In this video blog post, I want to share the interview I did with Rental Owner Realtor Doug Taber, CCIM, for his Rental Owner Insight (ROI) podcast. We discussed the importance of planning for one's estate, rather than just relying on a will, and what difference it can make for one's family once they are gone.
I am providing a transcript of the interview:
Interviewer: Well, I am with Rod Hatley today. Rod is an estate planning attorney with the Hatley Law Group. Rod is also a veteran of the United States Navy, very well known in the San Diego real estate planning community and the business community. So welcome, Rod.
Rod Hatley: Thank you, sir. Thanks for having me.
Interviewer: You know it’s great to see you, Rod. We have known each other for several years now. And I know that you have a lot of experience in estate planning. And that's why I thought it would be essential to highlight you on this podcast to talk a little about estate planning and how important it is with owners of rental properties because that's usually my market.
Rod Hatley: Right.
Interviewer: But, before we jump into that, you know, right now we are in May of 2020, we are in the midst of a significant change in the world with COVID-19, and things are starting to settle a little bit, but there's still quite a bit turmoil out there. From your position, how have all these changes, specifically around COVID-19 and quarantines, affected the estate planning world?
Rod Hatley: I think that it has brought home the necessity to have something in place because none of us knows when we may pass on. Indeed we are all going to die at some point. We might contract COVID-19. So, what do we do now? I have always talked to my clients about having a good estate plan in place, which includes a Healthcare Directive and HIPAA authorization. These are vitally important documents. I'll pick on myself. If I had an injury or disease, and I had to go to the hospital, and I can't speak for myself, I can't admit myself, but I have documents that say I have appointed people I trust to do the authorizations.
And if I end up in an irreversible coma or in a persistent vegetative state, I want to die in dignity . And so my agents are empowered to pull the plug, tell the doctors, “Don't keep Rod alive, he doesn't want that!” And I am also a big believer in being an organ donor for transplant purposes so if I could make someone else’s life better, I am all for that. My HIPAA authorization, my medical information is protected, so that the people who have received permission to access my protected information can do so.
The HIPAA authorization is vitally essential. Because if someone is going to act as the agent under my Health Care Directive, they need to have access to my protected medical information, talk with doctors and nurses, get my medical records, et cetera, to be able to fulfill my wishes. This is an interesting time for all of us -- because it's driven home the point. Get that statement in place, guys, and have those critical medical documents available, too.
Interviewer: It seems to me, Rod, that HIPAA is a recent term.
Rod Hatley: Yes. HIPAA is an acronym; it stands for the Health Insurance Portability and Accountability Act. It began in the late 90s. And what it does is, it says your medical information is private, it should be protected. A nd California has its state version. HIPAA is federal law, and California has the Confidentiality of Medical Information Act (CMIA). So together those laws say you can't access Rod's protected medical information unless you are authorized.
So, for example, Doug, I know you are married. And even though you and your wife trust each other, you want each other to be the one who make critical medical decisions for the other. Having the documents in place, at the ready, can make a real difference.
What I do in my practice is; I buy my clients a membership in a company where your Health Care Directive and HIPAA authorization can be faxed on demand to the hospital. Because nobody walks around with a copy of these documents. I set this up for three years. Because about every three years, I like to have my clients come back and see me to review their documents: See what's changed in their lives. Maybe they had changes in their family or differences in their wealth, the laws may have changed, etc.
I have seen where people don't come back for years, they may go 20 years between the time they got the original plan in place, and now they are updating it.
They are lucky, and maybe they dodged a bullet or two in the meantime. But, I am just saying 20 years would be way too long. So, about every three years, five years at the most, is a good rule of thumb for your plan review.
Interviewer: That's an excellent point. And that's why I was leading in with the HIPAA being a recent statement. A lot of the clients that I talk to ask me about their estate plans. It's sometimes even after someone has passed, and they just haven't reviewed their documents for decades. Is this common?
Rod Hatley: Yes. I think the anecdotal evidence is it's about 19.3 years -- that's a long time! I have had colleagues come to see me,and they did wills like 20 years ago. At least they had some plan in place, but since that time they had kids, those kids are adults now and have children of their own, so they have grandchildren.
So, the original planning was better than nothing, right? But, it should be updated, reviewed, and revised. I think there are lots of good reasons, especially in the world in which we are living today to have it reviewed and make sure it still meets your desires or what you want to accomplish.
Interviewer: Now, we have got a lot to cover on the real estate. But I wanted to open up with the importance of the estate planning piece, especially in today's environment. Is there a service that you offer that is a review for folks that maybe haven't looked at their planning for some time?
