In this episode of Anderson Business Advisors, Toby Mathis speaks with attorney Brent Nelson, partner at Rimon Law in San Francisco. Brent helps his clients understand, improve, and protect family structures that include trusts, business entities, private investments, charitable giving, and family governance. He is an established and respected thought leader in his field, and hosts the popular Wealth and Law Podcast.
You’ll hear Toby and Brent discuss a wide variety of scenarios and situations surrounding trusts – who should have them, how they can benefit you, and all the things they can’t do. People out there will try to tell you that you can avoid paying taxes by utilizing a trust, but as Brent and Toby explain, the IRS and the courts will usually always win, and they will eventually get what you owe. In fact you may even be paying more taxes than necessary with some trusts. In the end, you won’t get out of paying the taxes you owe, and you may just complicate your life by stashing your money in certain kinds of trusts, especially those promoted by less-than-scrupulous individuals.
- Trusts are not a way to avoid paying taxes – grantor trust rules
- Only certain trusts can own S-corp stock
- A “three-trust mechanism” – is it valid?
- When you should use a trust and its benefits?
- Promissory notes for stocks in trust
- Making sure trusts allow the client to live the lifestyle they are used to
- Non-US citizens/non-residents cap has been $60,000 since the 1930s
- If you have a green card, you can be taxed and fall under the $12M cap
- Canada’s exit tax
- Setting up a simple living or revocable trust is advisable no matter how little money you have
- Fund-promoted trusts in foreign jurisdictions – be very suspicious – you don’t save taxes, it’s just more complicated
Full Episode Transcript:
Toby: Hey, guys, this is Toby Mathis with the Anderson Business Advisors Podcast. I am really lucky today to have Brent Nelson who’s another attorney who works with a wealthy international clientele. I love picking the brains of folks like that.... Read Full Transcript
First off, welcome, Brent.
Brent: Thank you for having me. Always a pleasure to see you, Toby. Let alone talk to you.
Toby: Hey, we could do both.
Brent: It’s even better that way. I see you’ve got some bar set up in the background. I don’t know why we missed out on happy hour, but I guess we’ll talk about tax instead.
Toby: The sad part is none of them are open. I just collect the bottles.
Brent: I have a few not too far from me. I have a few bottles of wine. Every now and then towards the end of the week, I look to my left, I see them, and I think, maybe this working thing is going to be okay.
Toby: It’s 5:00 PM somewhere. I can appreciate that 100%. I just keep my hard booze over there. Every now and then, somebody points out one of the bottles and says, hey, is that such and such? I’m like, yeah. Why is it still full? I don’t know why, but I’m not good with hard alcohol.
Anyway, let’s talk about trust. Maybe we should call this trust in moderation.
Brent: Yeah, use with caution.
Toby: I want to talk about all the bad stuff because I don’t know about you, but I’ve been seeing these promoters all over the place showing you you don’t have to pay tax if you put your business in a trust, have your investments in a trust, and all this stuff. I remember going through this 10 or 15 years ago where we had Pure Trust and Constitutional Trust.
Can we put some of that stuff to rest and just dive in? First off, have you been seeing it? Second off, what do you feel about it?
Brent: I’ve been seeing it and I feel that it doesn’t work, but the more detailed answer is that first of all, as you say, this is an idea that is not new. It gets recirculated periodically that somehow, if money gets funded into a trust, then nobody pays any tax on the money.
You got to take two steps back chronologically. First of all, you’re talking about money that you earned that you’re then trying to stick into the trust. We don’t allow you to do that and escape paying taxes.
We have this very nice doctrine that was created by the courts called the assignment of income doctrine that basically says, if you earn income, you must pay tax on it. You can’t just shift it on to somebody else. This is not true, but just assuming hypothetically that the trust did not have to pay any taxes, the assignment of income doctrine would say, nope, that doesn’t work.
Then, just because that’s not enough, we have these rules that are called the grantor trust rules that would prevent someone from creating a trust for themselves and in many cases for their family because they like to keep control over these trusts and then not pay tax on it.
What happens is you put the money in the trust—say you’re a beneficiary of the trust—and you think, oh, great, now I don’t have to pay tax on the money. Even if you got over this assignment of income issue, the answer is not so fast because the grantor trust rule pretends that you still own what is inside the trust and therefore you still own the income and pay tax on it.
I know conceptually that that idea is weird because it’s not reality. Maybe you really did put the money in the trust and you really don’t have the money, but we just pretend for tax purposes that the trust is not there.
Toby: We like it because you could ignore the trust and pay the tax on it just like you own it. In an asset protection trust, it’s actually a handy dandy to have a grantor trust, but that’s not what these scam artists are doing. These guys are going right to the, hey, this is a complex trust and I can avoid all the tax by reallocating it to corpus and all this other stuff.
