Epic Real Estate Investing - Internet Lies About Tax Planning | 461

Episode Date: September 4, 2018

On today's episode of Tax Hacker Tuesday, Tim Berry and Matt Theriault expose internet lies about tax planning. Learn why the best tax advice won't be found in a YouTube video, how to avoid getting tricked by false information, and what a charitable remainder trust is and how to use one. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. Did you know that up to 50% of your lifetime income will be wiped out by taxes? What if you could stop this madness? Isn't it about time you play on a level playing field with the wealthiest 1%? Now you can. Tim Berry, attorney at law, shares here each and every week current tactics and strategies that anyone can implement to hack the tax code. Protect your assets and keep what's rightfully yours.

It's time. for Tax Hacker Tuesday. Hello and welcome to the epic real estate investing show. It is Tax Hacker Tuesday with my attorney and friend Tim Berry. Tim, how are you today? I am doing fantastic, Matt. How are you doing, sir? Doing well.

It's awesome over here. It's summer and it's just blazing hot. Matt, don't talk to me about blazing hot. Oh, this is true. You're in Arizona. But I'm telling you, Glendale, California has been feeling a lot like Arizona lately. but yeah on mondays here at epic we show you new and creative ways as well as time-honored ways of making money using real estate on tuesdays we show you how to keep it and that's what you're tuning into right now and if you have a specific question for tim and you're too shy to go to the website and ask it you can go to tax hacker.com for slash questions and we'll post it there and then we'll answer right here on the show all righty so tim you know i interview a lot of people on our thought leader Thursday episode we do that on thursdays and we bring in general business conversation because, you know, real estate investing is a business. So we get a lot of good

insights from other industries and how we can apply those principles and ideas and insights to our own business. And one of the questions I always like to ask, particularly to our educators and our trainers that we have on those shows is what's one bit of advice that you hear frequently that just kind of makes you cringe? And I kind of want to direct that question to you as well because we talked about a little bit. And, you know, the stuff that you see on the internet and you just like, it makes you cringe and you were sharing that with me. And, you know, some of that stuff can be downright lies or very misleading at the least. So what piece of advice out there really makes you cringe, Tim? The piece of advice is don't trust what Abraham Lincoln tells you about tax

planning. And we kind of talked about that, Matt, is in my family, we have a joke about whenever one of my kids says something really silly, I said, oh, did you read that on Abraham Lincoln's website? Because they just find all sorts of weirdness out there on the internet about things. So Abraham Lincoln has a website. Well, yeah, and the top of it says, don't believe everything you read on the web. That's his slogan. Got it. He was way ahead of his time.

He really was, wasn't it? Very interesting. But no, the biggest thing I cringe at, really, and whenever a client calls them and says, hey Tim, I just read on the web. I think, oh, no, this is going to be a 30-minute conversation trying to untrain them about the BS they read on the web. And or they'll talk about some complex idea, and they'll say, okay, cool, where can I read about this on the web?

Now, I'm saying, dude, you're not going to be able to read about this on the web because this is 10 layers down as opposed to two layers down, and the web is probably maybe one layer down. So that's the challenge whenever you talk to people about really interesting, fascinating things and bring it a lot of knowledge to the table. And then they want to dumb it down and then say, okay, where can I read about this on the web? Or where's a YouTube video where I can watch about this on the web? There's just so many different variables that need to be placed inside here. We can't do all the diving down.

Does that make sense, Matt? 100%. I can totally relate. I mean, people ask, what's the best real estate investing strategy? And it's just like, that's a big fat. It depends, right? There's no universal answer for something like that. So I can imagine it sounds like you experience the exact same thing.

And you probably have even more variables than I've got. Well, I don't know about more because real estate's a vast thing. But let me give you an example. There's a really cool thing called a charitable remainder trust. And as soon as I say charitable remainder trust, a lot of people get turned off because the first word. They think charity begins at home. I think, okay, cool, but you know, just stay tuned. Let's talk about this a little bit. All right. And the big benefit of that charitable remainder trust is you can put assets inside of there and then the trust can sell them and you don't have

to pay any taxes on that sale. It all stays inside the trust. So I have a client right now with millions upon millions of dollars in gain on an asset and for some strange reason they don't want to pay taxes immediately. So I'm saying, okay, let's do this CRT, charitable. remainder trust. And now he can slap the money inside there. Let's just say it's 40 million. He can slap the 40 million inside the trust. He'll get a tax deduction equal to about 10%. So we've got an upfront tax deduction of 4 million. He can now sell those assets, no gain, and he's got 40 million sitting inside the trust. That's a cool thing, right? It is, but that's back up. Yeah. Okay. So what is a charitable remainder trust, first of all? What is it? Yeah. Matt,

