Armando (0:00 – 2:16)
Hi, I’m Armand Roman, host of the Founders Guidepost. You’ve built your business over decades, and now it’s time to think about that once-in-a-lifetime exit. You’ve come to the right place.
Here, you will hear business exit professionals talk about what you should know before exit. Besides hosting the Founders Guidepost, I’m CEO and founder of Axiom Founders Family Office, working with founders to help preserve their American success story. And it all begins with a founder stress test.
We also host the Scottsdale Founders Forum for the founders considering exiting in the next 36 months. Here’s to your hard work and to your American success story. Enjoy.
Hi, Sam DiPietro with Spencer Fane Estate Lawyer. How are you doing today? I’m doing well, Armando.
How are you? Good, good. Sam, I’m glad we’re going to have this conversation because our listeners are people who created businesses from nothing and built some tremendous wealth in those companies for their families.
And even if they’re not thinking about exiting that business today, they are very aware that income taxes and estate taxes can be very painful if they’re not planned for and planned ahead of time. And of course, that’s the area that you live and swim in. It’s the estate planning perspective.
And often people come to you, I’m sure, saying, I’ve got to pay less taxes. I’ve got to plan. How do I do this?
So if you and I can have a conversation for that listener, that founder, that business owner who’s got the bulk of his or her wealth in that one company, and maybe they bought some now investment properties, some storage units, maybe a second or third home someplace, maybe an airplane, but the bulk of their wealth is still in this one company. And we’ve got, of course, the coming tax law change, estate tax thresholds will drop tremendously January 1 of 2026. And you are having those conversations with clients now about what they should be thinking about, what they should be doing.
And let’s talk about that for that particular segment of founders, of business owners. And before that, I’m going to ask you if you can fill in a little bit of blanks on your background, and then lead that into what you do for those founders who are in that space, please.
Sam (2:17 – 3:50)
Yeah, definitely. So born and raised in Arizona, Valley native, I joke, I moved from the hottest place to the coldest place in the world to go to law school, where I went to law school at Northwestern in Chicago, got my Juris Doctorate, my legal master’s in tax. I actually started my career as an income tax attorney in Chicago, which it was a weird time to start a legal career right in the middle of COVID.
It was here’s a laptop, go be a lawyer. I was working one bedroom with 600 square foot apartment, my wife and the other, not how I thought being an attorney or starting my legal career would go, ended up having to kind of make a career pivot when my older brother ended up getting sick and passing away in Arizona. And so I took a moment to kind of redevelop my practice that went from being an income tax attorney to an estate planning attorney, which was which was kind of jump if you know, the different worlds.
So the income tax side is more kind of an introverted intellectual role, which I really liked in the state planning, you know, you’re a little bit a little bit more outgoing, you’re meeting with people and you’re discussing things such as the estate tax exemption. And so it was a transition for me. But fortunately, I really liked it.
And I enjoy what I do. And to get to what you were saying, I work with families and their advisors and kind of help them plan what’s next, both from an estate tax perspective, and then also what they want their estate to look like, whether that’s passing the business on to a child, or whether that’s exiting the business and doing so in such a way that they maximize both the income tax opportunities, and then also the estate tax opportunities as well. And so what I like about my practice is I still get to do a little bit of the income tax, but then I also get the estate planning piece as well.
Armando (3:50 – 4:08)
Yeah, fantastic. Sounds like a good combination that you have that you bring to the table, as you talk with those families who own those companies. And so Sam, touch on if you can, January 1 of 2026, there, it’s already legislated, talk about what’s going to happen when that date rolls around from the estate tax perspective.
Sam (4:09 – 5:25)
Yeah, so as many of my clients are really excited to know, in addition to the income tax, we also have an estate tax, which kind of takes some people by surprise, especially because that exemption, which is what you referred to right now, is very, very high. It’s a little over $13 million for a single person, about $27 million for a married couple. Now, with regards to the sunset, and what’s keeping us very busy on my side, and quite frankly, I’m losing my hair over, is that number, that $27 million for a married couple, or $13 million for a single person, is scheduled to get sliced in half January 1, 2026.
And so what that will look like, or at least what we’re projecting, is $14 million for a married couple, or $7 million for a single person. Now, I tell everybody this, my crystal ball is no better than anybody else’s crystal ball. But in order to stop that sunset, we need to see a president that wants to do it.
And we also seem to see a Congress that wants to do it. And they also have to get it done by January 1, 2026. And so what I tell my clients is, I don’t know if it’s going to happen, but I think there’s a lot of value in planning, especially if you’re thinking about exiting a business and having a large growth event right before we lose that exemption.
Armando (5:26 – 5:38)
Yeah. So Sam, just to clarify if you can, the legislation is already in place. If nothing is done between now and then, it will get cut in half, as you say, correct?
Sam (5:38 – 6:17)
Exactly. So that exemption is tied to the Tax Cuts and Jobs Act. And so as part of that act, it had to be budget neutral.
And the way that they made it budget neutral is they scheduled a sunset, January 1, 2026, where it basically goes away. And for estate planning purposes, we revert back to 2010’s laws when the exemption was $5 million. Now, it’s a little bit strange because it doesn’t fall to $5 million.
Instead, it’s $5 million indexed to inflation all the way to 2024 or 2026, I guess, in this example. And so what we’ve predicted to be, as I said, is $7 million for a single person, approximately $14 million for a married couple.
Armando (6:18 – 6:38)
Right, right. So really nothing needs to change for that to happen. It is going to happen if nothing changes.
So if, as you said, Congress and President decide they want to change it, then they can certainly work on it. But if they don’t do anything, it’s already legislated, it’s going to happen.
