Wealth Safeguard: Decoding Complex Spendthrift Trust Mechanisms in Silicon Valley
In This Episode:
The challenges mount in a world where 78% of the affluent constantly look over their shoulder, concerned about the safety of their wealth. The U.S. tax code’s continuous metamorphosis, with over 15 significant revisions, further muddies the waters of estate and capital gains strategies. And the startling revelation? Only 34% of Americans genuinely grasp their financial world. Now, more than ever, the call for expert insight, particularly on tools like Complex Spendthrift Trusts, becomes not just a need but a lifeline
Silicon Valley Capital Gain Tax Strategies Knowledge Gap
- Asset Concerns: A CNBC survey found that 78% of affluent individuals are anxious about safeguarding their wealth from potential legal claims.
- Tax Code Uncertainty: The Tax Foundation noted that the U.S. underwent over 15 significant revisions in recent years, confusing estate and capital gains tax strategies.
- Knowledge Deficiency: FINRA’s study revealed only 34% of Americans possess adequate financial literacy, emphasizing the need for specialized guidance, especially in areas like Complex Spendthrift Trusts.
"Capital tax gain experts focus on understanding the client's entire story to create a holistic strategy that fits their unique financial situation."
About Scott Varney:
Scott Varney has a long combined history in the real estate, financial services, and capital gains tax strategy field. Scott obtained his real estate license in Texas in 1996 and became one of the top producers in San Antonio by 2001, averaging between 50-60 closes per year. He still maintains his license for referral purposes. In 2014, he entered the insurance and financial services field and obtained his life and health insurance licenses to assist clients with life and long-term care insurance as well as fixed and indexed annuities. While active in that business, he was exposed to and gained experience in a capital gains tax strategy in 2017 that intrigued him and led him to explore the different possibilities. Since then, Scott has continued to add and implement many other capital gains tax strategies and focuses on assisting clients in seeking out solutions to their capital gains tax concerns.
"The key in tax planning is not to fit people into a strategy, but to find a strategy that fits the person."
Show Notes:
- Transition from Real Estate to Capital Gains Tax Expert: The guest discusses their journey from a successful real estate professional to a capital gains tax expert, emphasizing the importance of being a resource in their field.
- Role of a Capital Tax Gains Expert: The episode delves into how a capital tax gains expert assesses clients’ personal and financial situations to devise fitting tax strategies.
- Pending Tax Proposals in Nation’s Capital: The podcast highlights current tax proposals affecting 1031 exchanges, estate taxes, and capital gains, outlining potential impacts on taxpayers.
- Impact of Tax Proposals on Various Strategies: Discuss how proposed tax changes could affect installment sale agreements, structured installment sales, and other tax strategies.
- Favorite Tax Gain Strategies: The guest shares their preferred strategies for tax gains, including structured installment sales and Delaware Statutory Trusts, and explains their benefits.
- Complex Spendthrift Trusts: Explanation of complex spendthrift trusts, their role in deferring capital gains taxes, and benefits regarding asset protection and tax deferral.
- Legal Provisions Defining Complex Spendthrift Trusts: The podcast covers the various legal requirements and provisions that govern complex spendthrift trusts, highlighting their complexity and effectiveness.
- Utility of Trusts for Different Types of Real Estate: Discussion on how these trusts can benefit rental properties and primary residences in terms of tax deferral and asset protection.
- Trust Expenses and Trustee Withdrawals: Insight into what expenses the trust can cover and how trustees can withdraw funds for personal use while maintaining tax efficiency.
- End-of-Year Tax Complexity and Advice for Capital Tax Gains: The episode concludes with a discussion on the complexity of year-end taxes for trusts and advice for clients looking to defer capital tax gains, emphasizing the importance of timing and professional guidance.
"Effective tax planning requires timely action, ideally before listing a property, to explore and implement the best strategies."
Episode Transcription
Describe your transition from being a real estate expert to a capital tax gains expert.