Don't ask me these questions. I don't want to board people. No. What's the turtum of a trust? Well, I know most of our audience has $40 million to play with. So I'm trying to make it a little bit relevant. No, this is relevant for people who want to get out of the real estate, don't want to do a 1031. I got it. So let's just kind of go. Let's start at ground one or ground zero. Or let's start at zero. What happens is a charitable remainder trust, tax exempt entity on a simplistic level of understanding, you put assets into the trust, and then you're entitled to take out a distribution of, let's say, 10% of the value of the trust each and every year. So if you put $500,000 inside the trust, you'll get up front an initial income tax deduction of about 10%.

So you'll get a $50,000 tax deduction on $500,000. And then each year, you're able to take out about 10% of the value of the trust as well. So if the trust stays at 500,000 throughout the whole time period, you'll be able to take out 50,000. If the trust increases 100,000 each year, year one, you take out 500 or 50,000. Year two, you take out 60,000. Year 3, you take out 70.

Once again, it's a 10% distribution each year. Okay. It lasts for about 20 years. And then at the end of that term, whatever is left inside the trust goes to your favorite charity or charities. Got it. Okay. Now, that's the simplistic thing.

And by the way, that right to take out the money each year, that's something called an income interest. Now, here's where we start diving down and start taking things apart and making this all sorts of fun and interesting. The income interest, you're right to receive that income from the trust, that's a property interest. That's something that can be bought and sold, just like anything. else. So let's say that three years into this, you say, you know what, Tim, this was a stupid

idea. I never should have set up this trust. I want my money back. In theory, you can't get your money back under the rules of the tax code. But in reality, you could sell off that income interest. And there's all sorts of investors dying to buy these because they get some neat tax benefits, too. But you could sell off your income interest and get your money back that way. So there's all sorts of little different ways that you can shape and mold these things that start to get your head spending pretty fast. Okay. So let's back up again. So now we know what it is. So this $500,000, you'll use that number. We put that in there. Did we pay taxes on that $500,000 we made? No. No. Okay. So we make $500,000. We put it in there. So it's just extra money. We're parking.

Let's go back. Let's say we have an asset that's been depreciated down to zero or it has a zero basis. So an asset, like a house? Yeah, let's say a house. Okay. Or a condo, because that makes more sense about it being depreciated down to zero. So we have a condo. We put inside of the charitable remainder trust. Let's say the condo now is worth 500,000. So if we just sorted ourselves and we didn't do a 1031, we'd have to pay taxes on that 500. Okay.

You're with me? Yes. Cool. We put it inside the trust. Then the trust turns around and sells the condo. Sells it for 500,000. The trust is tax exempt. all 500,000 goes inside the trust and it sits there.

Got it. Now the trustee. By the way, who's the trustee, Matt? You, the attorney? Well, I like that answer first off because I can charge fees. But most of the time, no, it's the client. Okay, so who's the beneficiary? Most of the time it's going to be the client.

Okay, so they can man both spots. They can man both spots. Okay, that's why I did not say that initially. I thought it was a trick question. No, no, no, no. It's a valid question because normally you can't with the trust. But so you put the property inside there. The trust sells it.

The trust now has $500,000 cash sitting inside there. And now you as trustee can say, cool, I'm going to take that $500,000 and I'm going to invest in pork belly contracts. Cool. You can do that. I'm going to take that $500,000. I'm going to make hard money loans. Cool.

You can do that. I'm going to take that $500,000. I'm going to buy whatever container homes. cool, you can do that. So you're in control of the investments of that trust at that point. Okay. As it makes money, the value grows, hopefully. And then, like I said in the beginning, you're allowed to take out up to 10% of the value of that trust each and every year.

Okay. Got it. And then at the end of 20 years, whatever's left goes to your favorite charity or charities. Is it always 20 years? It isn't always 20 years. That's the way how I. I structure it 90% of the time just because it gives people certainty. We can set it up based upon someone's life expectancy, but I just like the certainty more

than the life expectancy. So I just normally set it up for 20 years. So 10% over 20 years, you got all your money out? More than likely, yes. Okay. And some. Got it. Okay.

