah … property- Yeah … capital gains tax free.

Shannon: [22:02] Yeah. Swap till you drop. Okay.

Christian: [22:03] Mm-hmm.

Shannon: [22:04] That's

Christian: [22:05] funny. Love

Shannon: [22:05] that. Okay, so you work with a lot of investors. Yeah. What are the big mistakes you see people making? What's like the most common thing with their estate planning?

Julie: [22:12] I mean, not having anything in

Christian: [22:14] place. I was about to say- Not- … probably not having anything. That'd be step number

Julie: [22:17] one. You, you would be surprised at the number of people who don't have anything in place, and that's for a number of reasons. People don't like to talk about death, and I, you know, I, I do speaking events, and I al- I usually open up by saying, you know, uh, nothing in life is certain but death and taxes. Mm-hmm. Mm-hmm. And we know that, and we might not know exactly what the taxes are gonna be on the date that you die, but we know it's gonna happen, so we need to plan for it. So number one, at a minimum, just getting your basic estate plan in place. And then sometimes I have people, they'll just do like an online will and think that they're fine. I have had instances where people don't have powers of attorney, which a power of attorney is where you appoint someone to manage your affairs if you're incompetent. Mm-hmm. And think about if your father was in the middle of a 1031 exchange, you, we have a limited amount of time to complete that, gets in a car accident, and nobody has the power to sign those closing documents. We have to go through a court guardianship, which is much worse than a probate. Mm. It's expensive. It's timely. So getting those basics in place, that's number one. Okay. Yeah.

Christian: [23:30] Okay. So we have in our area, the Greater Seattle Metro Area, a lot of people that are not always citizens yet, that are also investors. We have lots of clients that are like this.

Julie: [23:43] Mm-hmm.

Christian: [23:43] Um, how can they plan their estate i- when they own property here? Does, does not being a citizen change things for them?

Julie: [23:52] Yeah, that's a, that's a really good question, especially this year. Things are, are- Yes … getting sh-

Christian: [23:58] And we'll talk

Julie: [23:58] about that in a second too

Christian: [23:59] shook up a little bit. Yes.

Julie: [23:59] Um, yeah. So i- there is a big difference between somebody who is, has residency in the United States- Mm-hmm … uh, versus somebody who doesn't. So whether you're a citizen or not isn't… It is, there's a concern in terms of, uh, we talked about those spousal bypass trusts. If once, if a spouse isn't a citizen, we have to write those in a special format. Mm. But if you're a permanent resident and you have residency here, you get the same estate tax, uh, rules as citizens.

Shannon: [24:32] Oh, okay.

Julie: [24:32] If you are not a resident, a legal resident, your estate tax exemption at a federal level is s- is about 60,000, I think. It's very low. Ooh.

Christian: [24:44] It's like nothing.

Julie: [24:44] Yeah, and same with gifting, and I, you know, when I talk about estate tax, the, the same rules apply to gift taxes- Mm when we gift something. So in those instances, it's really hard to plan, and i- and we usually are, are gonna be working with immigration attorneys as well to see, like, w- what options do we have here? But for most of the, you know, individuals that, uh, are real estate investors, they're, they usually have legal status here and residency. Mm-hmm. So it's not too big of a concern.

Christian: [25:16] Okay.

Shannon: [25:16] Oh, okay.

Julie: [25:17] Good. Yeah.

Shannon: [25:17] Great. Do you ha- do you have to update, this is another question we get from people. Yes. So real estate investors are, are busy people. And so oftentimes, this is what I've noticed, we like to put off, and I say we 'cause it happens to us too. 'Cause this is

Christian: [25:31] us, yeah.

Shannon: [25:31] We put off paperwork-related things, taxes, estate planning. Mm-hmm. Because it's not as fun as buying a new flip- Yeah … or picking the tile or whatever. So oftentimes, these kind of adulting paperwork things get on the back burner. When you a- add a child to your family, do you need to redo all of your estate planning?

Julie: [25:50] That's a good question, and that's gonna depend on w- how your estate plan was written. Typically, no. If you've done good estate planning, it should be written in a way that will include future children and include future assets. So y- you know, my wills and trusts have a thing about after-born children. Some of my clients still feel bad if their kid's name isn't actually in the trust.

Shannon: [26:17] We did. We did. Yeah. We redid stuff. We forgot- Even though it said that … for, like, three years, we forgot- Yeah … our last child wasn't in there, and we were like, "We should just- Yeah … change this." Sure.

Julie: [26:26] I- and- and if- She'll be sad and if your will doesn't have the language that includes future children, they are entitled to, uh, rights under the state laws, like an omitted child. But yeah, I mean, assuming you have a good estate plan in place, it should have the language where you don't need to update it. But yeah, just so you don't feel guilty Yeah. I know. Sometimes it's nice to just have that child's name there. Have all, all the

Christian: [26:49] kids' names on there. Yeah.

