Jason and John discuss estate planning.

Mr. Kenney has nineteen years’ experience helping families, individuals and business owners with estate planning, asset protection, wealth preservation and transfer and tax minimization. He is a Managing Partner of his law firm.

A sought after expert, Mr. Kenney is the author of several articles and has presented at dozens of seminars throughout the country to audiences of potential clients and his contemporaries in the legal and tax field.

Mr. Kenney is a Captain in the US Navy JAG Corps (Reserve Component). He serves on several non-profit boards within the Seattle area. He has been an adjunct instructor, teaching military justice for the University of Washington Navy ROTC program for thirteen years.

To learn more please visit www.kenneylawfirm.com

Below is the full transcript:


Announcer: Welcome back, America, to sound retirement radio where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. Now, here is your host, Jason Parker.

Jason: Alrighty, America. Welcome back to another round of sound retirement radio. We’ve got an excellent episode lined up for you. You’re listening to episode 104. I’m going to be bringing John Kenney on to the program to discuss estate planning today. Before we get going, I want to take a minute to renew our mind and I have a verse here for us. This comes to us from John 15 verses 16 and 17. “You did not choose me, but I chose you and appointed you so that you might go and bear fruit, fruit that will last, so that whatever you ask in my name, the Father will give you. This is my command: Love each other.” That’s awesome.

 Then I want to give you a joke, something you can share with the grandkids, and my good friend, who works here with us shared this one with me this morning right as I was walking into the studio, put a smile on my face. What do you get from a pampered cow? Spoiled milk.

 Let’s get into this show. I’ve got John Kenney on the program. I’ll give you a quick bio from him, and I want to remind you all these programs are archived and transcribed on soundretirementplanning.com. This is episode 104.

 Mr. Kenney has 19 years experience helping families, individuals, and business owners with estate planning, asset protection, wealth preservation, and transfer and tax minimization. He is a managing partner of his law firm, John Kenney & Associates. A sought after expert, Mr. Kenney is the author of several articles and has presented at dozens of seminars throughout the country to audiences of potential clients and his contemporaries in the legal and tax field.

 Mr. Kenney is a captain in the US Navy JAG Corps Reserve Component. He serves on several nonprofit boards within the Seattle area. He has been an adjunct instructor teaching military justice for the University of Washington Navy ROTC program for 13 years. Mr. John Kenney, welcome back to sound retirement radio.

John: Thank you, Jason. It’s great to be back.

Jason: It’s great to have you on the program. I’ll remind our listeners, if you haven’t had a chance to read some of my books on retirement planning yet, John was one of the attorneys that I interviewed. He’s been a good friend of mine for a long time now, and he’s just a real expert when it comes to this area of estate planning and tax minimization, so I’m looking forward to the program.

 John, we’ve been talking a little bit this month about estate planning, so maybe I’ll just have you kind of start out with the big picture: What is estate planning?

John: Estate planning, Jason, is somebody or a family trying to get their affairs in order, in order to make sure that they manage their wealth both through some sort of incapacity and even through death and be able to pass it to their family members or surviving spouse or children or other family members or even charities in an orderly manner and in a way that will avoid the maximum amount of income and estate tax as well as any excess costs that are unnecessary.

 It’s a lot. It’s a big area. There’s a lot of different techniques and tools that are used to help somebody accomplish estate planning and many different levels, from the very, very basic all the way up to very complex. That’s kind of what it is.

Jason: John, I just want to touch on this because I’m sure you run into this all the time, but just this morning I get into the office and I’ve got a voice mail waiting for me, a good client shares that health is starting to deteriorate for a loved one and, of course, there was a lot of procrastination, people didn’t want to get the estate documents done or signed off on, and so now everybody’s in scramble mode to get this stuff taken care of.

 We had several conversations about why it was important to do this, and yet there is this … I actually experienced this with my own grandmother, too. She always used to say she was afraid to do a will because she thought if she did it, she would die. John, how do you help people get over this hurdle of just taking initiative to get these important documents in place so that your family’s not scrambling at the last second?

John: I think the most important thing is to try to help people understand that it is necessary in most cases, if not every case, to do estate planning. I think having certain anecdotes and experiences from the past … I’ve got dozens and dozens of experiences, real life experiences now over the last 19 years or so, where I just help people understand the importance of it. Even if they have an estate plan, there are things that happen oftentimes because of a bad estate plan, something they did in the past that they didn’t change or update.

 A perfect example of that is I had a client in my office yesterday, and they had given a lot of money in wealth … This is a brother of somebody given a lot of money and wealth to a sister who was drug addicted because they didn’t do it the right way. The intent was to transition and give her some wealth and help her and make sure she was taken care of, but they didn’t do it using proper tools like a trust or something like that. The sister ended up doing her own will and dying eventually and giving all the wealth that her family had given her to other people that they don’t even know. That’s just 1 example. It’s on the forefront of my mind because the persons came in yesterday, but there’s right ways to do things and there’s wrong ways to do things.