Rod Hatley: Yes. I am happy to offer a complimentary review. I will meet with people and take a look at what they have in place. I don't charge for the meeting. And if I can be of contribution, I'll of course be. If they'd like to move forward with me, that's great. If they don't want to -- I always say, if you leave the office and you are smarter because of the conversation that we have had, then I have done my job. At least I can help you understand what you have in place. Initially, most people got something done by an attorney. They don't know what it means or how it works. I'll take the time to explain how the process unfolds, help them understand what their documents mean, what they do and say, et cetera. Happy to do that, I think it's valuable. I think it's worthwhile for people because forewarned is forearmed, you know?
In addition to offering a no-fee meeting, in this time of COVID-19, I feel so strongly that people have those essential medical documents that I will gladly do a complimentary Health Care Directive and HIPAA authorization. Even if you don't ever become a client, I think it's so important to get them in place; they may also have friends or colleagues who don't have the documents, and I am also happy to meet with them on a complimentary basis.
Interviewer: That's a wonderfully gracious offer. I encourage my audience to reach out to Rod. You never know, this COVID has caught everyone, the entire world, by surprise. And only Lord knows, when your time is up here. I just see too many of my clients, and hey haven't reviewed their information recently.
Swinging around a little bit, this brings me to one of the main areas that I think married folks have estate planning questions. If not only with rental properties but also when they are buying their first home, for instance, on the real estate side, the question that always gets asked by the escrow officer, how do you want to take title?
As California is a community property state, how does it work? Can you go into the different types or ways of taking title for a husband and wife? What do you recommend on something like an investment property?
Rod Hatley: Great question. The married couple can take title as husband and wife as joint tenants with the right of survivorship. And that's fine, probably not the best way to do it, but it would avoid probate on the death of the first spouse. Say if the husband dies, there is no probate at his passing. His wife will need to do some paperwork. Now, the property is in her name alone and that's it. But, there will be probate when she dies.
So, you dodged a bullet one time. You are not going to dodge it again. Now the question is “Is there a better way to do it? You could take title as community property with the right of survivorship. It's a better tax result, but it's still with the right of survivorship. So, when the first spouse dies there's no probate but, yes, when the second spouse dies, there will be a probate.
Probate takes time, it costs money, and it's a matter of public record. Having lived through a seven-year probate period when my father passed away, I can tell you, anytime you can stay out of probate court, it's a better answer. I recommend if they have a home, they have a living trust, because assets that are in living trusts never go through probate.
Here is what the trust accomplishes. It has two valuable results. I'll use myself. If I become mentally incapacitated as a result of an injury or a disease, and I have no planning in place, at some point, someone is going to need my signature. The way they get it is they take me to the probate court branch downtown and say, "Your Honor, this is Rod, he can't manage his affairs. Please appoint me, some third person, to be the one to manage his affairs."
Now, I am in probate court, which I don't want to be in, and my conservator, that's a guardian for a grown person, reports to the court every two years: How am I doing and how are they spending my money. I want to avoid the conservatorship and certainly, someday, when I pass on, I want to avoid probate, if I can. So, if someone has a home, I always recommend putting it into a living trust.
Now, your question is, clients of yours own an apartment building. And, probably the worst way to do that is husband and wife, as joint tenants with right of survivorship — no probate on the first death, but yes, on the second death. I would recommend they consider having it owned in a structure like a limited liability company (LLC). That way, they've built firewall of protection around that asset. So that, if they get sued, because of a slip and fall, lead paint poisoning, asbestos, mold, mildew, whatever the case might be, the lawsuit is not going to impact or be attached to their other assets like, home, bank and brokerage accounts, and more.
So, let's be clear. If your clients own an apartment building, they need liability coverage, and they may want to go further and have an umbrella policy, so that, if the limits of their foundational policy are exceeded, then there's an umbrella. But, the reality is, insurance, whether it's liability insurance or the umbrella policy, they all have a cap and may have policy exclusions.
So wear a belt with your suspenders. Set up a limited liability company to own the property. Again, build that firewall of protection so that even if the policy limits are exceeded, or you are knocked out because of policy exclusions, you have got a limitation of your liability. If someone files a lawsuit, all they can get are the assets inside the LLC. They are not going to have access to your personal assets. It makes sense.
Interviewer: I have seen couples that have a small rental property, maybe a four-plex, and they are holding title as husband and wife as joint tenants with the right of survivorship. Is there a difference between joint tenants and joint tenants with the right of survivorship?
