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Episode 33:  Planning Considerations for the Family Enterprise

In this episode of the Family Biz Show, host Michael Palumbos, alongside guests Gary Katz and Gerald Stack, delved into critical planning considerations for family enterprises. They discussed the importance of understanding the business's value, planning for unexpected events, and the significance of coordinating estate and business planning to mitigate taxes.

Gary Katz, a wealth preservation specialist, highlighted strategies for financial planning, wealth transfer, and business succession, emphasizing the importance of understanding personal and business expenses for future planning. He also touched on the concept of marketability assessments for businesses, which can reveal the true worth of a company and inform strategic decisions for wealth preservation.

Gerald Stack, an experienced lawyer, shared insights on estate planning, emphasizing the importance of accurate asset titling and the use of lifetime trusts to protect wealth from creditors and in the context of divorce. He also addressed the potential changes in estate tax law and the critical need for timely planning given the current political landscape.

The episode underscored the necessity of regular reviews and updates to one's estate and business plans, especially in light of potential legislative changes that could significantly impact wealth transfer and tax obligations. The collaboration among financial, legal, and accounting professionals was highlighted as a crucial element in effective family business planning, ensuring a comprehensive approach to wealth preservation and legacy building.

Episode 33 Transcript


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Michael Palumbos: Welcome everybody to the family biz show I am your host Michael Columbus with family wealth and legacy in Rochester New York.

 

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Michael Palumbos: We have an awesome show lined up for you today we're going to be talking about planning considerations for the family, enterprise and we've got Gary cats and Jerry stack with us and welcome gentlemen.

 

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Gerald Stack: Thank you Mike glad to be here.

 

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gary katz: Mike.

 

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Michael Palumbos: I can I got you what we what we typically do is love to have each of you kind of introduce yourself, give us a little bit about your journey, how you got to where you are today and, especially, you know the.

 

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Michael Palumbos: Times that you know, working with family businesses through through your career and then we'll dive in and we'll start asking you some questions about some of the technical things that are going on in the in the world today it's a big year in front of us isn't it.

 

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Gerald Stack: So this.

 

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gary katz: Is Jerry you want to go first and i'll follow up with my introduction.

 

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Gerald Stack: yeah absolutely very glad to so i'm Gerry staff and the lawyer, with the law from Berkeley damon in Syracuse New York.

 

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Gerald Stack: I graduated from Syracuse University College of law, many years ago, then I went to the University of Florida to get a Masters degree tax law.

 

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Gerald Stack: And I returned to Syracuse where i've lived my entire life to practice law, first with a law firm called hancock and not super.

 

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Gerald Stack: And then I switched over to Barclay Dame about 16 years ago, so my practice has focused on closely held businesses.

 

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Gerald Stack: Know sales and acquisitions, as well as a state planning for owners i've been around long enough now that I represent the grandfather the parents and now the grandchildren and family businesses so it's been a big part of my practice for the 40 plus years that i've been a lawyer.

 

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Gerald Stack: And so glad to be here thanks for having like.

 

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Michael Palumbos: Great thanks for joining us.

 

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gary katz: I don't know how that's possible we just turned 39.

 

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Gerald Stack: I wish I wish this long time ago, everything like that.

 

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gary katz: So quick introduction myself, my name is Gary cats i'm with stage more consulting.

 

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gary katz: A wealth preservation specialist I will be with sage mark consulting I can't believe it but on April 26 which is coming up real soon it'll be 33 years and I like Jerry started when I was six years old.

 

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gary katz: So what I what I do is the financial planning aspects of wealth transfer wealth preservation business succession.

 

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gary katz: And what I do is I help people transfer their assets to who they want when they want in the manner that they want protecting the people that they're transferring your assets to.

 

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gary katz: and reducing the taxes and where we should was is easy is just what I just said, but it's a highly complex process, so when I work with.

 

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gary katz: Michael and his clients and Jerry we Michael and I act as the architects from a financial perspective, because the whole process is as much a financial process.

 

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gary katz: As legal process we don't replace people like Jerry we collaborate real closely with people like Jerry that financial and legal and accounting process or us to collaborate and work together so that's a quick introduction on me right.

 

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Michael Palumbos: Again, thank you both for joining us.

 

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Michael Palumbos: This was.

 

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Michael Palumbos: You know when when we started to book The show it was back in 2019 or 2020 we started talking about getting the two of you on here.

 

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Michael Palumbos: i'm glad to get you here, because this is a year, that is just packed with changes probably bearing down on us, you know sometime this year there's a some proposals on the table, right now, and so we're going to dive in and talk about some of those things that are going on.

 

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Michael Palumbos: I want to kick us off there's there's eight questions that you know Gary and I have talked about Jerry i'm sure that we you know we'll get your feedback and your input on these things.

 

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Michael Palumbos: That just about every business owner, you know, should be talking about asking themselves, and so what I thought I would do is just kind of you know i'm going to just quickly hit the eight questions.

 

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Michael Palumbos: um you not everybody can see these see them if you wanted to you could reach out to Gary or myself and i'll get you a copy of this, you know but.

 

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Michael Palumbos: feel free you know, to listen in here carefully it's here's the questions and we'll just dive into them.

 

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Michael Palumbos: One have you decided when you want to exit from your business should be asking yourself this question on a annual basis, have you decided what amount of cash or annual cash flow, you will need to exit to support your preferred lifestyle.

 

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Michael Palumbos: Have you decided to whom you want to transfer your business.

 

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Michael Palumbos: Do you truly know how much your business is worth today.

 

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Michael Palumbos: Do you know how to sell your business to an outsider and pay the least amount of taxes Jerry we're going to have you chime in on that one a bunch.

 

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Michael Palumbos: Do you know if your business is even marketable.

 

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Michael Palumbos: Do you have a plan for your business if the unexpected happens to you.