Julie: [26:51] Yeah.

Christian: [26:51] Yeah. Yeah.

Shannon: [26:51] Yeah. I assume the same, uh, for if you add properties or add other assets in general, you don't need to make an update 'cause it says all the things you own, or does it just depend on what kind of estate planning you have?

Julie: [27:03] Yeah, it'll depend on the type of estate planning. Generally, I, like in wills, I don't list this asset, that asset, because we're just gonna talk about our assets as a whole, whatever they- Okay … may be. Mm-hmm. Where adding assets may require updates is if your wealth is growing to a level where you need to do additional tax planning, or if you have, like, a living trust, your assets need to be in that trust for that trust to have its value. I have some clients where they will purchase a property and not purchase it in their trust. They'll purchase it in their name, and if they die, that property will have to go through probate. So- Okay Mm … um, I usually follow up with my clients every five years, and, and sometimes we do those corrections. Mm-hmm. Like, okay, let's get that property in the trust, or the easiest thing to do when you're purchasing the asset is to purchase it in the trust so you don't have to pay to do it later.

Christian: [28:02] That said, it's sometimes tough to purchase it in a trust- Yeah … because you can't get the mortgage, 'cause the mortgage- Yeah has to be in your personal name, so you can- Mm-hmm.

Shannon: [28:09] Yeah, does the mortgage company care if you transfer into a trust?

Julie: [28:13] Yeah, that's a good que- yeah. Mm-hmm. 'Cause with due-on-sale clauses- Yeah … especially as interest rates have gone up, that is a concern.

Christian: [28:20] Mm-hmm.

Julie: [28:20] Especially, I have clients where they can't move their properties to their LLCs. Yep. Transferring most property, you are federally allowed to transfer it to your own living trust- Without triggering the due-on-sale clause. The exception is if the, there are four or more units in the property. Mm. So if you have an apartment building- Got it. Yeah … a lot of times we wanna get lender approval. But if you have single family homes, duplexes, it's called the Garn–St. Germain Act- Mm-hmm … and it, it allows investors t- or, or individuals to gift property to their immediate family members, transfer to their own living trust. And then if you have a federally backed mortgage, a Fannie Mae, Freddie Mac, you can transfer to your own LLC. You still, we still like to involve the lender in that, but they have to allow you to transfer to your own LLC.

Christian: [29:18] Hmm.

Shannon: [29:19] Okay. As long as you're not changing ownership. Like, if the LLC is owned by three people and the property's owned by two- Yeah … that would be a problem.

Julie: [29:26] Exactly. Okay. Yeah, you have to be the owner and manager.

Christian: [29:29] What if, I'm throwing a wrinkle in this, what if, like, we have a couple properties that we have a partner on-

Julie: [29:34] Mm-hmm … Speaker: we currently have them all in our own individual name, which we don't want to- Mm … 'cause we were worried about-

Shannon: [29:40] Not all, but there's one. Yeah … Speaker: one of them, yeah, worried about that transfer into an LLC. So if all three of us are a member of the LLC and we're the only three of the LLC, are we then allowed to transfer it into that LLC and out of our personal names without triggering the due-on-sale clause?

Julie: [29:55] Yeah, i- so if it was Fannie Mae or Freddie Mac, I think you'd be able to, but again, normally the lender is gonna ask for the LLC- Mm-hmm documentation to verify. Yeah. If it's not one of those backed mortgages, we, you n- wanna get lender approval. Approval

Shannon: [30:13] before

Julie: [30:13] you transfer. Yeah, and again, we don't see often where the due on sale is triggered for going into an LLC. Yep. Normally, when you update your insurance, sometimes the lender notices and is like, "Oh, well, why-

Christian: [30:26] Yeah

Julie: [30:26] has the insurance changed?" But we've seen it happen more in the last couple years.

Christian: [30:32] Yes, with interest rates- Yeah … increasing and yeah. Yeah. I've, I've heard of it more in the last couple years- Yeah … whereas-

Julie: [30:38] It's still- … Speaker: previously, never really heard of it at all. Yeah, it's still not, you know, I don't, of all the- It's not super common transfers I've done, I, you know, I used to be able to say I could count on, like, one hand where my clients have had the lender say something, but probably in the last couple years, that's doubled. Yeah.

Christian: [30:55] So. Yeah.

Shannon: [30:56] One follow-up question on updating. So if you have life insurance, and your life insurance is, I think the beneficiary is your trust, correct- Mm. Typically. Yeah. If you update your will or change anything, do you also need to update the life insurance documents?

Julie: [31:11] Oh, no. So assuming that you're not changing the name of your trust- Mm … no. The way that we will typically update the trust is we keep the name the same and we will do, is called restate or amend the trust. So then the title to your properties, the beneficiary designations, they can all stay the same, because they are such a pain-

Christian: [31:33] Mm-hmm … Julie: to go through and update, i- especially the more investments that you have. Yeah.