 If you don’t do anything, the state has a plan for you, which often it results in some very unfortunate circumstances. Your wealth isn’t going to go to who you want and oftentimes results in a lot of unnecessary taxes that could’ve been avoided.

Jason: John, one of the things that’s a little bit tricky here, because we’re in Washington State. The radio show is broadcast on 1300 AM KKOL, so people are driving down the road in Seattle listening this morning, but at the same time, sound retirement radio is a program that’s listened by people all over the country as a podcast, and so for folks that are listening around the country, what would you say about estate planning? Is it very state driven, or would they be able to work with an attorney anywhere?

John: That’s a great question, Jason. I’m glad you brought that up, because I heard you say that earlier across America, and I was wondering if this was all over. Yes, it is very, very different from state to state. The reason it’s different, starting from sort of the major concern is every state has its own estate tax system, or not. There are a couple of states that do not have an estate tax, but every state has a system, and it’s not the same as the federal estate tax system. For those of your listeners out there who don’t really understand what estate tax is, I’ll back up and briefly explain.

 An estate tax is not an income tax. People think, “Well, I already paid my income taxes during my lifetime.” An estate tax is something that a person or a family will only be confronted with after someone passes away. Basically, it’s a government, the federal or the state, looking at the value that a person owns at the date of their death and taxing it or not, and there are a lot of rules. It can be very complicated, and it’s even more complicated by the fact that as I said just a minute ago, every state has a different system, and it’s totally different from the federal government system, and so the estate tax rates what somebody will pay, I believe the highest rate federally now is 35%. The highest rate here in the state of Washington is 20%. Potentially, there’s 55% of someone’s wealth that could be paid to both the federal and the state government here in Washington depending how much wealth they actually have.

 The state and the federal governments have estate tax credits which basically mean that the state or federal government will allow a person to have a certain amount of value owned at their death before they start looking to tax it. In Washington, it happens to be $2,079,000. For the federal government, I believe it’s $5.4 million now. Again, I don’t have these memorized because they’re going up each year now based on a cost of living adjustment for both the state of Washington and the federal but, nonetheless, every state has a different system.

 Oregon, for example, their estate tax credit is about a million dollars, so people living in Oregon have a real risk of paying an estate tax. The problem with that, it also includes life insurance and retirement plans, so a lot of people don’t realize that their wealth, especially when you add in life insurance death benefits, will add up very quickly and get them to an estate tax situation very quickly.

Jason: Boy, if you just look at real estate on the west coast, it’s pretty easy to get to a million or 2 million bucks.

 I want to ask you a question, because we tend to work with a lot of high net worth people, several million dollars of assets. When we’re talking about some of these trust strategies for helping preserve wealth, are you more of a fan of having those trusts established before the person dies? Or is it an acceptable way of planning to have those trusts created at the time of their death through their will?

John: Everybody’s situation is different, Jason. What my process is, is I go through a process with clients to interview them and have a worksheet that’s a tool that I use to gather more information about my clients, and I talk to them about what their goals, their concerns, their needs are, and I contrast and compare that with what the actual laws are and what we can do for them. Oftentimes, at least in Washington I should say, at least in Washington, a basic will would be more than adequate for many people depending on their goals and concerns and their needs.

 Oftentimes, a trust of some sort would be something that they would need based on those factors. The state of California is a good example of a state where it’s almost required that somebody has a trust because of the complicated probate system there in the state of California and the high cost of probate.

 In the state of California, for example, the attorneys and the court system are paid a percentage of your net worth in order to administer the probate process, which is a court process that people need to go through, or their family members need to go through after someone dies. In California, it’s a percentage, so an attorney in California may get $100,000 based on the allowed percentage they’re allowed to receive, where an attorney in Washington would get 2 or $3,000 for the same exact amount of work. It’s a very costly state. I see a lot of clients coming from California with trusts because of this very factor, because it’s very, very advised in the state of California.

 There may be other states out there. California is close. We get a lot of cross border transfers, but there may be other states, so it really depends on those factors, a lot of different factors in the state you’re living in, what I would recommend. I’m not a fan either way. I try to lay out the options for my clients and let them make the choice with some good counsel from myself.

Jason: I’m thinking about a couple of the folks recently here where they have estates more than $10,000,000. I’m having a hard time wrapping my mind around the advantage of waiting until death to create those trusts. Why not just create them now so that everything’s in place?