 

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Michael Palumbos: And Have you taken the steps to protect your family's wealth.

 

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Michael Palumbos: And so you know what I thought i'd do is you know Gary why don't you chime in on a few of those pieces, maybe some of the ones that as i've said them.

 

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Michael Palumbos: You thought about and you're like you know these are some of my favorite things to talk about and then i'll flip it over to Jerry to to do the same.

 

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gary katz: Sure thanks thanks Michael so the.

 

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gary katz: First question have you decided when you want to exit from your business that is really a financial independence question.

 

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gary katz: So one of the most difficult parts of looking at things when you're a business owner is all business owners divide.

 

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gary katz: What they their living expenses, the business covers a bunch of them, and they have some of those things covered personally.

 

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gary katz: So for the things that the business covers you going to do an inventory, because those things, depending on what the tax rates are going to be are going to be different costs after taxes, so if your cars.

 

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gary katz: Country club your boats dinners travel, etc, etc, whatever the business is paying for you pay for that personally that's going to be $1 $32 40 more so.

 

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gary katz: Really, the first part of deciding when you want to exit your business is do you have, what do you need for your financial independence and, what is your value gap for your preferred preferred lifestyle.

 

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gary katz: So That to me is the first step in that planning, because a lot of people that Mike and I know we've spoken to and worked with they don't know what their actual expenses are if they don't have the business covering a bunch of them.

 

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gary katz: So Jerry Maybe you can just address that in a transaction and how the recasting of earnings and things of that sort is real important how you pull things out that you take out personally from the business and then i'll come back to some of those questions.

 

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Gerald Stack: yeah no that's right, the only thing i'd add to which said Gary is a heavy data plan what you get to a retirement is probably true with your clients as well i've had so many clients retire, and then a couple years later, saying.

 

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Gerald Stack: You know it wasn't quite what I expected maybe I was a little too early pull the plug so you really got to think through a personal level, whether you ready to take that step back.

 

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gary katz: In just with that we can get we have a checklist 10 questions I need to think about we have both the.

 

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gary katz: owner of the business and the spouse of the owner fill that out and it talks about the things you'll do charitably what you'll do socially.

 

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gary katz: What are you gonna do intellectual stimulation, we have 10 questions and i'll wait for that everybody, but we always have people go through that exercise even before they look at the financials great great observation.

 

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Gerald Stack: yeah that's an excellent excellent suggestion on your part, so so you know when you take the money out, you can take it out, either as a tax deductible item or comes out as either dividends or distribution, depending on the type of business that you're.

 

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Gerald Stack: In so we try to generally take money out on a tax deductible basis, simply because you avoid the double tax, you know so.

 

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Gerald Stack: But it's difficult sometimes to recast typically personal expenses as as business expenses so typically you know you increase the compensation setup and deferred compensation plan.

 

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Gerald Stack: To find things after retirement or items like that in order to get tax deductible for the for the money you're pulling out as opposed to pull it out with pre tax dollars.

 

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Gerald Stack: Great Jerry.

 

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Michael Palumbos: i'm going to bounce around on some of these questions and we don't need to go in order, we don't need to hit them all we've got you know.

 

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Michael Palumbos: Just a limited amount of time here, but when we you know, one of the questions is do you truly know how much your business is worth today.

 

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Michael Palumbos: And when we're talking to business owners, one of the things you know I see it really often is business owners either.

 

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Michael Palumbos: Really overestimate what the value of the businesses are really underestimate their very rarely are they dialed in to that number, do you want to talk about that a little bit Jerry.

 

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Gerald Stack: yeah you know you're absolutely right, like that happens all the time off and we generally turn to business valuation expert sometimes the CPA firm can do it.

 

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Gerald Stack: But sometimes they're not really confident to do it, so there are companies are firms.

 

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Gerald Stack: That specialize in value in business that that's All they do is value business and a jumping off point is to find a firm like that that you're comfortable with and there's a lot out there and do an excellent job.

 

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Gerald Stack: You know, some national ones we work with on a regular basis, that that frightfully expensive.

 

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Gerald Stack: they'll come in and they'll do a complete analysis of what the business is worth and they have a database that allows them access to numerous transactions for more than a CPA firm to come up with.

 

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Gerald Stack: To see what businesses like that are trading for in the market, you know it's almost always a multiple of Eva.

 

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Gerald Stack: You know earnings before interest taxes depreciation amortization but those multiples can vary greatly from industry to industry and business to business.

 

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Gerald Stack: You know, we were seeing now in the marketplace multiples as high as nine times, even though got a deal now going on for 10 times, even though and we've seen him for as low as three times.

 

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Gerald Stack: So it's a really unique what's going on in the market, you know your customer concentration risk.

 

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Gerald Stack: And things like that, but it's a combination of business valuation and having someone come in and take a look at that earnings before interest taxes.

 

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Gerald Stack: and appreciation that make sure it's an accurate reflection, so what you're trying to do is adjusted and back out.

 

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Gerald Stack: Those items that a buyer would not have so like Gary mentioned earlier, a lot of businesses are taking a lot of personal expenses out as deductible expenses.

 

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Gerald Stack: Well, that reduces your earnings before interest taxes depreciation amortization so you want to add those back in so you get a more accurate picture what the iba actually is.

 

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Gerald Stack: Generally, a multiple i'd be in most situations, sometimes it's a gross number your gross receipts but, more often than not it's a multiple people.

 

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Michael Palumbos: One other thing real quick Jerry when you're talking about business valuations and getting those done.

 

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Michael Palumbos: Who should be ordering those business valuations and why.

 

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Gerald Stack: yeah so we we always order them as the law firm and the reason for that is, we want to protect it with the Attorney client confidentiality and so, particularly if we're thinking of a gifting Program.