Shannon: [31:38] Okay. Makes sense.

Julie: [31:39] Yeah.

Christian: [31:40] Let's talk about everyone's favorite topic, politics.

Julie: [31:44] Oh.

Shannon: [31:44] Okay. Second favorite to taxes, or-

Christian: [31:46] Yes maybe a first- Yes.

Shannon: [31:47] Well, they kind of intertwine.

Christian: [31:49] They do, for sure. With everything going on in the United States right now, with Trump being president again, there is a lot of upheaval going on- Yeah … with taxes and literally everything. What is on the horizon that m- is or isn't being talked about that maybe we should be paying attention to?

Julie: [32:08] Yeah. Well, a couple… In terms of, you know, like-

Christian: [32:11] Based on what we're talking about today.

Julie: [32:13] Right. Yeah. Yeah.

Christian: [32:14] We'll narrow this down real small. That could be- There's a lot of things … a loaded question. A very loaded question. Yeah. Let's talk about what we've talked about today.

Julie: [32:20] Yeah. So, you know, in terms of for real estate investments and death, right? Mm-hmm. Um, we, the main thing we're concerned about is estate taxes and step-up in basis, right?

Christian: [32:30] Yep.

Julie: [32:30] So I don't see the step-up in basis going anywhere. The last presidency, there were some things trying to get passed through Congress, but they failed because I think if you take away the step-up in basis, it, it's, it's a nightmare logistically- Yeah for everybody. Yep. Right now, I said e- at a federal estate level, you get about 14 million per person where they, you, you're not subject to estate tax. That law is supposed to sunset at the end of this year- Mm … and revert to what it was before, which it used to be five million per person. If we go with inflation, that would reset us back to seven something million per person.

Christian: [33:19] Mm-hmm.

Julie: [33:19] Given that everything's Republican-controlled right now, I don't see that happening.

Christian: [33:26] Mm-hmm. Mm-hmm.

Julie: [33:26] I, I can't imagine that they'll let the estate tax go lower, but we don't know. Yeah. Right? Until, until we start to get closer to the fall or start to see what might be going through Congress, but that's something to know, and for my clients that are above 14 million, if, if we don't think that there's gonna be a stopgap, it's a good time to gift, which then we figure out what assets are worth gifting.

Speaker 4: [33:50] Yep.

Julie: [33:51] At the Washington state level, I used to say, "Oh, that 2.193 million's not going anywhere." There was actually just a hearing a couple weeks ago where they are talking about raising that exemption to about three million.

Christian: [34:07] Mm.

Julie: [34:08] But instead of the tax rate starting at 10% and capping at 20, I think the tax rate would start at 16% and go up to 36%. Oh, wow. So- If you are, you know, 6 million or below, fine. Um, but I, we don't know if that's gonna pass. The issue is, is that that 2.193 million has not been growing with inflation- Uh-huh … due to a mistake in h- like how the- How it was written … how it was written. Yep. It used to go up with inflation, it stopped. So we don't know. The, we'll know hopefully more in the fall. Yeah. But something to be on the lookout for, especially if that federal exemption's gonna tank or if the Washington rate's gonna go up. I mean- Mm … those are the kinds of things that I see as- Yeah … potentials this year.

Christian: [34:55] And this is why we pay to have someone- like Julie to- Advise us … advise us on what to do. She pays attention to all that stuff so that you don't have to, 'cause you, as an investor, have a lot of other things on your plate. You don't need to pay attention to this stuff. So- Yep … lean on your experts. That's why we have her here.

Shannon: [35:13] Thank you. Um, one other question to throw out there for you, you were talking about gifting, so if we have, if we wanna gift something to children, like what is the amount that you can gift right now?

Julie: [35:24] Oh, yeah. This is interesting in terms of what you can gift without paying taxes- Mm-hmm … and what you can gift without reporting. Washington doesn't track gifting. Mm. That's the, the big silver lining to- That's crazy. Yeah … Washington's estate tax. Federally, every time you gift, it eats away at that $14 million exemption, so if you gift a million dollar, you give a check for a million dollars or a home to your kids, now when you die, you can only die with 13 million instead of 14 million. How does the government know that you did that? When you gift over $19,000 to any individual in a calendar year, you're supposed to tell the federal government- Mm. "Hey, I made this gift." Anything 19,000 and under, and for spouses, you can double that, right? I was about to

Christian: [36:14] ask

Julie: [36:14] that, yeah. So you could give each kid each of you $19,000. Is that 38,000? Yep. Yeah.

Shannon: [36:19] Mm-hmm.