Sam (6:39 – 7:00)
Exactly. And I mean, up until last week, when we thought Biden was going to be the nominee, I was telling clients, if the Democrat Party wins, it is going to happen because that was in his platform. Now, we don’t know what the next nominee’s platform is going to be.
But if we have an indication from the Biden platform, what it was, it looks like it will at least sunset, if not go down even more.
Armando (7:00 – 8:01)
Yep. And so then it sounds to me, since it is already going to happen, it seems that if that family is planning and their net worth is such that that $27 million threshold is meaningful, it seems like they need to do something now, at least have a conversation with someone like you who understands this space really well, and can look at different strategies that are legally there, of course, available that can be done, whether it’s trusts or whatever, but having that conversation. So I think for our listeners, the business owner who’s got this business worth quite a bit of money, it seems like they probably need to get an understanding of what that value is, first of all, or at least a ballpark value, what it is, so that if it is applicable to them, then they need to have that conversation. And if they’re well below that threshold, maybe not so much.
Sam (8:02 – 8:45)
Exactly. And what I tell clients all the time is there’s a difference between planning and doing, right? There’s no harm coming in and having us model something out, right?
To see kind of different scenarios, what the implications might be. And what I love about my practice is I don’t have to sell anything, right? I show the pros and the cons, and if the pros outweigh the cons, then it’s a good plan to implement.
But at least have that discussion so you know the pros and the cons, and kind of have some thoughts as to what you want to do. Because the worst case scenario, and Armando, we’ve discussed this in the past, is someone sold a business last year and they come to me and all of a sudden they have a very large taxable estate. I’m limited in my options as to what I can do, whereas if they come to me a year before the business is sold, there’s plenty of planning opportunities that could be implemented.
Armando (8:45 – 9:05)
Yeah, yeah. So just a little more clear, you said it’s $5 million, but indexed for inflation, and it’s looking like that number for a married couple is going to be a taxable estate kicks in when their overall net worth is right around $14 million for a married couple. Is that about right?
Sam (9:05 – 9:24)
Exactly. And to maybe put it a little bit more plain English, what we expect is anything that you give away during life or at death, if you’re a married couple, $14 million will not be sold just to any estate taxes, but that every dollar above $14 million, either you give away during life or you give away at death, will get hit with a 40% estate tax.
Armando (9:25 – 9:38)
Yeah. So then someone whose overall net worth is $15 million would have a $1 million taxable estate, which would mean about $400,000 of taxes on that $1 million, right?
Sam (9:39 – 9:47)
Exactly. And it’s a little bit of asterisk there because the first million is taxed at a different, not just 40, but I’m using 40 for simplicity purposes, but that’s the concept.
Armando (9:48 – 10:31)
Yep. Okay, good. And that’s what I wanted to just make sure that was clear, because I think a lot of folks are probably there and they don’t realize it, and maybe getting some kind of a value of the business might be helpful.
But then also I can imagine some of the listeners might be saying to themselves, well, I’m not going to sell my company. So that means I can’t do anything because I’m not going to sell it between now and January 1st of 2026. But maybe you could touch on that for people who are not intending to sell their company and the planning to them seems like it might be less important.
It still is important and they still probably could do some things with you from a strategy and structure standpoint. Maybe just touch on those people who were in that camp.
Sam (10:32 – 11:53)
Yeah, of course. I mean, there’s quite a few people in that camp, right? Just because the tax laws are changing in 2026 doesn’t mean you let the tax tail wag the dog and you sell the business.
What really you look at for a client like that, that’s approaching or above that estate tax exemption amount is, how can I move future growth outside of the taxable state? And so sometimes what I tell clients is, if you’re above the estate tax and one of your objectives is to pass wealth on to another generation or somebody else, right? And I guess what I’m going there is, you’re going to spend everything, then don’t worry about the estate tax because you’re going to spend everything.
But if your objective is to pass it on and you’re already above that exemption amount, then you need to think that every dollar you earn really is 60 cents on the dollar, right? And so one of the things that you want to look at is, okay, how can I mitigate my exposure? Because you remember the estate tax applies either during life if you give it away, but then also at death when you do ultimately give it away.
And so it’s, how can I, if I’m not willing to give stuff away today, mitigate that exposure so when I do decide to give it away, whether it’s that during life or at death, that we don’t have a huge estate tax liability. And I mean, especially with business owners that want to pass it on to the next generation, how do I make sure that the next generation doesn’t have to sell the business to pay the estate tax bill?
Armando (11:53 – 12:21)
Yeah, right. And one thing I often hear, Sam, is control. People not quite ready to give up control of what they have.
So are there trusts, LLCs, strategies, et cetera, that you can talk about with them to our audience where they can maintain control and yet still make use of the higher thresholds right now?
Sam (12:22 – 14:02)
Exactly. And so I would divide the strategies that are commonly used. And once again, as with estate planning, it’s very client-specific, right?
So you take the client’s goals and you implement the goals. But common ones that I’m seeing that we’re doing quite frequently for married couples, there’s a concept called spousal lifetime access trust, which as you’ll learn when you talk to estate plan attorneys, we love our big words and we love acronyms even more. The acronym for that trust is a SLAT.
And what that basically is, is I can make a trust for my spouse whose name is Cheyenne, and Cheyenne can make a trust for my benefit, right? We could use our exemption today. So each of us has that $13 million exemption and we could lock it in.
So when the sunset occurs January 1st, 2026, it doesn’t apply to us because we’ve locked it in. Now, as long as I’m nice to Cheyenne and she likes me, I somewhat have indirect access to the stuff. So to get to your control aspect, as long as we have a relationship that we can kind of talk and work together, I have a little bit of indirect control there.