That is a great question. And before I start, I want to thank you. I have coached a lot of realtors around the country. And one of the things I’ve always said is to learn to be a resource and not just a realtor. So it’s a privilege to be here with somebody who, as I’ve seen interviews you’ve done, is actually that as a resource and not just a realtor. I appreciate what you are working to accomplish. So in 1996, I got my real estate license in Texas. I fairly quickly got up into the 0.2% of realtors in the country. Was invited to the Who’s Who of America of real estate professionals, and I was cranking it out 50, 60 closes a year. And then in 2008, I moved here to the Bay Area. I was on a pastoral staff for six years, helping a new church to get established. So for me, because I love working with people, I’m a listener, I love working with people and coordinating and mobilizing. And then when I realized that time was done, I went into financial services in 2014, where I got my life insurance and health insurance license. I was doing life insurance, long-term care, fixed index, and it was part of a great financial team. And in 2017, I came across a wonderful capital gains tax strategy at the time and got excited. Our financial team got excited about it. So I started learning about a strategy. I was a one-trick pony and then I started learning about more and more strategies as time went. And now when I teach a class, webinars for people around the country, I’ll go over 13, 14, 15 different strategies. And so because what I’m looking for is not trying to make people fit a strategy. but try to help the client to find the right fit for them. What fits them instead of making them fit the strategy? So that was a transition. I’m still on financial services, but I’ve added and added, and I continue to add different strategies along.
What does a capital tax gain expert do?
Great question. So what we do is we sit down with a client. We look at their case. They have a story to tell. And what I do, not everyone does this, but what I like to do is sit down and learn a lot about who they are as a personality, what assets they’re concerned about with the tax strategy. Look at the big picture, because what I’m trying to do is make sure that whatever it is that we come to conclude to do for the strategy has to fit who they are holistically. Not just, hey, these numbers fits. We have to look at the numbers. We have to look at the goals. We have to look at what is their tolerance for continued tax planning or do they just want to pay the tax and just not deal with things. So I help them and guide them to what seems to be a good fit with a bunch of options out there.
What are some current pending tax proposals in nation's capital?
Oh, this is where it gets a little fun and scary. So right now, 1031 exchanges, there’s some proposals there. And a lot of people ask me continually, are they going to get rid of 1031 exchanges? Maybe one day, but that has been in law since 1921. And so currently, instead of eliminating the 1031 exchange, or they’re going to cap out if they accept the proposal. Each spouse, if you’re married, it’ll be 500,000 in capital gains per year, per spouse that can be deferred. I see. And so if you have a $4 million building and you sell it and there’s two million in gains, you will be able to defer one million, but you have to pay tax on the other million. So they’re gonna cap how much you can defer in a year. in 1031 exchanges, so that could be a great problem. I mean, here in Silicon Valley, where we can’t even buy a porta-potty for half a million dollars, you know, there’s a lot of capital gains. Another issue is that the estate tax, they are ready, it’s 12.92 million per spouse. Now, in the sunset clause from the 2017 tax act, it’s supposed to drop to about 6 million per spouse, but they’ve proposed to drop it to 3.5 million. So a lot of people who have a lot of wealth, their kids are going to get hit with, they want to increase the tax rate from 40 to 45 percent, plus the state. You know, they could be upwards of 60 percent goes out in anything over that exemption. That’s another hit. And then the capital gains. This is where it’s going to get really brutal. They want to take any gains over a million dollars and tax it at 39.6 percent. Wow. Top rate right now is 20%. Now, one thing to understand is it’s not just capital gains. If you take your income plus your capital gains, if it hits a million dollars, then your capital gains is separated and taxed at 39.6%. That’s almost double what it is now at 20. And then the next bracket they’ve proposed is 28%, still much higher. So that’s gonna be a problem. They’ve proposed to increase the net investment income tax, we know it as Obamacare, from 3.8% to 5%. And then for those of us in California, they’ve proposed 13.3% to be raised to 16.55%. You add all that up, you could be paying over 60% in capital gains plus depreciation recapture. So that’s huge. And lastly, they’ve proposed to eliminate the step-up in basis. And that’s significant. For those that don’t understand that, if you buy a property for $200,000 and you sell for a million, you have $800,000 in capital gains that you have to pay tax on. Well, right now, as the law applies, if you buy it for $200,000 and you pass away and it’s worth a million, your beneficiaries get that step-up cost basis from $200,000 to a million, so if they sell immediately, there’s little to no tax consequences. But they want to eliminate that. So that creates a whole lot of problems in the capital gains world. And a lot of fear and a lot of anxiety should these be approved.