In my opinion, they’re just butchering the code, but I’m curious as to your opinion since you’re an expert in this area and you probably have to deal with it on a day-to-day basis.
Brent: I think the chances are that they are not escaping the grantor trust rules even when they say that they are. That’s the first thing. People don’t realize how sticky those grantor trust rules are. They exist to prevent you from not paying tax on income that’s in the trust, so it’s very difficult to avoid if you have any interest in the trust or you really maintain any controls over the trust.
Let’s just assume that you could get over that. Again, you’re earning income and shifting it into the trust. You’ve got this assignment of income doctrine that says, nope, that doesn’t work. You have to pay tax on the income.
Even if let’s say what you really did was you gifted business interest into the trust and it was truly a complex trust—meaning it’s a non-grantor trust—we have rules for that too. Those rules say that someone between the trust and the trust beneficiaries must pay tax on the income for federal purposes, so even if you park this thing in a state that doesn’t have state income taxes, that only solves the state income tax issue which I think is the half-truth that you get told in some of these promotions.
Toby: Yeah. They do the pings, dings, and all those. They’re saying, hey, we can avoid California tax or something like that.
Brent: Maybe you can but that’s state tax, not federal tax. Then, it also turns out that these complex trusts if they retain the income—so they’re going to pay income on the earnings—they pay tax at the highest rates at the lowest possible levels. Not only are you not saving tax. You’re paying higher taxes.
Toby: And just put it in perspective. It is like, hey, I made $15,000. I’m going to be in the highest tax bracket.
Brent: Yes. Basically.
Toby: That’s really it. I’m just like, let’s just be straight up. I forget what it is exactly.
Brent: I think it’s $14,000 something. I can’t remember the exact weird inflation-adjusted number right now.
Toby: And you’re at 37%.
Brent: Yes, so that’s not a great result.
Toby: Some promoter says this is a great idea. I’ve had two clients that were seven-figure clients get pitched this with their S-Corps for their business so that they would never have to pay tax on that money again. I’m like, not only would you pay tax, you’re going to get killed in taxes.
Brent: That one’s a really curious one. Again, let’s just assume they put the shares of the S-Corp stock into the trust. There are only certain types of trusts that can own S-Corp stock, so you’re no longer an S-Corp and now you’re paying corporate-level tax. You’re paying two levels of tax, C-Corp level tax plus tax on the dividends. That could be one option.
The other option is that you are a trust that can hold S-Corp stock, but it turns out that those are grantor trusts so you’re paying tax no matter what. You get it coming and going, and there’s just no relief. Again, this assignment of income doctrine kicks in.
At any time also—I guess we should probably note—that you’re trying to avoid paying the tax that you owe and you’re layering in a trust as a mechanism to make it look like you don’t owe the tax, even setting aside all these fun things that we talked about, courts can freely ignore that the trust exists if it’s a fraud.
There’s also that. The tools in the tool kit for the courts and the IRS who are arguing to the courts are vast.
Toby: There are people that correctly can point out that there is a provision in the code about reallocating certain things like extraordinary dividends and things like that into the corpus. These were shares, for example, instead of a dividend but it’s still taxed normally, and they’re saying, hey, just allocate it back into the body of the trust. Is there a situation like that where you could escape immediate taxation and it just gets added to the corpus of the trust?
Brent: No. The answer is you’re really talking about two completely different concepts. They’re somewhat related in the trust and state income tax rules, but when you’re talking about the corpus, you’re really talking about what’s called the trust accounting income issue and how you account for money that comes into the trust for state law trust purposes.
The general rule is that a dividend is “income.” It may be that income is payable out to beneficiaries or not. It might not be, but under most state laws and trust agreements themselves, you can allocate those things to the corpus, which means it may not be payable out of the trust immediately.
That does not change the tax status of the trust at all. That’s all just internal accounting for nontax purposes, so it doesn’t save you on taxes.
Toby: Sometimes people get confused because they hear the DNI or distributable net income. They’ll hear like, hey, the trust is sending it to the beneficiary. That doesn’t mean that nobody’s paying tax on it. It just means the trust doesn’t have to get killed at the highest level and it’s taxed to the recipient.
That’s not what these guys are doing though. I had another one. I’ll just throw this one. I know I’m throwing weird scenarios at you, but there were really nice people. They were in California and they do very, very well. They do lots of investments.
They were pitched a three-trust mechanism, one of them being a charitable trust, a business trust, and then just a grantor trust that held the business trust with the beneficiary being this foundation. They were loaning the money back out and doing all this craziness. I just said it’s a sham, look at it, and go, first off, that’s not how the rules are.