Now, obviously the devil’s in the details and there’s a risk, right? You get divorced. Well, gosh, there goes the control.
I don’t get the stuff I gave away back. And so it goes back to taking your client’s factual situation and what they want to accomplish and putting that into action. So for example, if it’s a client that has a prenuptial agreement, maybe the thought of giving away half the stuff to the spouse isn’t a good thought, right?
For that client or a client that’s single, you might look at a different kind of trust, for example, a beneficiary defective trust, whereby we move that appreciating asset outside of the client’s estate into a vehicle that the client still has control over.
Armando (14:04 – 15:29)
Okay. Okay. So that makes a lot of sense that you can still take advantage of some strategies that are there that are available, but it really begins by having a conversation with you and then you understanding what goals they’re really trying to get to, so that you can help address those for them.
So let me ask you another question. It’s not uncommon for that family that owns a business, not uncommon at all for the adult children begin to take over. And let’s say mom and dad run that company, started it from scratch and now it’s worth, I don’t know, $30 million and they’ve got four kids and maybe two of the kids are still minors, two already adults, but the kids have to grow to become adults, of course, but the goal ultimately is to transition that business over to the kids.
What I hear from parents is they don’t want to spoil the kids and they want to be fair to the kids. So if one of those four kids does not want to be in the business, then they’ve got a little bit of a dilemma to deal with. How do they still make it fair and equal and keep the siblings happy with each other?
So there’s some navigating that has to get done. But in terms of what you might be able to talk with that family about where mom and dad can still remain in control and yet do some things now where they can maybe begin to transfer some of that ownership of the company to the kids somehow, some way, there are ways to do that, right?
Sam (15:30 – 17:20)
There are ways to do that. And you brought up a wonderful point, which quite frankly is an interesting aspect of my job that when I first started being an estate planning attorney, I didn’t kind of anticipate and kind of go back. I always thought my job would be helping people solve taxes, right?
Whether it’s income taxes or estate taxes, and yes, that’s a large portion of my job, but an even bigger portion to your point is helping families transition businesses in such a way that you don’t kind of fall into that acronym, short sleeves to short sleeves in three generations, right? How do we transfer businesses to the next generation without taking motivation away that made it successful in the first place? And that’s quite frankly, as you know, a much more difficult question than something as mathematical as estate taxes or income taxes.
So to your point, common structures that I see just kind of going off a few clients that come to mind, I have one client that what he wanted to do with his estate plan is put a small amount today in trust for each of his kids, right? And so a small amount in this case was $2 million per child and basically let them run with it and see what they do to see whether they’re going to invest it, whether they’re going to spend it. And oh, by the way, in his case, his financial advisor is going to help them with the trust.
He wants to see what they do, because what they do will impact what happens with the broader estate plan. And so sometimes what I see with regards to businesses is if you have the business, for example, in the spousal lifetime access trust that I talked about, maybe make one of the kids a co-trustee, right? Retain the power to kick them off if things go haywire, but let them be a co-trustee and see how they start to manage the stuff.
Because quite frankly, as you know, I mean, basically like estate planning, planning is what really transitions the business well. When all of a sudden you pass away and the kid is running the business and they’ve never had any experience in doing that, that’s when the nightmare scenarios kind of rise up.
Armando (17:21 – 17:28)
Right. Yeah. At that point, maybe better off just selling the business so that you can, the family can still get some value from it versus the kid runs it into the ground.
Sam (17:29 – 17:59)
Exactly. And what I love about clients that proactively take that step is they’re able to identify issues and then address them, right? Once you’ve passed away, it might be too late to know that your kid has no idea what accounting is.
But if he or she starts managing the business with you and has questions about accounting and you can walk them through how to do it, why we do it, and kind of that aspect, then you’ll have a much higher chance of avoiding that short sleeve to short sleeves in three generations.
Armando (18:00 – 18:49)
Right. Right. And Sam, let’s talk about charitable giving for just a minute here.
Many people, when they start from humble beginnings and they’re very successful with their companies, they want to take their wealth and give it to different charities that tug at their heart. And they can do that, of course, in different ways. But when the family owns a business and now we have this looming estate tax threshold that would drop significantly, maybe you can touch on different things in that circle where if somebody does want to give money to a charity or benefit a charity somehow, some way, what might they be thinking about or what might that conversation with you look like when they’re having that conversation with you?
Sam (18:49 – 20:18)
Yeah, exactly. And so good news kind of from a high level standpoint, if you’re going to make a gift to charity, that actually doesn’t count towards your estate tax bill. And so sometimes I’ll get clients that aren’t ready to give today, but they’d rather give to charity to the government than the end.
And so that’s one of the things that you can plan for. Now, I think your question is more geared towards what people want to do today. And so some of those vehicles that you look at is, OK, if you’re going to sell the business and you want to leave a certain piece to charity, how do we structure that in such a way that the charity gets the benefit, but also you get a large income tax benefit.
So things that we look at sometimes are, once again, with our lovely acronyms, charitable remainder trusts or charitable lead trusts. And what those are basically are is they’re charitable vehicles whereby you can get an income tax deduction while also getting some benefits from the estate side as well. And once again, this goes back to plan earlier rather than later.
If you want to maximize the income tax deduction that you can get, you want to plan well in advance before you do sell the business, because once you’ve signed that letter of intent, you’re fairly limited as what you can do from the charitable piece for the income tax deduction. Now, if you’re charitably inclined either way, it’s still something you want to explore. But once again, going back to the plan sooner rather than later, you can incorporate some very, very cool, and I say cool because I’m a nerd, fun stuff into your estate plan if you’re charitably inclined that can really get you a good income tax benefit.