What other strategies will get impacted by some of these proposals?
Well, so right now, anything that falls into the installment sale agreement, tax code, tax code 453, there are many strategies structured installment sales, deferred sales trust, owner carries. A lot of times people will do a tax strategy where they spread out the capital gains over years, many years. So let’s say. I sell you a home, I do an owner carry, and you’re going to pay me 10% per year. By law, I only have to pay 10% of the taxes each year. So maybe I go from the 20% tax bracket to the 15% tax bracket by spreading it out. But here’s a problem. If they approve the current proposals, instead of going from the 20% tax bracket, to the 15% bracket, what if I end up going from the 20% bracket by spreading it out to 23 or 25 or 28%? So I could end up paying more taxes by doing owner carries or structured installment sales or deferred sales or any of that. That could be a real problem. So today, that’s a problem to do those strategies. Once approved, that’s a different story. But for right now, shy away. I encourage. clients to shy away from that because I don’t want them to pay more taxes than they have.
What are some of your favorite tax gain strategies at this time?
So I love structured installment cells only if we can spread it out enough to get to the 0% tax bracket. I think it’s a wonderful strategy. For a lot of my clients, they would like to sell their rental properties and not deal with the tenants, the trash, the toilets anymore. And so I encourage them to consider Delaware Statutory Trust, where they can go into a federally regulated investment and just have mailbox money. They don’t have to deal with the tenants anymore. And I do webinars on that every other month. And that is really helpful for a lot of clients because they stay in real estate, so they get the value of appreciation. and you can get the mailbox money. You just collect the checks, they give you a depreciation schedule, that’s all you’re doing. And if you are old enough that you’re concerned about step-up and basis, and a lot of people will just do a 1031 exchange into the Delaware Statutory Trust, hoping to keep it so that their beneficiaries get the step-up if they keep it in the law. I think Opportunity Zones have a good benefit. Fortunately in California, you still have to pay the California Franchise Tax Board because California still wants their money. So there’s also different ways using charitable structures to do that. But I think the most dynamic tool that there is, is the complex spendthrift trust. I see. And it’s a wonderful tool that takes care of a lot of issues. So that’s one of my favorites and probably the one I get the most calls on.
What is a complex spend thrift trust?
Oh, I love that you asked that. So complex spend thrift trust, this is a type of federal contract trust, not a statutory federal contract trust, that actually will defer capital gains taxes for years, decades, generations, hundreds of years. Maybe even a thousand years you could defer capital gains taxes. you can defer passive income. So if you own rental properties, that income can be tax deferred. If you are very good at investing, stocks, bonds, mutual funds, cryptocurrency, all of that growth can be tax deferred. The other benefit is that it follows the principle, the John Rockefeller principle of the key to success is to own nothing but control everything. I see. And by doing that, by controlling everything but not owning it, you have much more solid asset protection. Because LLCs and S corporations can be pierced, they are pierced 40% of the time, and you still lose the assets. So it gives you solid asset protection. And then for those of us who are self-employed, I have a business trust. So I’m able to defer a portion of my income taxes every year as well. So these complicated trusts provide capital gains tax deferral, passive income tax deferral, income tax deferral, and solid asset protection.
What legal provisions define this trust?