 

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Gerald Stack: We want to make sure, so when the when the business valuation comes in, it comes in a draft form.

 

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Gerald Stack: And you know we'll go through it will make a bunch of comments will ask do you account for them to make some comments on it.

 

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Gerald Stack: And we'll try to shape that you know within within realm of reasonable this not not being concerned about things, but many times, the initial draft, or the second draft they get it wrong.

 

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Gerald Stack: And so the worst thing that can happen is the irs agent comes in and says, well, I see you got a business valuation show me all the prior drafts again, so I can see the changes, you made from one to 10.

 

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Gerald Stack: If the client orders that irs is perfectly entitled to get their hands on if the law firm orders that it's protected by the Attorney client privilege irs is not allowed to see those prior graphs of evaluation.

 

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gary katz: love it just add upon that it really depends on what your ultimate goal is if it's a enter family transfer you typically are trying to get the lowest amount value amount.

 

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gary katz: From from a gift tax perspective and also very often we recap the company to voting and non voting and the starter offer the founder of the business typically is going to keep the voting share.

 

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gary katz: And then, what they're going to do is get a discount on the non voting share.

 

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gary katz: And the non voting shares going to be what you're going to transfer to family members or trust for family members and the discounts are anywhere between 30 and 45%.

 

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gary katz: Sometimes a little bit more sometimes a little bit less depending on the limits of the the non voting shares so that that means that the entire family transfer.

 

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gary katz: It, for example, the the transfer is to an outside party and there's no family involved it's just the opposite you're not looking for the lowest possible value you're looking for the highest possible value.

 

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gary katz: So, very often, the investment bankers will lead that charge to do that business valuation versus the the the gifting perspective.

 

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gary katz: Also, other transfers, for example, of the thing if it's an Aesop that probably is going to be a little bit higher because that's an erisa plan.

 

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gary katz: Then don't seem a lot of aesop's, but we do see some these stops so that's a very important.

 

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gary katz: evaluation plan and, depending on what type of corporation, you are, you need to stop can have some tax advantages to the to the owner and also to the new owners.

 

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gary katz: So that's the big difference between an internal transfer versus a family transfer versus if it's going to be a gift sale to family members.

 

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Michael Palumbos: Great wonderful point Gary and you know just for those listening.

 

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Michael Palumbos: Gary brick brings up an interesting point on aesop's and just a plug for a future episode, we got rob Brown and.

 

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Michael Palumbos: Tracy till coming on to talk about aesop's in the family business in a couple episodes coming forward in rob Brown is probably one of the preeminent attorneys in that ASAP world.

 

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Michael Palumbos: And happens to be right here in upstate New York i'm Gary let's talk about you know we've talked about you know the value of the business whether somebody decided to exit but you know hit real quick on the question of what about the unexpected what happens if the unexpected happens.

 

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Michael Palumbos: Why.

 

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gary katz: So people have different definitions of unexpected the the unexpected can be had in covert expect affect my business which.

 

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gary katz: Essential businesses actually was just the it was a positive for non essential business and unfortunately it was a it was a negative so those things you get a.

 

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gary katz: Very difficult to plan for it, but some of the unexpected things which are not fun things to talk about are things that you can plan for God forbid, if you you or key important person got disabled.

 

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gary katz: Also.

 

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gary katz: God forbid, you are a key important person passes away so Those are some of the unexpected things to look at and listening from a sales perspective.

 

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gary katz: Sometimes, some of the companies we look at half the sales may come from the top salesperson and that salesperson got disabled or passed away or was grid by a competitor.

 

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gary katz: What can you do to absorb the shock of that person either leaving voluntary or involuntary there's some really cool things you can do.

 

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gary katz: With some very creative designs where, for example, and we do it all the time, we can put golden handcuffs in for the important people were they'll get a tax free synthetic equity.

 

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gary katz: retirement benefit and at the same time, God forbid, if they passed away deaths that are family but also death benefit back to the company to relieve the shock of that person passing away or or or or getting disabled so that's some of the things you can do to cover the the unexpected.

 

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Michael Palumbos: Great i'm gonna i'm going to move away from those eight questions and again if anybody would like a copy of those questions that they'd like to get Ahold of you can email, you know us at the show you can contact Gary through linkedin whatever whatever works for you.

 

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gary katz: We do that there's one more comment, I want to make on those on those questions.

 

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gary katz: And that has to do with.

 

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gary katz: Is my business even marketable.

 

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gary katz: And we have outlets through our organization, where we can do a market ability assessment no cost at all to the to the client and we have.

 

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gary katz: Literally 25 different m&a firms that our firm Lincoln financial advisor stage more consulting has done due diligence on.

 

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gary katz: And we can do a free market ability assessment where those investment bankers it's appropriate for their industry.

 

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gary katz: can give an idea of what what the business is worth so tying that in is let's say the business is worth X.

 

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gary katz: When we do the financial planning, based on what they need for financial independence, they need X plus $5 million i'm just making that number up.

 

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gary katz: Well, what planning can we do and that's a lot of the work you do with clients Michael to make the business more valuable to fill up that value gap.

 

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gary katz: And what things can we do to make the business more valuable those Those are some key things that we work on that just one one of the things in those eight questions, I just wanted to bring up because that's a real important planning perspective.

 

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Michael Palumbos: yeah from from two perspectives Gary I mean it's one is you know what are the value drivers of the company and you know what can we do to you know implement a business, you know operating system, I like to call it, you know when when we're working with family businesses, especially.

 

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Michael Palumbos: And what can we do to make you know put more systems and processes in place so that.

 

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Michael Palumbos: You move from a place where its owner dependent to a place where itself operating right and that's that's the key.

 

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Michael Palumbos: But then the other piece is you know, through the network that we have in you know, in the m&a world, one of the things that has happened, more.