First blush, have you seen anything like that out there that you’ve had to deal with? What’s your first blush on something like that?
Brent: I can’t say that I’ve seen anything quite like that although I’d be very curious about how they were using the charitable trust. The transactions that I’ve seen, the way that it is almost always structured—and this is really where it starts to fall apart—is that let’s say you have these three mechanisms and all of these loans. Basically, everything happens on day one and the other promoter wants you to sign everything on day one, so you sign everything on day one.
Right off the bat, somebody like URI and certainly a smart lawyer at the IRS is going to look at that and say, we can ignore the fact that you have all these different parts. For tax purposes, we’ll just treat it the way that it really should be. The so-called substance over form, we’ll just treat it the way that it should be for tax purposes.
Do you know what? You want to set up all these buckets and do all this complicated stuff, mazel tov, but that doesn’t change the tax treatment, so you’re stuck with the tax treatment and you’ve paid a lot of money for this complicated structure. You’re stuck with both, unfortunately.
Toby: I actually emailed the promoter and wrote him a letter. I was just saying, my opinion is that this is a complete farce.
Also, it was a charitable foundation, but it was taxed as a private foundation […] to it. But it was all in writing. That’s what these guys do. I’m like, just send it to the IRS and let them know. Maybe there’ll be a recovery for you.
Brent: It’s interesting. I think you probably see the same thing. First of all, most of the promoters are not what I would consider serious tax professionals. That’s the first thing.
The second thing is that they oftentimes like to hang their hat on the fact that everything is aboveboard. They’re like, well, we have all these documents. We’ve got it all papered over, therefore, this is valid.
People need to understand the hard truth which is you can do all the dumb things you want, but that doesn’t mean you get the tax result you want. There’s a huge gulf between doing something that you want to do and then using it for a tax advantage and expecting the IRS to give you the tax advantage. They won’t tell you you have to unwind the dumb transaction. They’ll just say you can’t take the tax advantage.
Toby: And they’re going to say, hey, we don’t care what you’re calling it, we’re going to treat it this way.
It was interesting because I had another one out here. I get hit with these all the time, so I’m just thinking of the ones that I’ve had in the last year.
There was another gentleman. I get on the phone with them. It’s always somebody that they say is a lawyer, but it’s not a lawyer. The lawyer had a Supreme Court decision that they rely on when they said to do it, and I’m like, what’s the Supreme Court decision? Then, I look at it and I’m like, it has nothing to do with what you just said, or it’s something that is from the 1800s, something goofy a long time ago, or 100 years ago where you’re looking at it going, this is not relevant or this is not what you cited it for. This has nothing to do with anything. It’s all pretty words.
Brent: That’s a red flag for people too. I guess for anybody listening, if you’re getting promotions and what they’re hanging their hat on is that it’s black and white and the code lets you do this, just understand that first of all, the last time there was a major change in the code was 1986. The IRS and Congress might have changed their minds about certain transactions. They might not have anticipated this transaction happening.
Let’s just assume probabilities here. The chances of it being black and white in the code are not good. There’s a lot of gray area in the code, so whenever somebody comes out to me with black and white, of course, I’m a crotchety lawyer too. I’m just like, okay, come on. Really?
Toby: If it’s too good to be true, you’re just looking at it going, come on, everybody’s going to pay tax on this. When I see this, it’s always to somebody affluent and somebody who has lots of tax pain.
There are lots of ways to mitigate your tax. Paying no tax is usually not one of them. Maybe if you’re a real estate professional, operating in an exempt environment, taking a reasonable salary, or something, but for the most part, no, you’re not going to avoid it all.
But there are scenarios where trusts are your friends. Maybe we could touch on some of the areas because you’re working with wealthy folks. Your clientele sounds a lot international. When do you use a trust and for what purpose?
Brent: You mentioned one which was that asset protection trusts can be excellent vehicles for asset protection. In some states, you can get asset protection for yourself. You can create a so-called self-settled asset protection trust.
Whether those apply in every single jurisdiction, maybe a little bit of a cloud on that, but even if you don’t want to do it for yourself and you want to do it for your kids, so you’ve put two nickels together, you’ve earned some money in your day, and you want to spare some of that money from ever going to future ex-in-laws and things like that, you can put them in trust and get great asset protection for your family so you can protect that family wealth in the wrapper of the trust. All you have to do is create the trust and you get the benefit. If you don’t create the trust, you don’t get the benefit.