Armando (20:19 – 20:41)
Yeah, well, let me just talk to the listener for a second here. A listener, you want a nerd, in Sam’s own words, because they really thrive on digging into the details of the tax code and the legal words to get what you want from your estate going forward. So Sam, being a tax nerd, being an estate planning nerd, legal nerd, I think those are all good things at times.
Sam (20:42 – 20:47)
My wife might disagree at the dinner table, but yes, for whatever reason, I get a kick out of what I do.
Armando (20:49 – 21:58)
Good. And so you talked about charitable remainder trusts and charitable lead trusts as a way to get some tax benefit from planning now. But one thing that I’ve seen quite a bit here in the Arizona Valley where the bulk of people live here in the Phoenix Valley is that companies that are valuable, that have been here a long time, are acquisition targets for people from out of state.
And if an out-of-state company wants to set up a shop here in Arizona, easiest ways to buy an existing company. So they’ve got people who would just call day in, day out, calling companies, trying to buy them. And so sometimes that business owner might get on a phone call they never planned on, they never thought of, and all of a sudden it’s rush, rush, rush, because this buyer says they’re going to give them $30 million for this company.
Oh my gosh, they got to take it now. And what advice would you give to that business owner who has just received that phone call and now they’re a little bit heightened and a little more anxious and a little nervous and they want to get it done because they don’t want that $30 million to go away?
Sam (21:59 – 22:26)
Once again, from my standpoint, you don’t let the tax tail wag the dog, right? If it’s a business deal and it makes business sense, then by all means let the business side leading up the tax side. But in that case, I would say ASAP at least talk to an estate planning attorney to see what your options are.
Because I mean, even if you signed that letter of intent or you’ve got that call, who knows, maybe it will fall through and we’ll have a little bit more time to get the estate planning site done.
Armando (22:26 – 23:11)
And I’ll add to that as well, Sam, excuse me. I’ll add to that as well, that I’ve heard investment bankers and business brokers say that that first offer the business owner gets is the lowest offer they’re going to get. And that it is really shooting themselves in the foot if they accept that offer better to take a step back, think about the big picture, maybe hire an intermediary or an investment banker to run a process for them.
Because if there’s one buyer willing to offer you $30 million, there are probably others that would bid up that price and get a higher price, which would give them time to meet with you and talk with you and plan with you while the say the broker or an investment banker is doing his or her work.
Sam (23:12 – 23:26)
Exactly. I’ve heard that as well. Obviously, I’m not a business attorney, but I’ve heard that they’re not calling you to make you a charitable gift.
They’re calling you because they want to get a good deal. So, the extent that you can get a bidding war, I think there’s a lot of value.
Armando (23:27 – 24:16)
So, the phone that is ringing with that potential buyer with a rush, rush, rush, rush, just some advice to the audience that are listening. Yes, it might sound great. Yes, it’s a lot of money.
The biggest check you’ve ever heard about for you once you exit the business, but take a step back. This is a very valuable asset that you’ve built. And people like Sam, who we’re talking with now and investment bankers and others can certainly help with that exit so that in the end, it really is what you want to see for your family, for the employees and for your company going forward.
And so, Sam, as you have these conversations then with people talking about their estate planning and about this threshold, what are some of the common maybe misconceptions or some of the things you hear from them that you address with those families?
Sam (24:17 – 25:16)
Yes, common misconceptions are there’s nothing we can do about the estate tax. I get that quite a bit as families just assume the ones that know about it, that’s inevitable, kind of like the income tax. It’s tough to avoid, it’s going to be there.
And what I tell families all the time is the estate tax really is almost an elective tax. And the reason that I say that is because as long as you plan, it’s unlikely that you’ll pay it or it’s unlikely that you’ll pay the full amount. And obviously that depends on the client.
I’ve had clients that decided to start the estate planning process in their 90s. Unfortunately, there’s not a lot of runway that I can do at that point. I do what I can do, but to the extent that you can plan early, so while either you’re younger in life or right before you have that business exit, that’s where the most value is.
And in terms of kind of other areas that I see families commonly have concern about, it’s going back to your situation where one child wants to be in the business and the others don’t, right? That’s a tough conversation to have.
Armando (25:17 – 25:31)
Are you wondering if you’ve missed anything in your planning? We hear that a lot from very smart, very successful people. And that’s why you may want to know more about our Founder Stress Test.
If so, go to axiomcorp.com.
Sam (25:31 – 26:18)
And it’s how do you structure that? Do you want one child to get the voting percentage, whether it’s shares or stock of the entity and the other children get non-voting? Do you want to have some kind of exit plan whereby one child ends up paying off the kids that don’t want to be involved in the business?
It’s things like that. And oftentimes, I mean, as you can guess with my profession being death and taxes, they’re uncomfortable to talk about and people don’t want to talk about them. But if you don’t talk about them and you leave it to chance, that’s where you see the big issues arise.
And so it’s taking the time to address those uncomfortable issues. And, oh, by the way, when you’ve got that call and someone wants to buy the business and you’re already stressed, it might be tough to address the uncomfortable issues while you also have the stressors going on in the background.
Armando (26:19 – 27:38)
Right. Exactly. And Sam, let me just make that point again for the listener, which is what you said, that these conversations can be very uncomfortable.
And family relations between the kids, their own, the siblings’ relationships with one another can run very deep. It can be very, you know, some old deep wounds that might be there. But I’d say that from the families who we’ve worked with, I think that I can safely say that all of want their adult children to still be a family when mom and dad are gone.
They want the siblings to have a relationship, a good relationship. And I’d say that sometimes parents inadvertently set things up and don’t communicate things. And that creates a problem when it’s already too late, when the parent is gone and now it’s just a problem to deal with.