 

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Michael Palumbos: Frequently than you know, then I think people you know expect is when you know when they do you know.

 

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Michael Palumbos: When it's time to take the family business out to market the fam we don't have a family member that's ready to run this or a family member that wants to run the business it's just time.

 

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Michael Palumbos: You know it's not a failure to sell a business, you know they they always talk a lot about the shirt sleeve shirt sleeves and three generations, well, I like to knock that misnomer out of the park because.

 

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Michael Palumbos: it's pretty you know successful to build a business, up to the third or fourth generation and then say you know what, in order for the family to stay sitting at the thanksgiving dinner table or you know the holiday dinner table together.

 

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Michael Palumbos: it's in the best interest for the family to sell the business and allow people to cash out and go do do some of their own things to keep that piece of the legacy going well.

 

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Michael Palumbos: Through the m&a company that we've worked with how many times.

 

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Michael Palumbos: You know, have they come in and said, you know the value of the company's $40 million and the owner, you know.

 

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Michael Palumbos: said over and over again, I have had this number pegged at 40 million I know it's 40 million, you know it's been valued 13 times, through the years you know.

 

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Michael Palumbos: And then we take it out to the market and because of the bidding process.

 

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Michael Palumbos: You know that 40 million gets driven up to 50 or $53 million.

 

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Michael Palumbos: And there's you know there's some multiple higher than what the owner was expecting because the private equity group or the you know the m&a firm that you know, was able to put this deal together just had the right contacts that to them that business was more valuable to this.

 

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gary katz: edition, and so Okay, and so important to us specialists that do this.

 

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gary katz: Right, so we had a situation in our firm that somebody came in order for this this family business of 38 million for their business, and it was it was a private equity firm that was so excited we took a look at it, we did our market ability assessment and we saw it was worth a lot more.

 

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gary katz: So we went through the blind bidding process with an investment banker in their industry, everything was confidential.

 

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gary katz: The ended up getting not 38 million they got the guy that i'm getting 65 million, but this is the crazy thing about the story, you know who offered the 65 million, the same private equity firm that originally came to him for 38 which.

 

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gary katz: is so important to us a specialist.

 

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Michael Palumbos: yeah it, you know it's funny you that we just helped the company sell their business that was on the market for $30 million they got about 27 million for it, and the reason why they.

 

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Michael Palumbos: In my opinion, they received the 27 million is because they didn't use a specialist they didn't bring you know.

 

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Michael Palumbos: A business sale expertise in there, who would have packaged them beforehand and Jerry you've seen this before i'm sure.

 

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Michael Palumbos: Where they didn't have their financials in order everything wasn't clean the systems and processes weren't in place, so the other company just kept pegging them down pegging them down pegging them down.

 

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Michael Palumbos: And even though just the real estate this happened to be a development company was worth.

 

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Michael Palumbos: Those pieces they had it was run like a family business, you know when I you know I say run by a family that was happened to be in business and it just wasn't clean, so they were just able to take every discount that they could in there.

 

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Michael Palumbos: I want to change gears and and and Jerry.

 

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Michael Palumbos: You know, one of the next things I want to really focus in on is how it is how coordinating your state and the business planning.

 

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Michael Palumbos: can really save a family, you know as much as 20 to 40% in taxes, whether it's at the sale time or state planning time and just putting all these pieces together, why is it so important to coordinate.

 

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Gerald Stack: yeah well yeah absolutely right, like so you know you know as Kerry mentioned when you pass it on in your family.

 

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Gerald Stack: you're trying to eat the lowest value possible and it's all in the discount right, so I have a business that I know is worth $30 million, but if I can slice and dice it and give a slice of it.

 

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Gerald Stack: You know you'll get a discount of 35 to 40% and that value simply disappears from the state tax world completely, never to be subject to state tax.

 

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Gerald Stack: So you know with the state tax definitely going to change definitely going to go up I know we haven't talked about that much, but you know the proposal in Congress that Bernie Sanders says.

 

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Gerald Stack: put forth and he's had of the you know Finance Committee in the Senate now scary as that may be the business owners.

 

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Gerald Stack: You know his proposals to increase top rate to 60% from the current 40% estate tax rate and to do away with a step up in basis.

 

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Gerald Stack: which you know, is another tax on top of it, and when you add in New York tax which soon we'll go from 16 to 20% on the legislation it's going to be passing next week or so.

 

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Gerald Stack: You know, you could be talking about you know 60 to 70% of your state disappearing in a state taxes, if you don't plan properly in the business is your biggest asset.

 

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Gerald Stack: Then you want to set up a mechanism where you can take advantage of those discounts perhaps big gifts, but still find a way to have a string on it.

 

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Gerald Stack: so that you can potentially you and your spouse can potentially get the income of cases of big home run its head somewhere down the road.

 

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Gerald Stack: And you decide well as greatest state tax man got enough money to live.

 

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Gerald Stack: I want some of that, so there are ways to do that, you said, be careful think through what you're really trying to do.

 

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Gerald Stack: Is i'm sure you guys typically when you're talking to a client you're telling them what's not but the text tail wag the dog go away so much at your parish yourself with no way to.

 

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Gerald Stack: get it back, but it is critical to do it, or else you're going to lose just a ton of money if something should happen before you do something.

 

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Michael Palumbos: Great.

 

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Michael Palumbos: Gary anything to add to that.

 

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gary katz: No, no, what was said it's it's critical to look at planning this year because of the proposals, the proposals from the democrats, the one that Bernie Sanders office submitted like it was last.

 

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gary katz: Last Thursday Thursday before is on Thursday was also to potentially get rid of discounts as well, so this is in this step up and basis there was actually two bills submitted one by.

 

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gary katz: The House from Pascal from the Jersey and one from Center for male Maryland van houghton or something like that.