John: That’s a great question. Somebody with a higher net worth, like you said of about $10,000,000, there would be some advantages based on the amount of assets they probably hold the values, because avoiding the probate process is a big, big factor in looking at how much time it would take and how expensive it would be. The more there is to sort of take through that process, the more expensive it would be.

 The other thing, too, about probate is it’s a public process. All of your personal information and your wealth information, your asset information, it’s all filed with the court and is all public, potentially for other family members to look at who are nosing around and trying to get more information, potentially crooks and people that are looking to commit fraud of some sort, although that’s pretty rare, but still it’s possible. A lot of people will use a trust when they’re higher net worth because they desire the privacy and to avoid probate. Typically, if you have a trust, the administration and dispersal of all those assets to your beneficiaries and heirs is much quicker and faster through using a trust than it is in the court system through a probate process.

 A couple of big factors to look at there but, yes, higher net worth people usually may be able to take advantage of more things with a trust.

Jason: Here’s another concern that I hear from folks oftentimes. They’ll say, “Jason, I’m in sound mind today. I’m able to make good decisions, but one of my fears is that as I age, my ability and my capacity to make those decisions may diminish, and I want to make sure that there’s some firewalls, some safety nets in place that protect me from myself, because I don’t want to give all of my money away maybe to some con artist at the end of my life,” or you hear stories about people giving all their money to their caregivers.

 How do people, say they’re young, they’re healthy, they’re vibrant, they’re making good decisions today but they know that there’s a potential to lose that capacity, what do they do to make sure that that doesn’t happen, that they don’t end up in that situation? How do they build those firewalls?

John: There’s a few things. If somebody does not have any estate planning documents, they will typically go through a process in whatever state they live in that’s called the guardianship. That’s sort of not desirable. That’s sort of the default state process that you fall into if you don’t have anything. The guardianship process basically is a court process that costs thousands of dollars and basically someone ends up being appointed to manage things for you when you’ve lost your marbles, so to speak.

 If you do go to estate planning, you will usually have at least what’s called a durable financial power of attorney and a healthcare power of attorney. Those documents are designed so that when you reach the point of not being able to make capable decisions for yourself because of your mental capacity, that somebody else would have been pre-chosen by you to do that for you, an adult child, a trusted family member, your spouse.

 The other thing is, with a trust of some sort, you can also have your property controlled by the trust so that there’s that firewall or safeguard built in so that you can’t just give away your wealth to persons who would take advantage of you without somebody else checking on you, which would be like an appointed successor trustee who’s checking you to make sure you’re not doing things to harm yourself financially. I’ve seen cases recently where I’ve been speaking with adult protective services in Washington. They see these cases all the time where someone does get older, they’re lonely. Younger people who are looking to take advantage of them often will become friends with them or even move into their home and all of a sudden their wealth is drained by writing checks to these people, their friends, and usually it’s people buying drugs and doing that sort of thing. It happens quite frequently with older people who are lonely and don’t have close family members really close by to kind of keep an eye on things.

Jason: I’ve even heard that a lot of this fraud happens by family members. In some instances, what people are trying to do is protect themselves from the people that they’ve appointed to help them, and so it can be a scary position. The other thing, John, I run into a lot of people that don’t have children, and so when it comes to finding somebody that they can appoint, they don’t usually want to … Siblings, if they have siblings, they don’t usually want to appoint a sibling because they’re usually in the same age bracket, so what do people do? How do you give people guidance on who to appoint for these important roles in their life if they don’t have any adult children that are capable of making those decisions?

John: That’s a great question, Jason, and I see that quite frequently; in fact, I start counseling with them and asking them questions, because I think it’s better to have a family member. Sometimes there’s a niece or a nephew who’s gone to law school or is an accountant or a financial planner in Silverdale, and they’re capable and they’re competent, and they’ve kept in touch. That would be kind of a first line of questioning is, are there other family members? Sometimes there’s another sibling or something like that.

 Oftentimes, though, we have to advise them to, and help them to choose a professional fiduciary. A professional fiduciary would be like a … There are companies here that are usually run by attorneys or attorneys in combination with accountants where they actually provide these services for somebody’s trust or for somebody’s power of attorney. There are also big corporate banks and trust companies like Northern Trust or BNY Mellon or Wells Fargo or even Columbia Bank, which is a more local bank, who have trust and fiduciary departments who will do this. There is a cost, though. Whenever you hire professionals, there is a cost but, yes, we go through a process with our clients, and nobody walks out of our office who does estate planning without somebody named. You can’t just leave it up in the air, we have to decide, and that’s kind of a thought process we go through with them starting with family members maybe 1 level removed, and then move on to professional possibilities.