There are tremendous estate tax and generation-skipping transfer tax benefits in certain types of trusts. We mentioned grantor trusts, particularly grantor trusts that are irrevocable trusts which basically means you’re going to get asset protection. You, the grantor who created the trust for your kids, are going to pay tax on behalf of the trust, but everything in the trust is going to be free from estate tax.
Just imagine what that looks like because to me, if you’re trying to boil it down to what do normal humans understand, it looks like a Roth IRA. It’s like you paid the tax on the Roth IRA, and then it gets to grow tax-free, somewhat like that.
In these irrevocable grantor trusts you can set up for your kids, you’re paying the tax on behalf of the trust, and then the money in the trust gets to grow tax-free which is where you want all the growth because nobody pays estate tax on that money.
Toby: You say it’s growing tax-free for the estate tax, but you’re the grantor. As a grantor, you’re still paying tax if there are capital gains or whatnot. It’s still down to you, but you’re not burdening your kids.
We have this massive estate tax. I think you’ve been doing this as long as I have. I remember a $600,000 estate tax exemption when I started. I still remember those really small exemptions, and now we’re at a $12 million-plus exemption. If somebody is over that, you’re looking at this going, wow.
Is there a threshold that you use? It could be lower because we could be back at a million for all we know. I forget where it’s going to go when The Tax Cuts and Jobs Act sunsets, but it’s definitely not going to be $12 million. It’s going to fall way down there.
Brent: It won’t. It’ll be half of that. The base number right now is $10 million, and then it gets adjusted for inflation. The base number on January 1, 2026 will be $5 million adjusted for inflation. Just round numbers, let’s say it’s $12 million today, it’ll be $6 million then.
We’re in a really weird environment where you could have somebody who’s over $12 million. That’s easy. They need to do something. They have to plan for it because this tax is horrendous like you’re pointing out. It’s $0.40 on the dollar tax. You got a $13 million estate, you die, $1 million of it is over the $12 million, and somebody writes a $400,000 check to the IRS. That’s painful.
There is this weird middle ground right now between the $12 million and the $6 million where they don’t have a problem today, but if they do the dumb thing and survive until 2026, then they do have a problem. For those people, they have to pretend that they have an issue and start doing planning.
The way that I like to plan for people in that space is to try to do things that will in essence cap the value of their estates so we’re not going to get over $12 million. There are a lot of techniques that we can use to take some of the assets that they own that might have variable value, actually transfer those or even sell those into trusts, and convert them into something that has a very specific value.
Let me give you an example so people understand what I’m talking about. Let’s say I set up one of these beautiful irrevocable grantor trusts. I’m the grantor, so I paid all the tax for the trust, and you’re the beneficiary because you’re my best friend in the world.
I have a bunch of Apple stock. I don’t know what the value of Apple stock is going to be tomorrow, let alone in 2026, so I would prefer to take a promissory note that has a value equal to the Apple stock today and just hold that because I know that’s not going to change in value.
What I do is I sell my Apple stock to my new irrevocable grantor trust, the trust gives me a promissory note for the fair market value today, and now, if the Apple stock appreciates in value above the face value of the note plus whatever the interest rate is, all that appreciation is in the trust for your benefit. It’s out of my hands. No matter when I die, I’m not paying estate tax on it and you’re not going to pay estate tax on it.
These sorts of little valuation capping transactions become really important, especially for people in between these threshold numbers. If you get above the thresholds, then it becomes really important to not only do those things but really give away as much as you possibly can.
Toby: You just mentioned an installment sale basically. Are they paying it, is it deferred, or is it something where you can say, hey, don’t mess around with the interest because we don’t really want to sell the Apple stock?
Brent: We’re selling it, but because I own the stock and the IRS pretends that I own everything in the grantor trust, it’s not a true taxable sale, so there are no capital gains. I’m not going to pay any capital gains.
It’s a true sale and there is substance to it. It needs to be a real sale. There needs to be a real note with real interest that’s really paid to me. Ultimately, the goal is to actually pay off the note at some point, but we can pay it off over time. We don’t have to pay it off in the first year.
Toby: Do you put a marker on it like, hey, if you ever sell the stock, you have to pay back the note? And then in the meantime, the interest accumulates. Is this something where you have to pay the tax? What’s the mechanism? Do you have to start making payments in that first year?
Brent: We usually require at least interest payments in the first year. Very frequently, the notice set up is an interest-only note that has a balloon payment at the end. Say it’s 10–15 years. We might go something slightly less than 10 years on the term of the note because it gives us a little bit better interest rate, but the idea is that once we put the stock into the trust, the trust has free use of the stock.