And so it’s so much better when they can have those conversations with the adult kids now. And even if it’s going to offend or hurt some relationships, if this is what mom and dad want to do, then they’ve got to make it clear and communicate it so that they can try to get beyond that while they’re still here, still alive. And that planning that you can do for them and help them with is just so critical in helping nail down all those and desires they want for themselves and their family.
Sam (27:39 – 28:30)
Exactly. And what I tell my clients, and obviously it depends on family situation, but to the extent that they’re comfortable doing so, after they sign the documents, that shouldn’t be the end all, we should have a meeting to go over it with the kids to make sure that they understand the documents because I can give you the best, most complex estate plan in the world. But if your kids don’t understand it, it’s not worth much more than the paper it’s on, it’s going to cause confusion, it’s going to cause disruption.
So the extent that you’re comfortable doing so, I tell clients, invite the kids into the meeting at the end, when you sign the documents and you go over the plan, why are mom and dad doing things this way? And oh, by the way, if there’s an issue, great, you’re alive and you can solve it. You can see what needs to be done to address it.
Once you’ve passed away, the music has stopped in the musical chairs and you are where you are.
Armando (28:31 – 28:59)
Right. Exactly. Exactly.
So I like the words you use, you use the words elective tax for the estate tax. And I think that is such a good way to put it because it makes it very clear that, well, wait a minute, I don’t have to pay this. Well, with the right structuring, maybe you don’t.
And as you said, somebody who’s charitably inclined and wants to give money away, that’s one way to not pay that estate tax.
Sam (29:00 – 29:42)
Exactly that. And I mean, once again, it goes by client by client kind of analysis. So I have some clients that are right on the borderline, say the $15 million range.
And they say, well, gosh, $400,000, 1 million times 40% of estate tax. It’s not great, but for us, we’re on the stage where we’ve sold the business and now we’re spending down. We don’t want to do the advanced planning.
That’s wonderful, right? You don’t have to do the advanced planning if you’re going to spend down. And if you don’t mind that there might be a small estate tax bill, great.
But if you’re on the 14 million and you’re going to keep growing and estate taxes bother you, then it goes back to the elective part. You plan and you can mitigate it, not eliminate it.
Armando (29:42 – 30:25)
Right. And what I would add to that too, again, for the listeners benefit is if they are at that $14, $15 million mark today, and the plan is to spend it down, you’ve got to factor in inflation. You’ve got to factor in, yes, you’re going to travel now because you’re younger and healthy, but at some point that travel is going to stop and your spend might also decrease tremendously.
So just modeling that out for the next 20, 30, 40, 50 years, however old mom and dad are today, but modeling that out with inflation, with contingencies is so important so that when they have the conversation with you, then they really know what they’re looking at and really understand what that picture can look like so you can help them accomplish the goals they’re trying to accomplish.
Sam (30:26 – 31:02)
It’s exactly that. And it goes back to the planning stage. And what I do, I’m not in a silo.
I work with professionals such as yourself, financial advisors, accountants, and we take a holistic view of where you are today, what your exposure is, what you want to accomplish, and then we lay out where you should think about going. We give options, whether that’s a slot, whether that’s a charitable trust, we diagram it out, we model it out, and then you choose what makes the most sense. And as I said, sometimes you’ll have clients where really a $400,000 estate tax isn’t a concern and they like where they’re at.
Great. They’ve done their due diligence and they know what might happen and they plan for it.
Armando (31:02 – 31:32)
Right. Right. And Sam, let me ask you, sometimes I had a couple in here just last week who has no kids.
They’re approaching 80 years old. They’ve got no kids, no grandkids. And so they don’t have a next generation to hand those monies off to.
And so it’s a different conversation with them. And I guess how might you talk with them about their own estate planning if they’re over that taxable estate?
Sam (31:33 – 32:23)
Exactly. It’s going back to what they want to accomplish, what is meaningful for them. So for example, I have many clients that don’t have direct descendants, but nieces, nephews, relatives are very near and dear.
Their nieces and nephews are like their kids. It’s planning that way. Or once again, charity doesn’t count towards that estate tax.
And so sometimes it’s okay. What do you want to accomplish when you’ve passed away? If that’s a donor advised fund, you leave it to a donor advised fund, no estate tax there.
Who do you want to basically manage the fund or what do you want that to look like? Do you want a foundation? It’s okay.
What do you want to accomplish? Because I mean, even if you don’t have direct descendants, chances are there’s people or things that you care about and your estate can go a long way for bettering those lives, whether it’s a person or a charity.
Armando (32:23 – 32:46)
Right. And sometimes it might benefit their alma mater where they went to college or maybe to high school, or maybe they had a relative die from heart cancer and they want to benefit the Heart Cancer Association. And I guess if they do nothing at all, then their money will go to- It’ll go somewhere.
Yeah. It’s going to go somewhere. They can decide where that goes or they can let somebody else make the decision for them.
Sam (32:47 – 33:13)
Exactly. And the context there, if you don’t have a will, it’s going to go intestate, right? Arizona, it’s kind of a yo-yo.
It says, okay, did you have descendants? No, you didn’t have descendants. Okay.
Did you have siblings? No, you didn’t have siblings. Do you have parents?
And it will just bounce until it hits somebody. So to the extent that you don’t want that bouncing to occur and that there are either charities or people that are near and dear to you, you might as well direct it to those charities or people that are near and dear to you.
Armando (33:14 – 33:42)
That makes sense. I want to go back a bit here, Sam, to a couple of things you mentioned, because some of these require time. You mentioned the Spousal Lifetime Access Trust, the SLATs, the acronym that you used.