There is a lot, that’s a great question, a loaded question. So it has to follow so many laws and rules. You have statute. various statutes, you have the Scott on Trust law. Now, Scott isn’t me. It’s this big, thick, as they call it, the trust Bible. Scott on Trust, you have a uniform tax code, uniform commercial code, uniform Prudent Investor Act, a statute of frauds, the law of perpetuity. Trusts have to have an ending date. Longest trust I’ve seen is like 90 years, but they have to end. And then you have the Internal Revenue Code. And in the tax code, there’s about 15 different tax codes that have to be applied. So there’s a lot of rules, laws, codes that it applies. Now in terms of actual provisions, these are non-statutory. What that means is that they don’t follow state laws. These are following federal contract laws, the right to contract. So it’s very different than the state laws. It’s also… a it’s not self-settled. And what that means is a lot of people will set up types of trust and they make themselves a beneficiary to get the benefits of it. Here, it’s not self-settled. You’re setting up a legacy trust for your beneficiary. And you’re the trustee. And you’re basically the caretaker of the estate for the next generation. You get the benefits of using it. So you’re controlling it. Like I said, own nothing and control everything, and it creates the tax benefits. It is non-grantor, which means that you are not the one that’s credited with creating the trust. Somebody else gets credited with creating the trust. They fund the trust. They appoint you as the guardian and trustee, and then they resign. And upon the resignation of making you trustee, then you bring assets to the trust. Now by doing that, this is really critical. Remember I said earlier 40% of the LLCs in S Corps are peers? Well, part of that is because there’s an alter ego status with corporations. By doing this non-grantor provision, it eliminates the alter ego status, which is huge. Then it’s irrevocable. And what it means here with the irrevocable is down the road if you… If the trust comes to an end and is not renewed, because these are renewed every 21 years to follow the law of perpetuities, if it’s not renewed, the assets do not revert back to the original grantor. So that protects the assets from going to someone that it should not. They’re complex. And of course, this trust is really complex. Yeah, seems like very complex. Yeah. But see, you have. Complex and simple tax codes and tax prep. And so business trust follows simple tax codes. Personal trust, a beneficial trust follow complex tax codes. Complex discretionary provisions give you the ability to defer the taxes, following tax code 643, as long as you don’t distribute to the beneficiaries. And so, so that could continue on and on and on. And then Spendthrift Trust, there’s a lot of case law that supports Spendthrift Trust. And Spendthrift Trust help with the asset protection as well as the tax mitigation. So these are very, as you can see, these are very complicated. Right. But it’s amazing what they do.
So in simple terms, how does this trust help clients?
So for my clients, it’s helping when they’re selling real estate. big capital gains taxes. If they set it up to where they set up a trust, they sell their asset to the trust and the trust sells the asset, the trust gets the capital gains tax to for all benefit. I see. And so most of my clients actually are dealing with real estate. Some of them are dealing with business sales and some of them are dealing with lots of cryptocurrency, but most of them have large amounts of real estate.
Links Mentioned:
Connect with Scott Varney:
- Connect on LinkedIn
- Email: scott@svconsultantsinc.com
- Call/Text: +1-408-569-0778
- Website: SV Consultants
Watch or Listen to all Episodes
on any Podcast Platform:
on any Podcast Platform:
Sharad Gupta
Sharad Gupta, a dedicated real estate professional and former tech expert, brings a wealth of life and professional experience to his role as a podcast host. Transitioning into real estate after a two-decade-long career in tech, Sharad is deeply committed to providing for his family, yet his true passion lies in community service. Inspired by his special needs son, he consistently raises funds for local organizations. His commitment extends to his pivotal roles as a San Jose Neighborhood Association Member and an active participant in the San Jose Rotary Club. Here, he tirelessly advocates for community betterment, initiating impactful service projects, and championing local issues. His diverse background, coupled with his relentless drive for community service, resonates deeply with his podcast audience, providing them with an inspiring and profound listening experience.
"Exploring financial strategies and innovative solutions significantly propels one towards financial independence, enabling choices not driven by financial constraints."