If the trust sells the stock so they’ve actually generated a capital gain because they sold the stock, we also usually have a provision in that trust that should I want it, I can ask and get permission if an independent person agrees to it to be reimbursed for the cost of the capital gains tax. I’m not going to be burdened with the capital gains tax that I didn’t want to pay.
Toby: Because it’s still a grantor trust, I am responsible for the income. If there are dividends paid at Apple, for example, they pay a small dividend, but would that also be taxable to me? Let’s say it’s a parent for a child instead of just being really nice to me and giving me lots of stock, although I wouldn’t stop you.
Brent: You wouldn’t stop me, okay, good enough.
Toby: But you’re still paying the tax on that. If I need to pay interest, is it something where I could continue to make additional contributions to the trust in case there needs to be cash that’s paid out as interest? How does that work? Do I have to sell stock to pay that interest?
Brent: Hopefully not. The idea is actually, what you would do is first, when I create the trust, I would seed the trust with other investments. Maybe it’s cash, but maybe it’s other investments. I like to seed it with something that has a return on it so that collectively, the return that we can get on those assets plus the thing that I’m going to sell into the trust is far more than the interest that’s going to be paid on the note.
I don’t want to overly burden the trust, I don’t want the trust to be uneconomical, and of course, what I’m trying to do is put more money into the trust. I don’t want the money coming back to me. I want as much in the trust as possible.
A really good example would be if I have some real estate that’s rented out and it has a pretty good stream of income on it, I might gift that into the trust first because the income off the real estate is going to support the promissory note in the future.
Toby: Either gift it or sell it. I understand what you just said. You’re gifting the entire real estate in there so that the income stream covers the interest on the note.
Brent: Yeah, or it can be a mix. Maybe I gift a part of it, and then I sell the balance in just so that the assets collectively—between what I sell into the trust and what I gifted into the trust—are able to generate plenty of income to support the note payments because again, I don’t want the trust to be uneconomical and I want the note to actually be paid off at some point.
Real estate’s just great because it often has a relatively consistent stream of income and it can be used to do future financing. If the financial terms are appropriate, you might be able to suck some equity out of the real estate, pay off the note, and now you’re just paying back the bank, but you’re going to pay off the bank over probably a longer period of time than my promissory note. Those sorts of transactions are possible in the future with something like real estate.
Toby: That’s really smart. It sounds like if somebody is over the $5 million mark, they might need to consider this. Would it be business interests, stock, or real estate? Maybe they’re getting a portion of it that might be highly appreciating or keeps going up in value that they just want to freeze so that they don’t have estate tax issues. Is that primarily what we’re doing here?
Brent: That’s what we’re doing, and it would be all of the above. Obviously, it depends on what somebody owns.
The first question I almost always ask a client is something along the lines of how much can you afford to give away? What do you need to live on?
We also are not asking clients to do something that then impoverishes them in a way that substantially affects their quality of life. I’m not saying super lavish lifestyles, but I want them to be able to live comfortably the way that they enjoy living. We’re trying to come up with strategies that can generate streams of income coming back to them from these trusts that will, in reality, support the lifestyle that they want.
I want them to also maintain enough funds outside of the trust so that if everything goes south in the trust transaction, they have enough money to take care of themselves, of course. I don’t want to do something that is unreasonable because it just doesn’t really work for their lifestyle. We’re always trying to match up payment terms and assets with the reality of the client’s lifestyle.
Toby: Shifting gears slightly, you mentioned international clients. You have wealthy international clients. Are we talking just US citizens or do you have folks that are noncitizens too?
Toby: If you’re a US citizen, you get the benefit of the US estate tax, these huge amounts, the $12 million right now and in 2026 going back down to the $5 million indexed for inflation which will be around $6 million. What about the international folks? They don’t get the benefit of that, do they?
Brent: They do not. If you are not a citizen and you’re not a resident—and resident means you don’t live here with the intent to stay here, you’re not a so-called domiciliary of the US—then your estate tax exemption is $60,000.
That number has existed since the ’30s and they’re not changing it. It’s not indexed for inflation. No one is coming to their rescue. These people don’t vote, so nobody’s helping them.
Toby: Let’s say that I’m in Spain and I own $1 million US real estate. Am I going to be paying 40% on that $1 million minus the $60,000 exemption?
Brent: Unfortunately, yes.
Toby: What if I’m married to a US citizen? Do I get any reprieve or am I still going to get hit?
Brent: In that case, if you leave the property to your US citizen spouse, you get the benefit of what’s called the marital deduction against the estate tax. That’s a dollar-for-dollar deduction for all the value that goes to your US-citizen spouse, so you would pay no estate tax at your death in that case.