Julie: [36:20] Um, and then grandkids, I, I mean, me, you could give me 38,000. Um, but, you know- And- … uh, without reporting it- Yeah … nobody needs to know. Yeah. It's once you gift more than that, you're supposed to do a return, a, a, a gift tax return filing, to let the government know you made this gift. Mm-hmm. But- If you have not gifted more than your 14 million exemption in your lifetime, you don't actually pay tax on it. So it's just an informational filing until you use up your exemption. So- Interesting … there's kind of, when we talk about the gifting, there's the two, and then of course there's charitable gifting that-

Shannon: [36:58] Yeah

Julie: [36:58] is treated totally different.

Shannon: [37:00] Yeah. I know a lot of investors, or not even investors, home buyers- Mm-hmm … get gifts for down payments often. Yes. Yeah. And so I'm sure they would be interested to hear about that, so.

Julie: [37:09] Yeah. And you know, I will tell my clients, "Hey, you're supposed to do this filing." I'm not a CPA, I don't do the filings. You know, if, and then I say, you know, "If you're never gonna gift that 14 million, they're really just informational filings."

Speaker 4: [37:23] Mm-hmm. Mm-hmm.

Julie: [37:24] And you know, if you didn't do them, I don't, I can't even say what the penalty is, but if you are getting up there in your assets, it's important to document the value of those gifts so that you're not fighting with the IRS later about, "Well, I only used up this much of my exemption," and you're getting a retroactive appraisal. And so it's, it's good to document.

Shannon: [37:47] I hope we have that problem. We have- That'd be great … so much to gift.

Julie: [37:51] It's a good problem to have. Yes.

Christian: [37:52] It's a great problem. Yes. Okay, so let's wrap up. Let's go over the final, I guess, top three recommendations that we talked about today, just so that people have those top of mind. So what are the, what are kind of the top three things they need to do next?

Julie: [38:06] Yeah. So get your estate plan in order. Yep. Right? And that's probably for real estate investors, especially married couples- Mm-hmm … utilizing trusts. Mm-hmm. I love a living trust to avoid the probate process, if it's works for you, right? You talked about- Yeah … when you're a really dynamic investor and you have bank loans, sometimes that's difficult. Yep. So at least get yourself a really great will and power of attorney package, and particularly with investors that are gonna be above that 2.193 million mark, making sure that you have those spousal bypass trusts- Mm-hmm set up.

Speaker 4: [38:43] Mm-hmm.

Julie: [38:44] Making use of tax strategies, thinking about your step-up in basis- Mm-hmm … utilizing 1031 exchanges, whether that's to get your rental out of Washington or, you know, to acquire larger investments over time- Mm-hmm … while deferring your gain. And then being careful when you're gifting. Yep. Keeping in mind that step-up in basis, and then making that gift maybe after one spouse dies- Mm-hmm … and

Shannon: [39:10] you get that step-up in basis.

Christian: [39:12] Yep. Those are huge. Wow.

Shannon: [39:14] Thank you so much. How do people who want to go over their individual scenarios connect with you so they can do all this fun- Yes … planning and get- Yeah a plan that actually works for them and for their scenarios?

Julie: [39:26] Yeah. So you can email me, it's, um, so my law firm's Dimension Law Group, dimensionlawgroup.com, and my email's julie@dimensionlaw.com. And you can reach out and, and we're happy to chat with you.

Christian: [39:41] Awesome. Well, thank you so much, Julie, for joining us today. I know I learned a ton, and we've- Me too … already talked to you, but I still learned a ton, so thank you so much. Um, Shannon, great job today. Thank you. You had a lot of good questions.

Shannon: [39:55] I was gonna say, our kids are gonna be very thankful-

Christian: [39:57] Yes … Shannon: that we've- … hired Julie- Yes … and are thinking about this, so you're welcome, Nossum children. Again, if you have questions about your own stuff and you want to set things up correctly, even if you don't think you're, like, quite there yet, you probably are. If you own real estate, you probably should talk to Julie. That's, that's where a lot of people think, "No, I'm not, I don't have mu-," you, you do. You really should just talk to Julie. So dimensionlawgroup.com, yes? Yeah, dimensionlawgroup.com. We'll put it in the show notes as well.

Julie: [40:28] Oh, dimensionlaw.com.

Christian: [40:29] Dimensionlaw.com. Yeah. One of the two. It's-

Julie: [40:32] One of them We'll figure it out You can Google us. There's not that many-

Christian: [40:35] Exactly … Julie: uh, firms with the same name. Yes, yes. Yes. So again, I'm Christian Nossum with the Nossum & Nossum Group at Wilson Realty Exchange, Inc. We're a group of Seattle area real estate agents, brokers. We help people that are investors, first-time home buyers, all of the above, buy and sell real estate. So thank you so much for listening. Until next time, we'll see you back here on the Nossum in Seattle podcast. Thanks for listening. Bye.