 

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gary katz: But the Denver these house bill per step up in basis was going to be effective January 1 2022 the Senate bills actually retroactive to January 1 of this year.

 

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gary katz: which includes any guests now nothing's been passed, so what some people are nervous about which one's going to be passed, we can do things as loans.

 

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gary katz: And then, as soon as you know what the rules are and let's say it's effective hopefully January 1 2022 you forgive the loan so there's your gift, but you don't have to worry about making a big a big tax and we'll get actually speaking of taxable gifts if these new laws come through.

 

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gary katz: Many people who have significant wealth will consider taxable gifts, because the democrats proposal is taking the exemption from 11,000,007.

 

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gary katz: To 3.5 million at death, but the amount that you can give during your lifetime right now is unified it's 11,000,007 you can give during your lifetime and 11,000,070 death.

 

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gary katz: The proposals to DEMO from the democrats, is to reduce the amount that you can give during your lifetime to 1 million preparing.

 

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gary katz: So that'll be a big big change now when people pass away they're proposing to take the rate anything over 11 nine seven as a 40%, the proposal is to take the rate over three and a half million to 45%.

 

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gary katz: Anything over 10,000,050%, this is only the federal that doesn't include New York.

 

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gary katz: And then anything over 15 million at 55% and then, if you're lucky enough to.

 

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gary katz: be the investors there with the home runs like Michael can recommend these, and you can be over a billion dollars that's actually at 60%.

 

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gary katz: But we work with a lot of family businesses that are definitely in the 10 to 15 million and some over over 15 million so in New York is Jerry saying, if these proposals, all come through the tax for people over 50 million could be 70 75% it's insane.

 

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gary katz: And that's why packing gives maybe makes sense because the gift tax is still be a 40%.

 

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Gerald Stack: it's important to understand just how radical these proposals are we don't know to be an active, but most countries either lose a step up and pay capital gains when you die or you paying a State tax.

 

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Gerald Stack: I don't know of any developed country where you do both we don't get to step up and you pay the estate tax so, then you know it's really it's really a war on wealth type proposal that the democrats put out there, so we need to get Brian.

 

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Michael Palumbos: Right, the name of it is for the 99.5% act so that's I think that's it's pretty much telling you what they're what they're gearing after.

 

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gary katz: And then I just want to caveat, nothing has been passed.

 

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gary katz: yeah right it's got to go through committees, and you have to have every single democrats say yes.

 

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gary katz: Plus, the Vice President to say yes now can they do that, yes, they can they just did that, with the reason stimulus plan, but they had a couple of.

 

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gary katz: senators, especially Center mentioned from West Virginia that's a little bit more conservative and they backed off on some things so from a negotiating.

 

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gary katz: Negotiating style they're asking for everything i'm sure Bernie Sanders wants all those things Canada link, I think it would be a challenge for every Saturday to vote for that now the way the current.

 

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gary katz: system works in order to pass these programs that make them permanent you need 60 votes in the Senate.

 

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gary katz: Unless they do something called reconciliation.

 

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gary katz: and reconciliation historically is only been once a fiscal year, so they just use that reconciliation.

 

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gary katz: Justice past couple weeks ago in the past 1.9 trillion, so the next reconciliation would because fiscal years October 1 October 1.

 

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gary katz: Now there was something in the news just yesterday, where the Senate parliamentarian did say there's a possibility, they may be able to use reconciliation three times this year.

 

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gary katz: But that's still not defined and Jerry may have read more about that I just heard it on the Bloomberg news room this morning, which means they're trying to use that for the infrastructure bill.

 

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gary katz: So there's a lot of negotiations that have to happen has to go through committees, so will the things stay the same, as they are now highly unlikely, will it be as.

 

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gary katz: Progressive as these proposals, probably not but you never know Jerry your thoughts i'm sure you.

 

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Gerald Stack: know I think you hit the nail on the head Gary I agree.

 

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Gerald Stack: 100% I think what you'll end up seeing is the exemption amount of load from 11 seven into six to $7 million range per person.

 

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Gerald Stack: I don't think you'll see much change with the rate, I think you may see a loss of step up, but I think there'll be a.

 

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Gerald Stack: threshold above which below which you won't lose a step up the document a billion dollars right now.

 

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Gerald Stack: So assets, because of the problem, the last step, of course, is that that it's almost impossible for people to go back and trace what the basis was for parents and certain assets, I mean that's a huge undertaking.

 

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Gerald Stack: So the thought is well will exempt the first million dollars or assets from that and you don't give step up for assets above that I wouldn't be surprised to see something like that take place.

 

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Gerald Stack: So I think that will be changes, but I don't think that we nearly radical as Bernie would like to have us think they will be yeah.

 

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Michael Palumbos: As we're talking about this, one of my favorite things to do is just talk about a quote from Supreme Court justice learned hand you.

 

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Michael Palumbos: Both have probably heard this at one point or another, but for our listeners, I just want to share this real quick.

 

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Michael Palumbos: Anyone may arrange his or her affairs so that his taxes she'll be as low as possible, he is not bound to choose that pattern which best pays the Treasury.

 

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Michael Palumbos: There is not even a patriotic patriotic duty to increase one's taxes, over and over again, the courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible.

 

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Michael Palumbos: Everyone does it rich and poor alike and all do right for nobody owes any public duty to pay more than the law demands, and so, you know as we talk about these things it just reminds me that there's laws that are set up, and you know.

 

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Michael Palumbos: I think about you know you don't have to be extremely smart to take advantage of these things, this is not about smarts, this is about hiring the right people.

 

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Michael Palumbos: And you know we we look at Tony shay's just died, the guy you know created zappos and had no will.

 

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Michael Palumbos: So i'm like I mean that just was mind blowing to me I understood when you know Prince died and didn't have a will, and you see that a lot of times with you know famous famous entertainers.