In essence, the policy is great, now, the property is in the hands of an American. We can tax Americans, so we’ll expect that we’ll tax the spouse later on. Of course, the exemptions are so high for Americans that it’s not as useful, but that is still the policy.
Toby: Do you see this scenario play itself out? Is this something that you have folks come in and they’re like, I have $5 million or $6 million real estate in the US. I’m not a US citizen. I don’t intend to reside here. I’m not married to a US citizen. I just own a bunch of real estate here. Is that something you see?
Brent: I do. When they have done the thing and bought all the property before talking to me, that’s a real challenge because it’s hard to back out of that transaction without paying tax on some level. Usually, what it requires is swallowing a somewhat bitter pill and paying capital gains tax in order to avoid later paying estate tax.
The reason for that is the typical way to plan around is there are really two ways. The first way is for a non-citizen, non-resident of the US—and it’s important that that is what they are because this doesn’t apply to US citizens—if you set up a foreign company that’s viewed as a corporation here, you own stock in a foreign company, and it owns the US real estate, when you die, we pretend you only own the stock in the foreign company and not the US real estate, so no estate tax. But in order to back into that structure, when you already own the US real estate, you have to pay capital gains tax.
Toby: You’re going to have to sell it to the corporation, right?
Brent: In essence, yeah. It doesn’t mean there’s an exchange of cash. It’s just we pretend that it’s a sale when we contribute it to the foreign corporation.
Toby: How would this change if you do have a US-citizen spouse?
Brent: It’s a little easier when you have a US-citizen spouse because of the marital deduction, but there’s a little bit of a logical conundrum because you’re guessing who’s going to die first. If it’s the foreigner, you’re fine. If it’s the US person, then you got a problem.
The other way that we usually handle this problem if we don’t want to pay capital gains tax is we simply have the foreign spouse buy life insurance if they’re insurable because proceeds on life insurance on the life of a non-citizen, non-resident of the US—very important that that’s what you are because this doesn’t apply to US people—are not subject to estate tax. We buy the life insurance to cover the estate tax on the off chance that that foreign person dies second, not first.
Toby: Very, very interesting. Does it change if they are a resident? Maybe they have a 10-year green card or something along those lines. Does it change everything under those circumstances?
Brent: It totally flips everything on its head, of course. It’s like, yeah, you got a green card, great, you can’t vote, but we’re going to tax you like a US citizen. But that means you get the benefit of this $12 million exception as well.
Toby: You get it, so if you have that green card, that’s your reprieve. If you become a non-resident so your green card is for three years and it expires, now you’re back in, oh, heck.
Brent: You could be. In the meantime, the fun thing is we pretend you’re a citizen, so we tax you on all your worldwide income. We get it from some angle, and then there are some very specific rules about long-term green card holders. If you hold a green card for more than 8 of the last 15 years and then you give it up, under some circumstances, we charge an exit tax. We pretend you sold all of your assets, and then you have to pay capital gains tax on the US on your way out.
Toby: I think that’s some Canadian friends that I know here. They were dealing with that. I’m going to go back, and then they were like, I’m not going to go back because the tax is so heinous.
Brent: It goes both ways. Canada has its own exit tax. They actually call it the exit tax. We call ours the expatriation tax, but they functionally are the same.
When you’re a Canadian resident, you come down here, and you become a US resident, you have an exit tax to pay in Canada. It can be kind of painful, so Canadians who accidentally trip up on the Canadian exit tax are not happy.
Toby: Yeah, because the CRA is not a pleasant organization. The other fun one is when they put things in trust. They treat it for Canadians. They treat it as though they sold the asset too.
Brent: They do. If you’re a Canadian resident and you create a US trust because that’s what your very smart and well-meaning US advisor told you to do, it’s a deemed sale of the asset to the trust in Canada, so you pay taxes in Canada. The US doesn’t care, but Canada really cares.
Toby: Blame Canada.
Toby: I guess the moral of the story—I could talk to you all day about this stuff because I find it fascinating—is it’s complicated.
Brent: It is very complicated, yes. Unfortunately, it is.
Toby: Yup, and if you have a green card, if you own substantial assets, and you’re a non-US resident, non-US citizen, you need to talk to somebody who knows what they’re doing. If you reside here and you have assets over $5 million, you need to talk to somebody who knows what they’re doing on this precise issue because it sounds like it could be a nasty ramification.
I want to ask you one last question. This is a softball because I know you and I think the same way.
There are also these revocable trusts that are floating around out there, most notably the living trust that we oftentimes hear about. I just want to get your take on people that do wills versus living trust versus doing nothing at all.
Brent: I’m not in favor of doing nothing at all to be perfectly clear. My number one preference is to do a living trust or revocable trust at a minimum. That’s for almost every single one of my clients regardless of how much money they have in the bank or in the company.