Jason: You bring up financial advisors, John. I have to tell you, this is a question that I get asked more often than you might imagine, people asking me if I’d be willing to fill that role for them. In almost every situation, there’s only been 1 situation where we discussed the possibility. We haven’t accepted that responsibility, but in most instances, because I’m their financial advisor and we operate in the fiduciary capacity, I’m always trying to reduce or eliminate conflicts of interest, and there can be a conflict of interest if I’m their financial advisor, I’m investing money for them, and I’m also managing their estate, so we try not to take that responsibility. I know a lot of people have asked us to do it, but it’s just not an area that I feel comfortable stepping into.

John: Absolutely.

Jason: It puts people in a really tough position. I’ve met with a couple CPAs that have accepted that responsibility and then they end up having to pay a lot of additional money in insurance costs as a result of the type of relationship that they’ve formed. I agree with you. It’s best to find a family member if that’s possible, but unfortunately, for some people, that’s just not an option.

 Have you run into any stories with guardianships recently that you can think of where things just really went south and it was kind of a bad experience?

John: You know, I’ve seen a couple of guardianships. One was a case where I was doing the probate for it, so I was privileged to see the file for the guardianship that had been done a few years earlier for this woman, but it was a woman who had a very modest estate by many standards, a home worth a couple hundred thousand and some money in a bank account. She had, I think it was 6 adult children and several grandchildren who were already adults, and there was a guardianship a couple years before I became involved in the probate, and basically all of these adult children were vying to be her guardian to take care of and manage her money.

 Unfortunately, often in those cases, the attorney’s fees are paid for out of the person’s own money, so her money and her accounts were drained to the tune of 20 to $30,000 from what I recall just to go through this sort of time-consuming expensive process where 5 or 6 of these kids were fighting and vying to be her guardian, and it was unnecessary. If she would’ve just had the foresight to appoint somebody, it wouldn’t have happened at all. That’s 1 example.

 I’ve been in court with these cases, and there’s literally all these factions of children standing up at the bench with the judge each with their own attorney, so there’s half a dozen attorneys and then all their clients sitting in the audience, and you just know that the clocks are running on all these legal fees for those attorneys, and it’s just unnecessary if you do proper estate planning.

Jason: Folks, you’re listening to sound retirement radio. You can find us on-line at soundretirementplanning.com or soundretirementradio.com. This is episode 104. I’ve got my good friend John Kenney on the program. He is an attorney. His firm is John Kenney & Associates right up in Poulsbo, really an expert when it comes to these issues of estate planning and avoiding probate and helping minimize the tax especially for high net worth individuals.

 John, I want to ask you real quick, because we’ve been talking about kids and family. What are your thoughts about parents putting their adult children as joint owners on real estate or bank accounts?

John: I personally think it’s a bad idea. There may be some exceptions to that, but generally speaking, it’s a bad idea. The reason it’s a bad idea is, I’ve actually seen cases where an older parent puts a child on a bank account, and the child is sued. When you make someone co-owner of your account even though you think in your mind it’s your money and you’re just doing it for convenience of helping the child help take care of your bills and stuff, that child was sued, and the bank account was garnished, garnished meaning money was taken out of it to satisfy the creditors of the child. That’s 1 potential negative that I’ve seen and actually witnessed.

 The other thing that’s problematic with that strategy is people don’t understand that when they make their child a co-owner of their bank or investment account, is they make a potentially taxable gift to that adult child of 50% of the value, because you’ve now taken an account that you own 100% of, given your child a co-ownership, which is 50%, and in the United States people don’t understand that we have a gift tax system which basically means that if you give somebody more than $14,000 worth of value per year, you have to report it to the IRS and may need to pay a gift tax. They don’t realize that.

 The other thing that’s potentially problematic is there’s income tax consequences. If you give somebody an account or half of an account that has appreciated assets like stock, then you lose the possibility that upon your death that child would get a stepped-up basis, which is an income tax technique that the IRS allows people to use to get some huge income tax advantages when somebody dies. Well, you’ve lost it for 50% of the account.

Jason: John, unfortunately, we can’t get into that final thing. We’re out of time, but I want to remind our listeners John’s a great resource here. You can find him on-line, John Kenney & Associates. John, thanks for being a guest today.

John: Thank you, Jason. Thanks for having me back.

Announcer: Information and opinions expressed here are believed to be accurate and complete for general information only and should not be construed as specific tax, legal, or financial advice for any individual and does not constitute a solicitation for any securities or insurance product. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives or its affiliates, have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance-related discussions are subject to the claims [inaudible 00:24:29] ability of the company.

 Investing involves risk. Jason Parker is the president of Parker Financial, an independent fee-based wealth management firm located at 9057 Washington Avenue NW, Silverdale, Washington. For additional information, call 1-800-514-5046 or visit us on-line at soundretirementplanning.com.