If someone comes to you today and says, hey, yeah, that’s a great idea. Let’s go ahead and do that. It takes time, of course, to structure, to move monies around, retitle things, start to finish.
Is that a month, two months, six months? What’s that typically take for time?
Sam (33:43 – 34:47)
I would say a minimum of six months. So one of the things that you look at with Spousal Lifetime Access Trust, and I know this is not a discussion on that, so I won’t go too deep, but is a doctrine that the IRS has called the Reciprocal Trust Doctrine. And what that doctrine says is if you make trust too similar, so back in my example where Cheyenne, my wife, made a trust for me and I made a trust for Cheyenne, if they’re identical in terms, they were formed at an identical time with identical assets, the IRS might come and unwind those trusts and say, for estate tax purposes, you’ve accomplished nothing.
It’s as if you made a trust for yourself. One of the ways to battle that doctrine is to have time, the time to plan, the time to have differences in the trust, to have it funded at different dates and sometimes funded with different assets. And so what I tell clients is, no, if you want to do a slack plan or something like that, it’s not going to be done next week, nor should it, because if it was done in such a short period of time, chances are it won’t work.
So to get to your point, you really want to have that buffer time at a minimum, six months to go through to design everything out.
Armando (34:49 – 34:59)
Okay, perfect. Thank you. You also mentioned charitable remainder trusts and charitable lead trusts.
What kind of time frame are you looking at, start to finish on something like that?
Sam (35:01 – 36:00)
Those trusts are a little bit less worried about the reciprocal trust doctrine, a little bit more concerned if you’re trying to get a large deduction on the sale of the business. And what I mean by that is, say you have the business phrase today at 10, you put it into a charitable trust, and then it sells for a hundred, right? I would want that sale at a hundred to basically not be subject to your income tax.
I want to move it out of your estate. So if you put it in today at 10, and then all of a sudden you sell tomorrow at a hundred, there’s chances are that the government’s going to look at that and say, okay, that appraisal at 10 doesn’t hold water. It really was a hundred.
So once again, the more time you give me as an estate planner is for me to structure that and plan that the better. I would say at a minimum, I really like six months, if not more. And so I know sometimes that’s uncomfortable.
And yes, there are situations where it doesn’t make business sense to do that. But I tell clients, the closer you go, the risk you’re against. So to the extent that you have time, plan early rather than later.
Armando (36:00 – 36:43)
Yeah. Yep. That makes sense.
Thank you for pointing that out. So I’m just going to reiterate what you just said, Sam, for the listener’s benefit, that the IRS has their own lens that they look at this through. And from their lens, it has to make sense.
So what Sam just said is, what you just said, Sam, is if it’s appraised at 10 and sells for a hundred million six months later, no one’s really going to buy that, including IRS. So having a little more time from that initial appraisal value of 10 million versus that a hundred million dollar sale down the road, the more time, the better. And it looks like it’s more realistic rather than it was a tax play to pay less taxes.
Sam (36:44 – 37:16)
Exactly that. Because remember, when the IRS takes a look at all these things, it’s facts and circumstances. And so what I tell clients is there’s good facts and bad facts.
I can’t tell you what’s going to be determinative, but I can tell you that the more good facts that you have going into an examination is better than having a lot of bad facts. And so to the extent that you can structure it in such a way that you maximize the good facts and you minimize the bad facts, chances are you won’t be the case that they decide to take to court because just like me, the IRS doesn’t like to lose cases either.
Armando (37:17 – 37:29)
Yeah. Right. So if they’ve got six they’re looking at and they’re going to choose one to go after, you don’t want to be that one.
So you want to have more facts in your favor is what you’re saying, right?
Sam (37:30 – 37:52)
Exactly that. Because, I mean, you have to think about it in two ways. One, the IRS wants to collect when they audit.
Two, they don’t want case law that makes it more difficult for them to collect. And so when you’re structuring it and it goes back to the acronym, pigs get fat, hogs get slaughtered. Right.
Which is the tax when we like to throw out. They’re really looking for the hogs.
Armando (37:53 – 38:15)
Okay, good. Well said, Sam. Sam, what have we not touched on so far in this conversation as you’re having these conversations with business owners who are not quite sure what to do, maybe not gone through this process before, and you’re helping to educate them, helping them understand what the options and possibilities are.
What have we not touched on in this conversation yet, if anything?
Sam (38:15 – 39:21)
A big one that we haven’t touched on and it goes back to the planning is how can you take an existing business today and perhaps restructure it in such a way that you get a better tax treatment when you give it away. And so one of the common things I’m talking about there is sometimes you can take an existing business and you can break it up into voting and non-voting. And then when you gift the non-voting stock, you can get a discount.
So sometimes people get a little bit confused. I teach estate planning at Grand Canyon University. So sometimes my students get a little bit confused by this concept.
I’ll use an analogy that I use in the classroom, which will hopefully make it a little bit more sense. Armando, if I gave you $10 and I asked you, how much is that $10 bill worth? Well, you’d say $10, likely.
If I gave you a $10 gift card to Starbucks, you might say, well, it might be worth $10, but I can only spend it on Starbucks. If I said, well, no, Armando, it’s even worse. This $10 gift card’s only valid at 1 p.m. at Starbucks on Mondays. You wouldn’t pay me $10 for that gift card, right?
Armando (39:21 – 39:23)
I would say to me that has no value.
Sam (39:23 – 39:24)
Exactly.
Armando (39:24 – 39:25)
I’ll give it to somebody else.
Sam (39:25 – 40:16)
Exactly. And so you can take that concept and you can apply it to a business interest. I can make a business interest less attractive when I give it away.
Because when the IRS looks at what you give away, they say, what would a third party pay for this? What’s the price, the maximum value? So when I’m gifting, that test is applied, even though I might be gifting to a trust for, say, my spouse’s benefit, right?