Toby: I wish more lawyers say that.
Brent: The thing that really keeps me up at night is the nightmarish guardianship and conservatorship files that I have that exist because somebody didn’t do a very small amount of planning into what could’ve been an extremely simple revocable trust that would have resolved an issue of what happens when they become incapacitated, who’s going to manage things, or what happens if you die and you leave money to a minor? Who will manage things for the minor?
If it runs through a revocable trust, it just solves all those problems and there’s so much headache that can be resolved just by doing this very simple thing that I see almost no circumstances where it doesn’t make sense. The biggest caveat with it honestly is usually with foreigners where their home jurisdiction has a rule like Canada that says doing a trust is a deemed sale. Setting that aside, it’s almost always the right answer.
Toby: Does Canada always tax? If you do a living trust in the United States, you’re a US citizen, and all your assets are here in the US, would Canada still hit it?
Brent: If you’re a US citizen and not a resident of Canada, then you’re okay. But if you’re a resident of Canada and you’re doing a trust here, in most instances, they’ll treat it as a sale of the assets to the trust.
There are some very small carve-outs for elderly people who are doing basically revocable trust. They call them bare trusts in Canada. Those trusts escape these rules, but the general rule is you have to.
Toby: I believe it’s over a certain age.
Brent: It’s 65 and older if I remember right.
Toby: I remember seeing that. It’s in the recesses of this brain.
I want to hit on the living trust just one more time because a lot of times, people will go to somebody and they’ll say just do a will. I’m always like, that’s comparing a happy meal to buying just the burger. I can’t just buy the burger. The happy meal comes with other stuff, and the other stuff sometimes is what’s really important.
You just talked about doing guardianship files and conservatorships. That’s always included in a living trust. I’ve never seen a living trust that did not have power of attorneys for financial and health, and I’ve never seen those attached to just a will. Sometimes, somebody will do both, but usually, if you’re going through the trouble, you’re either doing the estate plan or you’re not. That’s the part that just bugs the heck out of me because I see that over and over again.
Again, it’s like should I have a meal or should I have a soda pop? Soda pop is perfectly filling, but they’re two very different things. When somebody says, should I do a will or a living trust, I always look at it going, they’re different animals.
You mentioned some of your files. How arduous is the process of getting to become somebody’s conservator or taking over their finances when there isn’t a written document? Is it pretty heinous?
Brent: In my fine state which is similar to most states, somebody who cares enough about you has to file a petition with the court. The court appoints somebody to be an investigator, talks to all the interested parties, and submits a report to the court. The court appoints a lawyer to you who is now incapacitated, so at least two lawyers are almost always involved. The court appoints a medical professional to do a medical examination.
All of this gets submitted to the court, you have a public hearing on your inability to manage your finances which may not be very pleasant, and then somebody gets appointed. Every year, they have to account to the court down to the penny everything that has come in and out of their hands on your behalf. They do that for your lifetime or until you’re cured which is not usually the case.
Toby: If you have somebody with dementia or somebody that was in a car accident and for whatever reason can’t make decisions on their behalf—maybe they’re braindead—you’re going to have to go through this process even under those circumstances?
Brent: Dementia definitely. Car accidents, definitely. The dementia one is easier to plan for and plan around. If somebody gets in an accident and they end up with a personal injury settlement, that can be hard to plan for and pan around and you may be forced into one of these conservatorships. But they are just very burdensome and very time-consuming, and when people hear time-consuming, they should think expensive. That time is being charged by the hour.
Toby: But a will is easy and probate is […] in my state. I wish I had a nickel. Probate is not bad in my state. Oh, you don’t need that, and you’re just losing your mind. I think we think alike on that one.
Brent: Yeah, we definitely do. The other thing is they say, well, I have a power of attorney that takes care of it which is fine. It’s just that the banks don’t always agree. If the bank doesn’t agree, your power of attorney is worthless.
That happens so frequently. Sometimes, people don’t believe me, but that is the case. It happened plenty of times over the last 10 years that I could say with full confidence that banks hate powers of attorney.
Toby: Yup. Do the trust. I have dealt with the same thing you’ve dealt with, but they’re covering their backside. They have obviously been disastrous in some circumstances. Ultimately, I don’t think anybody’s acting with ill intent. They’re just trying to do what’s in their best interest and it’s not easy, so make sure you got your bases covered to make it easy.
Anything else you want to hit on? I’ve really enjoyed our conversation, so I’m just curious if there’s anything else you want to add.