Rod Hatley: By default, if it's a joint tenancy, it doesn't have to say the right of survivorship. And sometimes, it’s not expressed as such but, you know, you might have seen JTWROS, joint tenants with the right of survivorship. But, you just see something that says as joint tenants, with the right of survivorship is assumed.
Interviewer: Okay. Good to know. Sometimes, I think someone is lazy when they are putting the paperwork together, and they didn't include the addition or the box was too small. That leads me to ask -- what would be the difference between having an asset in an LLC versus having an asset in a trust. I have seen it both ways. Is there more protection in an LLC versus a trust?
Rod Hatley: Yes. Here is the best way I can describe that. If you put an asset, for example, like an apartment building into a living trust, okay, that's great. It will avoid conservatorship if someone is incapacitated. It will avoid probate when they die. But here's the big insight and we are talking strictly from a liability standpoint. I tell my clients to think of a living trust as an open-top box. We can put assets into the box, and we can take assets out of the box -- refinance the property and whatever.
But the reality is, it's an open-top box. If you can reach in to take the assets out, so can creditors. Having assets owned by living trust is a great answer to start, but think it through. It will avoid conservatorship, it will avoid probate, but it doesn't avoid being sued and having that asset taken from you. In a successful judgment, a creditor can reach into that box and take the asset away from you. But, if a limited liability company owns the property, it will protect your other assets from being reached by the successful judgment creditor. So, there's a slip and fall, lead paint poisoning, all the list of bad things that can happen, all they can get is just the property asset. They can't get your other assets. Does that make sense?
Interviewer: It does. Sounds like the LLC would be preferred. In regards to your investments and ownership of the LLC, they would be in the trust, right?
Rod Hatley: Bingo! The membership interest of the LLC will be transferred to the living trust. So, that upon, incapacity or typically death, that asset would pass through the trust to the beneficiary. It might be children, grandchildren, whoever you wanted to designate.
Interviewer: So, if you are structuring it properly, always have a trust in place. What's common in our business are folks will get an LLC for every new property they get.
Rod Hatley: And, you know, and that is probably one way to do it. When I have a conversation with clients, the question is do you want to do a separate LLC? Some do, and they may have a really large property. It doesn't make sense to put more than just one property into an LLC, because now you are potentially contaminating those assets. They should get one asset in the LLC, then that could spill over to the other asset that's in that LLC. In California, there is a feature called a “series LLC". The bottom line is, in California, you could have one mother LLC and then, it will have baby LLCs underneath it. The goal was you would only file only one tax return federally. California said, no, no, no. We are going to tax you on each of the baby LLCs, okay?
You have to file returns for each of the baby LLCs at $800 a year franchise tax fee. You don't see series LLCs so much anymore, because of the challenge with the state of California franchise tax. But I think it's smart, depending on how large the assets are, perhaps have a separate or distinct or discrete LLC for each of the properties that you have. But yes, more paperwork, it’s more of an accounting challenge, I guess. But, you know what, you are just building liability protection for each of the properties you own.
Interviewer: Sure. All this makes sense. These are some of the main areas I wanted to cover; they are the ones I see most often. Whenever I meet a new client, or I am putting a valuation together, I am looking at public records. I see folks exposed because they are just holding a -- maybe a two million dollar building in a joint tenancy. It just doesn't seem like it would be the wisest thing to do.
Rod Hatley: You are correct.
Interviewer: So, when it comes to estate planning, which is your expertise, I know you also have expertise in taxation. We are talking about investment properties, investment real estate, either here in San Diego or maybe investments spread across the country. What are some of the key areas that you see are of concern that folks should look out for or areas where you are working with clients?
Rod Hatley: And it’s a great question. Making sure the title is held the right way and clearly; that’s the number one, right out the gate. Making sure that it's the right kind of entity that they are going to put it into. I think the LLC is probably the easiest. If you put into a corporation, especially land going for a corporation, you may have a real tax problem that works against you. Trying to get the property out of the corporation means you will pay a lot of capital gains taxes on it. So, the best answer is to work with your CPA and your estate planning attorney. Make sure that those assets are put into the right structure, because you don't want to be triggering any unnecessary capital gains taxes against that.
For example, years ago, I worked with a dentist, who had put the building that housed the dental practice into a corporation. Well, he didn't know any better. He thought it made sense because he was thinking in terms of the limited liability, and that's wonderful. But, he didn't get the very best tax advice, because now, to take that building out of the corporation, it was a C-Corporation, which was also a mistake, but to get it out of the corporation, it's going to take him a number of years.
He would have to convert to an S-Corporation, and he had to wait a number of years before he can liquidate it out of the corporation. An LLC is a much better answer for clients. And that's probably the mistake I see that's made most often.