 

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Michael Palumbos: Because they're you know really keyed in on the art but typically from a business owner they've got the great attorneys they've got the right pete you know people around them and for Tony hsieh from zappos to not have those things in place just was mind blowing to me.

 

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gary katz: So Mike Mike we were talking about the super super wealthy.

 

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gary katz: There had been some things that even the year or two ago she the end of 19 the Republicans actually passed, something that was attacked revenue razor and that was the secure.

 

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gary katz: there's some positive things in the secure act for people with retirement plans.

 

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gary katz: Where they made the required minimum distribution used to be 70 and a half, they increase that the 72 and they did some other things, to put more money away.

 

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gary katz: What they did do, on the other side is they changed when you take money out of retirement plan used to be for anybody who's not your spouse it used to be that they could take the money out over their life expectancy.

 

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Michael Palumbos: Right.

 

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gary katz: The rules have changed now there are some exceptions to the rules where they can still take it out of your life expectancy if they're under 18 or disabled.

 

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gary katz: If your spouse is more than 10 years younger than you a couple of things like that, but for the most part, most of the clients that we work with.

 

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gary katz: that have accumulated funds in their retirement plans their spouses the beneficiary, and then the kids are the contingent beneficiaries.

 

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gary katz: So if you take the money out over 10 years, let me, let me give you a quick example let's send me somebody who's 62 years old, as, and this is not something that's a rarity has.

 

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gary katz: A million and a half and their IRA from 401 k's are pension plans and things of that sort.

 

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gary katz: Well, they don't take touch the money and they wait till 72 back in a second quarter to $3 million.

 

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gary katz: Now, when they stayed start the recording minimum distributions those required minimum distributions will be hundred and 20 250,000 a year, which is all taxable income.

 

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gary katz: Which means it's probably going to bump those people die or bracket.

 

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gary katz: In addition, God forbid.

 

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gary katz: both spouses don't die at the same time, and you have a surviving spouse single taxpayers are at a higher rate than married.

 

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gary katz: So when they start they're required minimum distributions that's going to pop them up into a higher bracket if there's a surviving spouse.

 

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gary katz: In addition, when the kids get the money if it comes out every 10 years it's going to pop the kids into higher bracket.

 

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gary katz: So if somebody is exited their business and as retired they sometimes between 60 and 72 are like in a sandwich or they're in a lower bracket.

 

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gary katz: What we're recommending for a lot of people is take a look at those retirement plans and maybe take distribution to take advantage of the low brackets before either you.

 

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gary katz: Your spouse or your kids becoming a higher bracket so there's a lot of planning to do with that, but also, I want to emphasize retirement plans life insurance annuities all passed by beneficiary so.

 

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Michael Palumbos: not controlled by the well.

 

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gary katz: yeah so Jerry can put together the fancies will mean in history of the State of New York and the city of Syracuse.

 

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gary katz: But if the beneficiary designations are not coordinated with the planning, then those.

 

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gary katz: assets can be last subject of creditors and predators, especially life insurance subject to tax of I thought Jerry Maybe you can.

 

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gary katz: address a little bit about how the collaboration, the coordination of the titling and the assets.

 

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gary katz: it's critical from a wealth transfer standpoint for retirement plans life insurance and then even regular assets being titled properly to take advantage of all those.

 

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gary katz: As well learn hand says to take advantage of what the government has given us because it's voluntary or involuntary to use these things you get the US and in the volunteer not to use them, you lose them.

 

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Gerald Stack: Know you're absolutely right Gary solid it's fundamental when you start the state planning process, you get an accurate description of all the assets and how those assets or title.

 

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Gerald Stack: Because you write your will trust will only act with respect to assets which are in your name what we refer to as probate assets.

 

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Gerald Stack: You know, certain assets during the hell that sets i'm going to be affected by that So if you held your accounts jointly with someone else, then by operational off they're going to pass to the elbow joint tenant.

 

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Gerald Stack: Retirement plans, as you mentioned, you know, according to the beneficiary designation life insurance going to go a coordinated beneficiary designation, so you can set you can put together great will.

 

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Gerald Stack: A great vocal trust and have it not effective for a lot of the assets that may we're all make up the bulk of your estate because it's not unusual to see clients who have.

 

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Gerald Stack: tremendous amount socked away retirement plans or have insurance to cover the unexpected scenarios so it's critical to get the beneficiary designations make sure everything fits together.

 

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Gerald Stack: As the most common state, we see people putting together the state plans is they forget to do that final step so good point.

 

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gary katz: yeah and Jerry remember you can also chat about the years ago i'm looking back when like when I started in business 2530 years ago.

 

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gary katz: Many people on their assets go to their kids in stages like 25 3035 now, the majority of people that have wealth setup lifetime trust to protect the children from creditors and predators, can you can you address that for a little bit.

 

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Gerald Stack: yeah so you know, there has been a change, so the same two things either lifetime trust or coming out of trust that have much later age and life than than what we used to see so when I started practice, you see.

 

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Gerald Stack: You know 28 now it's either lifetime, as you mentioned, or it is you know 4045 50 or 45 5055 something like that stagger it out.

 

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Gerald Stack: So the advantage of keeping interest for lifetime is protected from creditors, if a child gets involved in a.

 

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Gerald Stack: creditor situation has an accident and get some financial trouble but tax it need better divorce, although a prenuptial agreement is still the best protection.

 

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Gerald Stack: Trust as a backup in a good protection as well, because in almost every state assets that you inherit from the parents are not considered marital assets in the event of the doors unless you commingle them.

 

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Gerald Stack: And if so, if I inherit a million dollars my dad and I put in the joint account, and I put it in joint account for five minutes because I got to set up a separate account.

 

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Gerald Stack: It loses its status to separate property he becomes subject to the claims and my spouse, in the event of a divorce so.