Brent: I guess the only thing we didn’t mention is along the lines of the conversation we had at the beginning about all these fund-promoted trusts. If it’s a trust that’s in a foreign jurisdiction, just know that you’re in […] to go 50,000 storeys high because it probably doesn’t work.
Toby: Oh my gosh, we didn’t even get into it. I don’t know about you, but I’ve had multiple clients go to me and say, I’m going to do this trust. This trustee has been in business in the 1800s or something weird, and then they come back a couple of years later going, my trustee won’t respond. How do we get my money back?
I’ve had more than three occasions. I can think of just a few of them right off the top of my head. Have you dealt with that too? You said your tenant goes up. Is that one of the reasons or are there other reasons too?
Brent: One reason is just because the way that they’re promoted is not the way they actually work. It’s supposedly some sort of tax move. It’s not. Surprise, you don’t have to weave through the details. The surprise ending is it’s not a tax move. You don’t save taxes. You usually complicate your taxes is what happens.
Nightmare scenarios do happen. One of the most egregious cases that I had was a client who had a trust that was set up actually by her husband. There were two individuals who were the trustees and they basically just completely mismanaged the funds and stole money.
It took years to run them down and get rid of them, and we literally still have in the investment accounts one or two Irish mutual funds that were frozen during the Great Recession. Not great investments to begin with, but they were frozen during the Great Recession. We cannot recover the money. That was in 2009 or 2010, and we still haven’t resolved it.
Toby: Again, there are enough nightmare stories of the trustee quit responding. Where is this trust? Isle of Man, Cook, or some island somewhere. I’m like, we’re going to have to go there. It’s going to be expensive litigation if they’re still there.
Chances are they just disappeared with your money. I’m not a big fan of going offshore unless you have a really good reason, but that’s interesting. You and I think more alike that I realized on a lot of these just from what I see because boy, we see a ton where somebody comes in and some promoter is like, go to this island, go to that island, go over here, and go over there.
I’m like, do you have business over there? Do you have people over there? Do you have infrastructure over there? Because it’d be really, really bad if you have to enforce over there. It’s going to be tough. You have no infrastructure.
Are there any situations where you do go offshore?
Brent: It tends to be non-Americans. Foreign clients who are, say, investing in the US. We might set up a trust for them that’s a non-US trust although we set up plenty of US trusts for those people.
But sometimes, it’s better to set up a trust in a foreign jurisdiction because their home jurisdiction and that jurisdiction are more friendly to each other than that jurisdiction in the US, so we’ll use the foreign country to set up the trust. That’s really it.
Frankly, the US tax laws and the US trust laws are so good and so robust, and it’s such a good environment for investments that very frequently, the trusts are here even for foreign clients.
Toby: My experience too. Us is hard to beat. We tax worldwide income, so you’re not going to move it outside the US and somehow still have access to it and get it, but why would you? Buy the asset, let it appreciate, borrow against the asset, and it’s going to step up when you die. There are just so many other benefits that are floating around here in the US tax code. Why go mess around overseas unless you’re Amazon?
Brent: I get that from people sometimes. What about Amazon, Apple, and all these companies? I say, you’re not a company. You play by a completely different set of rules. What are you thinking?
Toby: And they’ve been hit with billion-dollar fines too. Apple is getting crushed.
Brent: Just don’t. You’re an individual. Don’t. It’s not worth it.
Toby: Yeah. You don’t need your team of lawyers to go overseas and try to argue why you should pay the tax that they’re trying to assess on you that you set up to avoid. Sometimes, it’s easier just to keep it simple.
Brent, how does somebody get a hold of you if they want to reach out?
Brent: If they google Brent Nelson lawyer, they’ll probably find me. I’m a partner at a firm called Rimon. I live in Tucson. The firm is an international firm of about 180 lawyers or so.
I’m on social media, @wealthandlaw, and I have a podcast, the Wealth and Law podcast. That’s on all the normal aggregators, Apple, Spotify, et cetera.
Toby: I’ll put you in the show notes too. I’ll make sure that we put a link so it’s easy to find you.
The world needs good people like yourself. Again, we have some crossover, but I have no problem in saying reach out. If you’re somebody who’s over that $5 million mark and you want somebody who knows what they’re doing, this is what guys like Brent do all day. You want somebody that knows their stuff 100%.
I really appreciate you coming on. I was going to call this trust scams and things to avoid. We all see them and every time somebody comes running in and says, I don’t have to pay tax, this guy said, I’m always like, oh no, not again.
Brent: Not again, exactly. Let me give the compliment the other way too so if anything I said makes somebody think they need Toby’s services, great. That’s fine. The world is abundant. That doesn’t bother me at all.
Toby: Never a worry here, but I just appreciate you sharing.