There's plenty of advice out there, but the client is so busy, running the business and building an empire, et cetera, that they give short shrift to the really good advice. And many of them also don't have a good financial plan in place, they may or may not even have a basic will.
It's great to be an entrepreneur, building and contributing to the community by providing housing, et cetera, but often they leave a lot to chance. If there is a disability or someone dies, you've got a mess on your hands that has to be cleaned up. Especially for the beneficiaries, if it's Mom or Dad or now the last person has died, and the kids have to come and clean this stuff up, it can be a real challenge.
Interviewer: We have talked about real estate, we have talked about some of the key points and sounds like, those are the main areas. How you take title, entity structure, and I am assuming those are services that the Hatley Law Group offers?
Rod Hatley: Yes. In fact, I earlier invited many of your listeners to this podcast, if you would like to contact us with regards to getting a Health Care Directive and HIPAA authorization in place, if you don't have one, we would be honored to do that free of charge just because I think it's so valuable to have that in place, at a minimum. To those of your listeners who have real estate holdings, such as an apartment building or duplexes or any multifamily, I would recommend, if you want to come in, we would happy to take a look at the entity structures and see what you have in place and make recommendations for you to consider. And at the end of the day, even if we don't end up working together, if I help you understand your rights and responsibilities, then you walk out of here smarter than when you came in, and I have done my job. Of course, when we have a chance to work together, that's even better. But the goal is to educate.
Interviewer: Wonderful. Any other pieces of advice or, or areas of concern in the broader world of estate planning?
Rod Hatley: I can't overstate this, if you have a plan in place, congratulations! You are ahead of the curve. But, if that plan has not been reviewed within the last three years, it's probably time to get the plan checked out. Is it still working for you, does it still accomplish what you wanted it to? And, as you know, we have had tax law changes, estate tax law changes, and the economy has changed, and your personal situation changes. It's impossible to write an estate plan one time that takes care of everything for all time.
You have got to put a plan in place, keep it updated and maintained and if you do, when disability or when typically death comes, that should be a much cleaner plan to administer for the benefit of the family. And that's the reason why to do this planning. Now, certainly the Health Care Directive and the HIPAA authorization will allow your family to take care of you when that day comes and you have to go to the hospital and you can't speak for yourself. So they can make those important decisions for you. But certainly, some day when you are gone forever, the set of instructions that you leave behind saying this is what I want to happen to my assets and this is who gets them and when. I think that's incredibly powerful, and let's talk about that for just a moment.
I define estate planning, and I didn't come up with this definition, but I will share it with you. The definition of estate planning is “I want to control my property while I’m alive and well. I want to provide for myself and my loved ones if I become mentally disabled. And someday, when I pass, I want to leave what I have to whom I want, when I want, and more important, the way that I want. And I want to be able to do all of these things with fully disclosed and controlled settlement costs.” That's the best definition I can give. I can't take credit for it, but I think if you want to understand estate planning in a nutshell, that would probably be it.
Interviewer: It sounds to me, which is one of my client's favorite word, its control, it gives them control: Of how their assets are handled.
Rod Hatley: Yes. There is a big misconception out there. People may think if I set up a living trust, and I put my assets into it, haven't I lost control? I will say, no. In fact, you have more control now than you had before. All we are doing is changing the names on the things that you own. So, for me, Rod Hatley, I changed over assets from my individual name to my name as trustee of my living trust.
So, all I do is just change the names on the things I own. But I have more control now than I did before because if I become incapacitated mentally, then I don't have to go through conservatorship and then, someday when I pass on, there won't be a probate to the assets that are owned by my living trust. So, I am in more control than I was before and that's a good feeling. And I have my Health Care Directive and my HIPAA authorization. I have a special service that I provide where these can always be accessed 24 /7/365 and a copy of those documents faxed to the hospital. And this even works internationally or if the fax doesn't work, you can go on to the Web site and you can download it there. And then, my agents can speak on my behalf if I couldn't.
Interviewer: That sounds like a great service. Estate planning is really all about caring for your clients. I can tell that you really have a passion and a focus on caring for your clients.
Rod Hatley: I think I can help clients provide for their families and their desire for the American dream. You know what they say, one generation plants the tree, the next generation gets the shade. You want to do this for your family. And, your real estate clients, you know, they are contributing to the society, they are providing housing and that's value. But by the same token, they want to protect what they work so hard to build and acquire.
Interviewer: I can tell you are an expert in your field which is why I wanted to have you this podcast.
Rod Hatley: Thank you for having me! Call me at (858) 465-8002.