 

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Gerald Stack: A lifetime trust protects that situation as well, plus if you have the gst exemption we don't know what's going to happen that because there was another proposal for these things to do away with.

 

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Gerald Stack: generation skipping transfers, but if you had a gst exemption, you can postpone that tax event and the death of a child and grandchildren or Great grandchildren great grandchildren died.

 

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Gerald Stack: So you can save tremendous solve the estate tax problem your children may have, if you do it correctly.

 

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Gerald Stack: always difficult to pick the right trustees for that period of time child will be one we always like Kevin independent.

 

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Gerald Stack: As well generally give the child, the right to reward the independent trustee replacements and they're getting along, so the key that is coffin to and getting the right trustees are everybody's conquer what's going to happen 30 4050 years down the road to the extent we.

 

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gary katz: yeah big misnomer when people hear the word generation skipping I think it skips the kids it skips the tax right.

 

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Gerald Stack: Exactly well.

 

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Michael Palumbos: Great point um one of the things that you know i've seen to my career is amit a business owner and they've.

 

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Michael Palumbos: been you they've used the same financial advisor or the same attorney or same accountant that they had when they started their practice, you know their business and it wasn't worth anything.

 

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Michael Palumbos: And now you know they they've been successful and they've done a great job, and you know the.

 

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Michael Palumbos: You hate to talk about it this way and I don't know i'm just maybe the two of you can help me with this conversation a little bit, but the person that they're working with the professional that they've been used to using.

 

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Michael Palumbos: it's not a Jerry stack it's not a Gary cats or Michael Columbus they don't they don't look at it, you know from all aspects, they don't understand.

 

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Michael Palumbos: The you know a lot of things have changed at the wealth level of wealth that they are today than when they started working with them.

 

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Michael Palumbos: What are some questions, people should be expecting they're professionals to be asking them, you know, or when should they start to question whether it's time for me to change what league i'm in.

 

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Gerald Stack: But it'd be you know I think the jumping off point is always what's the potential state tax power today today and, as your attorney or advisors project that out.

 

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Gerald Stack: and have they given you any options to reduce it it all because there's a menu of things that someone to consider.

 

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Gerald Stack: If to face it, a state tax but, but first you need to know.

 

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Gerald Stack: Are you facing and state tax, have you put together a financial a snapshot of where you're at and what she expects going to happen and what is the potential state tax and do nine months after both spouses died, how are you going to pay for it.

 

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Gerald Stack: And if you don't want to pay that amount of state tax, so you don't want to get insurance to cover the.

 

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Gerald Stack: The manufacturing, what are the options that are available, where I can make transfers and reduce that number two what would be your guys's odd we have that conversation with you.

 

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Gerald Stack: Initially, and then sit now once a year, or once IV of the every other year in a worst case scenario, to see if everything's still on track, whether things changed what's changed for you like.

 

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Gerald Stack: That, but it is important to that have They sat down and talk to you honestly about where you want your state to go and how do you want it to go.

 

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Gerald Stack: Because that's as important or more important than what the taxes are.

 

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Gerald Stack: You know, tell me where it is that you want your state to go, do you want to trust your children, you want our right to children.

 

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Gerald Stack: What about the spouse, the interest should be out right what's the advantages and disadvantages when would you consider a trust the spouse when you may not consider it.

 

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Gerald Stack: Those are conversations that i'll be taking place once a year anyways if they're not taking place then maybe on a question whether you have the wrong.

 

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gary katz: It just to add on that i'm going to give it now, a couple of analogies so when you're getting a health check up you go to your Internet.

 

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gary katz: The internet's here's something on your heart, this is okay go to a cardiologist, then the cardiologist listens to your heart says okay try this medicine this medicine that medicine.

 

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gary katz: Oh, we see you have blockage now you have to go to a cardiac surgeon, so the world is a world of specialties and it's a world of collaboration when when we work with a family, where typically not replacing their other advisors we're an add on and the specialists are and.

 

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gary katz: you're not going to unless you work with a large firm that has all these different departments.

 

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gary katz: it's it's a golf analogy, I don't play golf, but I do know what a mulligan is.

 

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gary katz: You don't do this right you don't get them all again if you pass away he didn't he didn't use these these different tools, but it's it's a it's a collaborative collaboration so it's almost as crews.

 

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gary katz: Michael Have you had something wrong with your heart Where would you go to your podiatrist to save money to fix your heart.

 

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Michael Palumbos: Right well he's not he's a doctor she's a doctor not.

 

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gary katz: funny it's funny because i'm working with a pediatrician that.

 

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gary katz: has been very fortunate that he bought the building board other practices so significant significant network.

 

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gary katz: And he was asking, can I go back to my original attorney and we looked him up to see what he could be on the calls, you can collaborate but i'm going to ask you a question, Doctor you're a pediatrician.

 

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gary katz: If a family member or a patient or a patient parents is I need open heart surgery, what would you say because I wouldn't do it until.

 

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gary katz: So it just it's a world of special thing and collaboration, once you get to a different level, you need you need specialists to bring it to another level, not meaning after replace the the original people.

 

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gary katz: right there add ons to bring to the team and it's a collaboration process yeah.

 

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Michael Palumbos: And it's it is tough, it is tough, you know when you're when you're talking on the Attorney side or the accountant side or the financial advisor side wherever wherever that person sits you know it's.

 

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Michael Palumbos: I tell people when it when you're looking at a financial advisor the the three things that kind of poke out at me is if they're not asking to read.

 

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Michael Palumbos: Your trust and your will the odds are they don't understand it if they're not asking to read your tax return they're probably you know they don't understand it and that's why they don't.

 

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Michael Palumbos: There was a time 1020 years ago that I didn't ask people for their.