So now I'm getting it. Now it's starting to make sense. And then some, exactly. All right. Can that charitable remainder trust by a, another house and can you live in that house? Oh, good question. No. You can't use the trust assets for your personal benefit. It has to be for investment purposes. It's kind of like the exact same rules of retirement plans. Just like with the retirement plan, you can't loan money to yourself from the

plan. You can't use the plans assets for your personal enjoyment. Same thing with the charitable remainder trust rules. Okay, got it. So now let's go back to our original subject. Now we know what to see the Charterorandah Trust. We're using this as an example of things that people read on the internet and get misled. So what would people normally read on the internet about this that would have them, ooh, no, I don't want to do that. Well, they'd be reading that they can only take out 10% a year. They'd be reading that the money is stuck.

They can't get it out. They'd be reading that all the assets have to end up going to a charity. And they wouldn't realize that, gosh, if you're three years into, it, you can sell off your rights. You can sell off that income interest. Oh, you want greater than 10%? Cool. We can sell the income interest, but we'll make it over a five-year installment note. So now you're getting 20% a year instead of 10% a year. Oh, you're worried about too much money going to the charity? No big deal. Make a loan over to a non-related party at 5% interest. And by definition, if you're taking out 10%, it's losing 5% a year. So there's just so many different things that you can do to really,

make the CRT work full bore for you. And quick side note, under no circumstances are we going to do any planning that's going to make it where we're going to rip off the charity? That's not the case here because you're getting all sorts of neat tax benefits already, but we're just going to make sure that we maximize the benefit for you as well as the charity gets its 10% of the pie. Okay, I got it. All right. It's starting to become clear. So, yeah, you're going to read on the internet that it sounds like you're just giving your money away to charity is what it sounds like, right? It sounds like it's an irrevocable pledge to charity and you have no more control after that.

And yet there are so many different ways you can have so much control. Got it. Okay. So one thing that you mentioned, give me a scenario, say we got this $500,000 in there. And we have this annual income interest. And you said we can sell that. So let's just say on year one, we're expecting to pull out. $50,000 with that no tax to that 50 grand, right? What would that selling that to somebody else

to get more money out for ourselves look like? Clarification too. Whenever you take a distribution from the trust, that distribution is probably going to be subject to taxes. It's going to be taxed to you the same way it would have been taxed the trust whenever you take it out. So this is a tax deferral mechanism for the most part. Okay, got it. Now, how would that look? Gosh, It's kind of like saying, how would it look whenever I sell this piece of real estate? Because it's just like a piece of real estate. We could go out to somebody and say, hey, look, I have rights to 10% of this trust for the next 20 years. Give me $520,000.

And if you can find somebody willing to pay cash $520,000, boom, it's done. Or you can go to somebody and say, hey, this is worth $520,000 in my eyes, but you don't have the cash. Why don't you give me 10,000 this year, and I'm just making up numbers, 100,000 this year, and another 100,000 for the next six years, boom, so they can buy it via an installment note. There's just so many ways you can structure it. You can structure it where someone gives you a 50,000 the first five years, and 100,000 for the next three years, just whatever. Okay.

And the reason someone would want to do that, I would guess, is that whatever you've invested in is performing. Well, that's one reason. This is where I'm probably going to lose people, is there's just so many cool things you can do. Let's say somebody buys it for $520,000. Let's say it's $500,000, just to keep the number simple. And let's say there's 10 years left on the payout. And let's say they take out distributions of $60,000 a year whenever they buy that thing.

Are you with me so far? Okay, so they're giving you $500,000. What's the actual money inside? of the Charle-Roman Ranger Trust that they're buying. Let's say 500,000 still. So it's just a straight trade, 500 to 500. Yeah. Okay.

So my question, we'll resume in just a sec. But what's the benefit of the buyer to just make this trade? Stay tuned. We're getting there, Matt. Okay, got it. All right, cool. Don't rush me. You're really rushing me, Matt.

I'm feeling threatened. Okay. Okay. Here's the deal. Since this trust right that the person purchased only has 10 years of life expectancy, see, they're able to write off their acquisition price, the $500,000 bucks over that 10-year time period. Translation, they get a tax deduction of $50,000 a year.

So now as they, and they take over that $500,000 inside the trust, they now manage the investments. So now is they take a distribution, if they take a distribution of $55,000, the first $50,000 is tax-free because they have that write-off. or let's say, and this is getting in the weeds a little bit, let's say they structure the trust so that they don't take a distribution in year one. They want to save it to have it come out in year two and then it's going to be $100,000. But big deal, year one, they still get a $50,000 tax deduction.