They’re applying that third party test. And so I might be able to take that stock and make it really unattractive if I were to try to sell it to a third party. Now, when you sell the whole business, right, the whole Apple, that restriction might not be super relevant because you’re selling the entire Apple.
But with respect to that gift, I can make it unattractive. And by doing so, I might be able to get a pretty substantial valuation discount when I give it away.
Armando (40:17 – 41:44)
Right, right. So, Sam, let me make that point that you just made as well, but for the listener’s benefit. The company that that family owns, maybe on the open market today, maybe they got a call and somebody offered them, say, $10 million for it.
And so they have this number in mind that my company is worth $10 million. That probably isn’t that uncommon for people to have a number in their mind based on either people they know, stories they’ve heard, but somehow they’ve got some kind of a number in mind that their company is worth, say, $10 million. But what you just touched on, Sam, is that there are appraisers that will come in to take a look and determine a value of that company based on limitations that are inherent in that company.
What I’m really saying is that, just what you said, that yeah, a $10 bill, it’s clear what that $10 bill is worth. It’s worth 10 bucks. You give me a piece of paper that is only negotiable at one place, well, the value drops a lot.
And that’s what the valuation people can do when they look at that particular company that the family owns, and they can value it at less than $10 million. Maybe it’s going to come in at $8 million or $7 million or $6 million, depending on how that valuation is done. And if you can drop that value substantially and then do the estate planning with you at the same time, then they can really get a bigger bang for the buck.
Sam (41:45 – 42:29)
Exactly. And so to kind of make that full circle, what I’m saying from my end is, say you have that business that you think will sell for $40 in a year, right? Well, if you can structure it right away and get a pretty big valuation discount, you might be able to get it out of your estate and only maybe, say, use 25 of your estate tax exemption, right?
And then when it does sell for 40, that growth, the difference between the 25 and the 40, you’ve moved outside of your taxable estate. And once again, it gets back to timing, right? If you got the appraisal that says it’s 25 today and you sold it the next day for 40, that appraisal is probably not going to hold water.
But if you get the appraisal this year and the next year you sell for 40, that might be a different issue because a lot can change in a year.
Armando (42:30 – 43:00)
Right. And it also gets to the point, Sam, you made about planning ahead, that maybe six months for a spouse-elect to max this trust. But if you’ve got to engage someone to do business valuation, then they will have their own time requirement from start to finish.
Maybe that’s going to be a month or two or three for them to get their work done. Then it comes back to you to understand what options you can work with given the value they’ve assessed on that company.
Sam (43:01 – 43:25)
Exactly. And what I tell clients that we’re seeing more of as we approach January 1st, 2026 is the valuation people are getting really busy and it’s taking longer and longer for them to get appraisals back to me. And we’re still a ways away from January 1st.
And so next year, the closer we get to that deadline, the more difficult it is to get all the ducks in a row prior to January 1st, 2026.
Armando (43:25 – 44:06)
Yeah. So listen, let’s make that point that Sam just made there. So listener, what he’s saying is all those service providers in this space are going to get busier and busier as we get closer and closer to January 1st, 2026.
So yes, you might think you’ve got maybe a year and a half or just over a year to get this done, but realize that all those service providers, your tax CPA, the business valuation people, the estate plan attorney like Sam here, all those people are getting busier and busier and busier, and you’re going to get placed last in line for them versus now when there is time, you can see them a lot sooner than later.
Sam (44:07 – 44:35)
Exactly. And I mean, every attorney, we have an ethical duty to make sure that we do our best for the client, right? And so sometimes that means, for example, when we had the For the 99% Act, we had to turn people away just because we ethically couldn’t take that duty because we didn’t have time, we were too busy.
And so it’s getting, it doesn’t have to be me, but getting on somebody’s radar to make sure that if this is a concern, it gets addressed well before we get to the point where we just have to turn people away.
Armando (44:35 – 45:20)
Yeah. Yeah. And I’d like to also, again, speak to the audience here, the listener, that they’ve got some kind of a number in mind for the value of their company.
And that may or may not be the right number, but they have some idea what that business is probably worth. And so if there’s somewhere near a value of the company, say somewhere around $14 million or maybe 12, maybe even 10, probably worth it to get a better handle on what is the real value of the business, especially if they expect that value to grow, to increase over time, because that’s when Sam and other state lawyers like Sam, but that’s when Sam here can do some of his legal work to put you in a better situation.
Sam (45:22 – 45:30)
Exactly that. And there’s no harm in getting things looked at, get it modeled out, see what the options are, see what the risks are, and then decide what you want to do from there.
Armando (45:30 – 46:06)
Yeah. Yeah. And often what we’ll do, Sam, is a precursor to that meeting is we’ll make sure that we’re talking with our families that own the business and make sure that we’re clear.
I should say that that couple is clear what they really want to see going forward for their family, for their adult kids, for the grandkids, because when we can nail down some of that ahead of time before they come to see you, then it’s a more efficient process. And then you know what the goal is sooner versus having to go through some different conversations with them. Is that helpful for you?
Sam (46:07 – 47:26)
I mean, estate planning, like any other area, it’s not a, we sit down in an hour and we figure out what your life goals are and how to accomplish them. It’s another cliche, because you can talk about these cliches. It’s a journey, not a destination.
So the sooner you start those conversations, the better, because what you think might be valuable to you. So for example, you might think passing the business on to the kids is something you want to do, but you have the conversation, all of a sudden you find out the kids don’t want to run the business. That will impact what you do.