 

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Michael Palumbos: You know the the business, you know returns or the or the financials of the business because I didn't understand them, so I learned them so that I, you know could bring them in and.

 

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Michael Palumbos: and coordinate those pieces and the same thing would go for the buy sell agreement where I think it gets sticky sometimes.

 

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Michael Palumbos: Is understanding the level of expertise, you know we like to work with Jerry stack and you know it's it's it's you really understand your.

 

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Michael Palumbos: Where you're coming from your easier collaborative and easy to work with, but here's The point is that you know.

 

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Michael Palumbos: If i'm if i'm a client if I go get somebody that says, you know the has the shingle under thing that says business in a state, I don't know the difference, sometimes between what Jerry brings or the accounting firm that i'm working with versus.

 

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Michael Palumbos: That level, so I guess you know how do you understand you know Jerry for from your perspective, how do you help How do people answer that question or figure that out.

 

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Gerald Stack: yeah that's a tough one, because you know you start with the assumption your visors a smart right, I mean because they went to college they went to law school they get to CPA whatever.

 

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Gerald Stack: So you start with the assumption that really smart they know what they're doing and it's tough for for a client to figure it out, you know.

 

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Gerald Stack: You know whether they're really getting the good advice good advice so that's a tough one, to answer with I don't know what I don't know how you do, that the tell my client really to.

 

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Gerald Stack: To figure it out to other than you know we will we like to do is like you guys do to.

 

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Gerald Stack: not replace the current advisor just tell them, you know I mean, and we always try to make clear what i'm trying to steal your client.

 

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Gerald Stack: I want to work with you to get a good result for your clients and then they're happy they're happier with you than they were before, because you brought a specialist in to help.

 

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Gerald Stack: and use help solve their problem you were part of the solution, as opposed to be in a blockade to get the solution done so.

 

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Gerald Stack: You know, we always try to make that.

 

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Michael Palumbos: that's a really good point.

 

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Michael Palumbos: Jerry is that, if your advisor isn't meeting with the rest of the advisors, probably at least every two years that's probably a pretty good indication that they might be in a protective mode.

 

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Michael Palumbos: that's that's great i'm gonna ask you know I I think we're at the top of the hour here.

 

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Michael Palumbos: we've got a couple extra minutes if either of you have parting words or things that you know that we didn't get a chance to talk about before we wrap up what's you know how would you what would you want people to know.

 

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Michael Palumbos: How to reach you.

 

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Michael Palumbos: Number one and to just any parting thoughts on things that we didn't cover today that you'd hoped we would.

 

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Gerald Stack: You know I think i'd start very died I just think we're in a critical period in our history, you know, things are going to change radically.

 

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Gerald Stack: For worse, I think you don't may not change that radically this year, but I think it's probably a question of time is heading towards in this country change and younger people seem to look at things.

 

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Gerald Stack: differently than we looked at things, so I do think that.

 

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Gerald Stack: This year, unique position to take some steps to save your family money, I think that when those going to close, if not this year, probably next year to year after.

 

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Gerald Stack: You know gary's absolutely right 5050 divided the Senate, but there's an election two years right and maybe democrats get control and then they get DC statehood, in which case you're guaranteed to get two more senators.

 

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Gerald Stack: So changes are coming and it's time now to pay attention to it think about what you can do and don't hesitate a longer because talking about just state plan and so difficult for people, because they don't want to think about that.

 

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Gerald Stack: Most of us firmly believe it's never going to happen to us, it just locally, but that's that's our belief.

 

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Michael Palumbos: Gary.

 

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gary katz: Great just a quick parting words is, I would say the key aspect is to take inventory and have somebody do some type of analysis of what your exposure is and that way and do a review of what the coordination gaps are.

 

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gary katz: And that that's frankly what Mike on I do with lots of people listen we'd love you to come to Mike on I to help you but it's important to go to somebody to help you.

 

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gary katz: Did and you gotta work with a financial person the accountant the estate attorney it's got to be a collaboration.

 

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gary katz: And somebody's got to be the quarterback typically it's somebody in the role that Michael and I.

 

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gary katz: lead, as the coordinator, again we don't do everything we got to work and collaborate that's that's The key thing.

 

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gary katz: And as Jerry says, this is the year that so important to get things done while we still have these tools available.

 

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gary katz: Because we may go some time without these tools available and who knows what's going to come back listen.

 

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gary katz: They made your social security taxable as you make over like $40,000 a year 85% of social security was can be tax people said they were going to get rid of that very, very quickly, so screwed is going to be tax free.

 

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gary katz: medicare when Lyndon Johnson I just noticed from history, I was.

 

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gary katz: I was too young for that we all were too young for that rejoice when Lyndon Johnson past medicare the Republicans were like that's only going to be very temporary it's going to go away.

 

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gary katz: Because it's socialized medicine, well, here we are over 50 years later, and so there are many things that we thought and listen obamacare to same thing, who can imagine john mcclane putting the thumbs down.

 

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gary katz: So McCain so you don't know what's going to come back so failing to plan is planning to fail, it as my parting words and to get that to me quote call Michael because we work together.

 

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Michael Palumbos: Well, thank you, everybody for joining us on another wonderful episode of the family biz show i'm your host Michael Columbus with family wealth and legacy in Rochester New York.

 

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Michael Palumbos: And, really, really enjoyed having you both here and sharing all of this fabulous stuff be sure to check out further episodes and you can enrich your learning when it comes to family businesses have a great day, everybody thanks Michael Thank you Michael take care.

If you’re a family business or a family business consultant and want to be on the show, share your story and help other family businesses, send us an email to producer@thefamilybizshow.com or fill out a contact form here!

*not affiliated with Lincoln Financial Advisors Corp.

Michael Palumbos is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Family Wealth & Legacy, LLC is not an affiliate of Lincoln Financial Advisors Corp. Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.

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