So they're able to write off their acquisition price, their purchase price of that trust asset each and every year. So this in the right hands is a fantastic vehicle to, A, generate some giant-sized tax deductions, and B, give you tax deferral at the same time. time. Got it. Okay. So that's the benefit for the buyer. Right. I see. But the original person that put it in the charitable trust still has that 10% tax deduction annually, right? They got an upfront 10% tax deduction. And that was it. It stopped. Oh, and that's it. Got it. So the buyer is going to get that 10% every year. The buyer is going to get that 10% every year if it's a 10 year life expectancy. And we're getting way deep in the weeds. So let's, let's,

just simplify from here because otherwise it's going to have everyone's minds spinning. Does that make sense? Yeah. So this is why we're talking about it because the internet doesn't get deep in the weeds. They just tell you what it can and can't do on the surface. So you're saying I'm a culprit of my own thing, huh? I'm trying to stay on a simple level. Yes. Now you're not you don't want to go deep now and you just want to contribute to all the lies that are being. No, I get it now. Okay. So here's another thing. could you get with a partner, you both create a charitable ranger trust and then sell each other the trust? So now you get the 10% deductions each year? You know, that's kind of a gray area.

The iris wants to see a change in economic circumstances. They want to see that if simple answer is no to what you're talking about. Okay. Because if I set up a trust with $100,000, you set up a trust for $100,000, and then we sell each other, each other's income interest. IRS isn't going to like it. They're not going to like it one bit. So they're going to say, oh, your economic situations haven't changed. Tim, you had a trust worth $100,000 with a 10% annual payout.

Matt, you had a trust with $100,000 with a 10% annual payout. And you guys just cross-sold those. We're not going to say there's any substance to that. So that's probably not going to work. But if you guys are going out there and if you're buying other people's income interest and there's different dollar amounts that will be given credibility or that will be recognized. I can't think right now, accepted by the IRS more than likely. Got it.

Okay, so here's another scenario, Tim. Okay, let's hear it. What if there were three people and you created this triangle and you didn't actually swap, but each person bought the other persons? Even if we had 85 people, and this is a little bit far-fetched because the IRS isn't going to expend the resources. But even if we had 3,923 people and they were able to track that everybody just did the triangle or whatever that would be a do disuse, Mupu, whatever it might be, they would still say no economic substance. There has to be a change in someone's economic situation for the IRS to recognize it.

Got it. But there's tons of these things out there. And these charitable remainder trusts, there's a database of them on the web. And you could literally, if you wanted to make a profession of it, you could probably make a bank. Just sending people a letter saying, hey, I'd like to buy your income interest. And that's a whole other show because that's all a function of what price do you pay based upon interest rates. You buy it from them for 7%. You get all these massive tax savings and you sell them out to some or you buy it so that you're guaranteed a 10% rate.

And you sell it to someone else at a 7% rate. You pocket the difference. There's all sorts of neat things you could do there. Wow. That's exciting. It is. I mean, and it's all public record. It's just amazing out there.

This is a whole new world right here. Well, this is why you need a professional to help you. Indeed. Right? Super. All right. Thanks, Tim. I think that was enough for today.

That was up there. That was deep in the weeds, right? Yeah. Cool. So whenever you're ready to have Tim customize this tax hacker blueprint for you, or if you want to have a conversation to the level that we just had, because this sounds like it might fit your situation, that's probably a better conversation for off the air.

You can go to tax hacker.com, answer a few questions about your situation. Tell Tim what you'd like to have happen, and his team will take it from there. And then in the meantime, while you wait to talk to Tim, he'll give you a copy of his free American novel, the loopholes of tax. There we go again. That's such a tongue twister of Trump's tax plan. I'm going to stop trying to be creative and funny and cute, and we'll just wrap it up. How about that, Tim? Any last bit of advice?

No real last bits of advice other than if you want to dive down in the weeds, make sure you talk to a professional who knows what they're doing. Don't get the advice from the web. Perfect. That sums it up. We brought it all full circle. Great. All righty.

So that's it for Tim and myself. We'll see you next week for another episode of Tax Hacker Tuesday on the Epic Real Estate Investing Show. That's it for today as we dream of a tax system that works just for you. But until then, you have Tim Barry. See you next Tuesday for another episode of Tax Hacker Tuesday. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit c-sweetradio.com.