And so to Armando’s point, if you’ve had that conversation before you’ve signed the documents, all of a sudden doing this estate plan that puts a business in the trust, well, you might realize that that’s not what you want to do. So it’s having the conversation, letting there be some time to digest, to think it through. Maybe as I said, to the extent you’re comfortable with talking to the kids about it and seeing what their thoughts are.
And then once you have a clear direction coming to an estate plan attorney to actually implement the plan, that’s a good thing to do. Because once again, if we’re April of next year, and I’ve only got X number of months to get the stuff done, it’s going to be hard to have more discussions on what is meaningful, what the value is, because I’m trying to get the work done.
Armando (47:27 – 48:23)
Right, right. Yeah. And I’m going to just drill home the point you just made that it’s to the listener here, that it’s really, really important that you have a conversation with your adult children and be clear that they in fact do want that company.
Because it’s common, fairly common for the adult kids to want to do something else. They often don’t want to run the business that mom or dad or mom and dad together built. They don’t want it.
So it’s just critical to have the conversation with the adult kids. And even though it might be a very uncomfortable conversation, have the conversation. And that way, when you get to Sam and you begin planning, he knows what to do.
And you can talk about the viable options available versus those that really don’t make any sense for you.
Sam (48:24 – 48:37)
Exactly that. To the extent you’re comfortable doing so, have the conversations. Because the real train wrecks that you see is when the conversations were never had.
And now all of a sudden it’s transferred to the next generation, and then they don’t know what to do with it.
Armando (48:37 – 48:52)
Yeah, yeah. All right, good. Well, Sam, I think we’ve probably touched on, I think most things, unless there’s anything else that we didn’t touch on that you have in those conversations with people, those initial conversations with people who come to see you for the first time?
Sam (48:52 – 49:37)
No, I mean, I think we’ve covered a large… The estate planning book was thrown at everybody on this call, right? It’s the breadth of issues that you take a look at.
And as I said, with everything I mentioned, I gave you a thousand foot overview to something that’s really a mile deep. So for example, slats, that’s an hour-long discussion in of itself. Beneficiary defective trust, which I just mentioned in a sentence, that’s another hour-long discussion.
And so it’s kind of, as I said, you take a look back and you say, okay, am I going to be subject to this sunset? Is it something that I’m concerned about estate taxes? And then having that discussion to go more meaningful into, okay, how do I address it?
What are the options and what do I want to ultimately do?
Armando (49:38 – 51:34)
Yeah, excellent. So I’m just going to touch on a couple of things, just recap a little bit here. And we talked about the maintaining control of that business and of the assets.
Often the one who created that wealth wants to retain control as long as possible. And there are ways that working with you, they can structure things in a way where they can still maintain control. They don’t have to give it away yet.
They can be very aware of that estate tax threshold and be mindful of it. And you can help them to not be in that elective tax zone where they don’t have to pay that estate tax if they structure things the way they should. We also talked about the spousal lifetime access trusts, how that can be helpful as well for some couples.
We talked about not spoiling the kids often. The parents who’ve created this wealth don’t want to spoil the kids. And then how do you do that?
You talked about charitable remainder trusts, charitable lead trusts as well, different ways to give to charity now while you’re alive and using different vehicles to do that. You mentioned that the estate tax really is an elective tax. You can’t elect out by doing things ahead of time.
And you also talked about, Sam, about restructuring, restructuring the business, the assets so that that restructure allows them to get a better, to minimize that estate tax and using discounting, valuation discounts in a business so that they can, again, be in a better position because they’ve done that restructuring. So, Sam, I think this has just been a great conversation. Thank you so much for having this conversation.
And if somebody, say, is listening and really likes what you said, and they want to ask you more about that acronym you used, how is the best way for them to get in touch with you?
Sam (51:35 – 52:13)
Yeah, well, first, thank you for having me. I very much enjoyed talking about what I do. As I said, it’s not something that a lot of people necessarily enjoy doing, but I get a kick out of it.
I love to talk about it. So, if there’s ever anyone that does want to talk about it, I work at a law firm called Spencer Fane. You Google my name, crazy Italian last name, and I’ll come up.
Feel free to send me an email. I’m active on LinkedIn. So, if you want to reach out to me via LinkedIn, please do that as well.
And what I tell clients is don’t charge for initial meetings. And so, if you ever just want to have a conversation, happy to have that conversation, and we can go from there.
Armando (52:14 – 53:21)
Fantastic. Thank you, Sam, so much. And so, just a moment here for the listener.
So, listener, what you want to do is listen to this conversation. Of course, a lot got thrown at you, as Sam said, about the whole estate planning world. And there is a lot there.
It’s very deep conversations. But take this away, that if you’re at that taxable estate right now, overall net worth is somewhere around $14 million, maybe even a little bit less. That means you’re probably somewhere near the border.
And it’s worthwhile to have a conversation with Sam, so that when it’s all done, what happens with your estate is exactly what you want. Your adult children are still a family together, even when you’re gone. You’ve minimized that elective tax, the estate tax, and you’ve engaged the right people to help you do that.
That’s what’s possible when you listen and take action ahead of time. Plan before that due date rolls around. And that due date’s coming quickly, January 1 of 2026.
It’s going to happen. So, do it now. Plan now.
Sam, thank you so much for this conversation. Really, really appreciate it.
Sam (53:22 – 53:24)
Thank you as well, Armando. Appreciate it as well.
Armando (53:24 – 53:47)
Right. Hope you enjoyed this episode of the Founder’s Guidepost. Whether exit is on your immediate horizon or maybe 10 years down the road, there’s something here for you.
Wondering if you’ve missed anything in your planning? Schedule your 30-minute founder’s strategy call at axiomcorp.com. And congratulations on your business success.
You are the American success story.
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