10 Reasons why you need the Trifecta! The Perfect Legal Structure

Foreign.

To this week's episode of the Main street business podcast with yours truly, Mark Kohler, my amazing co host, Matt Sorenson, aka the Birthday Boy.

That's right, baby. 41. Yeah. 41 years old. Young. However you want to look at it, I guess.

Wow, that was a little bold to claim yourself young at 41.

Yeah, you know, you know you're old when you refer to yourself in years young.

Corey. Let me ask Corey. Cory, is 41 young? No. Corey says you were over the hill. That's a millennial just giving you a shot of reality.

I think I need like an AARP membership before I can refer to myself in years young. Oh, what a. What's happening to me? Yeah, no great.

Happy birthday.

Birthday weekend. Saw Mark come down, my girlfriend put together a cool birthday little party of sorts. So Mark got me a cowboy hat. Do you call it a cowboy hat or just a hat? Like do cowboys call it cowboy hatch

or they just call it a hat? Well, I think they'd call it a cowboy hat because see farmers, farmers are more of a trucker hat. John Deere.

Yeah.

But ranchers, it probably just hat. But for us, we need to death. We. I think we need to be definitive. It was a John Dutton Yellowstone felt brown cowboy hat. And you look good.

And I got a belt buckle too. So there's a little theme going with it. Mark wants to, you know, make me a real man cowboy. He like, you know, you gotta be a little more tough. I guess so. Yeah.

Winning Rome. So. Well, happy birthday, Mr. Sorenson.

Thank you.

So, okay, well, today's episode, for those that have not listened to our podcast before, welcome. We try to give a tax and legal tip each week. We were going to do the open forum today. We had a lot of questions in the hopper. We will still address those next week, but we felt we needed to cover the trifecta. This is a big deal and we've had some requests to say, can you explain the trifecta? I don't have a YouTube video on it. I'm going to write an article tonight on it. I got it. I got to knock it out. So. But this is. Every attorney that comes to our office literally is a brand new associate and even our paralegals, we train them on the trifecta.

Yeah, it's a big deal. And this is really the brainchild of Mark Kohler. I mean it really was and it's simple, but it's also the most effective way to. For even the most complex client we would, we would face on how to separate out tax planning, asset protection planning, knowing what goes where, how it coordinates together and it's. There's just family planning.

You forgot the trifecta. You said tax planning, asset protection, and

then family and estate.

There you go.

You know, so. Because you ain't going to live forever, so the, this thing will need to carry on.

Look at that. Matt pulled an. Ain't gonna see you. Look at you get a cowboy hat within seven days, you're thrown down. Ain't gonna live forever. Yeah, see, it's already had an effect on you.

Oh, shucks.

Oh, man.

Well, okay, I reckon I'll be saying that one too.

Reckon, reckon, reckon. Yeah. How are, how are your crops doing?

I reckon pretty, pretty, pretty good.

I don't know. I think of Ryan Hamilton. If any of you have not seen the Netflix special, this is your homework, everybody. This week there's a Netflix stand up comedy special called Happy Face and it's Ryan Hamilton. Ryan Hamilton, think of the play Hamilton that's taking the country by storm for the last three to five years. But Ryan Hamilton, he's from Idaho and now living in New York and he talks about the juxtapose relationship and difference between the two. So funny. So I'd really recommend all of you get over and watch that Netflix special. It's really, really fun. Okay, so if you haven't been on our show before, we really, really want to help you build wealth, save taxes, protect it, leave it, plan it. We're the lovers of the legal community, not the fighters. We're there to protect you, make it work. Really, really love my job and I know Matt does. And so we've had two new attorneys join our firm this last month. And it's been emotional for them because they're like, this is so fun. This is what I dreamed of doing as a lawyer is actually helping people plan their future. And they've left the litigation world and they love it.

So, yeah, no one wants to fight battles. And even when you win a lawsuit, you still really feel like you lost. It's such a pain. So. But this is the time and I think as we go through this to, to kind of sit back and look at your own business, your own assets. And also for those planning out, you know, you're making some business plans yourself. You want to get some rental properties, you want to grow your. Well, you want to plan for your future. Like this is how to bring it all together. Okay, trifecta.

Now I've got a little tax tip. I don't know if I have a legal tip today, but I'm going to just throw it on quick. Tax tip. We sometimes have a guitar riff before the tax tip. I don't know why we got rid of that. I kind of liked it. You thought it was cheesy, didn't you?

It was a little cheesy, but.

Okay, well, just. I'm a team player. If my partner's out all on, all in, I'm not going to do it. So. Okay, so no guitar riff. Here's my tax tip. A lot of people have been asking me this, And that is, why did Justin Bieber cancel his tour stop this July in Vegas? No, that's not what he's been asking. Okay. Everybody's been asking is Joe Biden and his tax plan. What's going to happen? What's coming down the pipe? Well, it actually was a breath of fresh air this week. About three weeks ago, President Biden and his team, I guess, for lack of a better word, kind of laid out their plans of what they want to pass in Congress this year. And that's kind of how politics work. You got it. They got to float it. They got to let everybody kind of, you know, mull it over. It's got to see if it gets some traction. So they threw out some pretty aggressive tax hikes. The greatest tax hikes or the biggest tax hikes since 1993. That's a big deal. So three weeks later. Now, though, what's been in the news this week, which has been very refreshing, is the Senate Democrats have said, and especially the moderate Democrats have said, hey, we get it. We need to increase some taxes. We're okay with that, but we're going to be really careful here. We're not going to overdo it. We're going to be very targeted. And there was several quotes from some senators. We won't get into the minutiae here, but the big quote this week is there's no room for error. And that was from the Maryland senator that I forgot his name at the moment. I apologize.

Van Hollen.

Yeah, Van Hollen. And I think that's good.

Matt, there's only 50 of them. They need everyone to pass it with the vice president voting, so they can't lose one. And so, yes, which is good news because hopefully it's going to take some bipartisanship to get this done if they do it. And it's gonna not be what Biden's gone out and asked for. My biggest thing in the bill I'll just is, was not just the tax hikes, but that he wants to hire 87,000 IRS agents to go do audits. And there's a big belief amongst Biden's team that, and they're relying on some, some studies that there's a ton of tax fraud out there and people unfairly underreporting taxes, particularly among high net worth individuals. And that if they just go audit the heck out of them, they'll create way more revenue than they spend in employing these 87,000 agents. So that was a big push too. I know. It's part of the bill also.

Yeah. I will just make one more comment on that particular note. You have to take that with a grain of salt, if I may say it that way, because the accounting industry is. Got a huge demand and very little supply. The big accounting firms, our accounting firm all over the country, they can't find enough workers. I don't know where the IRS is going to find 87,000 people that are qualified. And it's going to take them two to three years to get those 87,000 people functional and operational. And so our goal has always been, and we talked about it on the show quite a bit, is there's a happy medium. We want to be aggressive but not create it. Put a target on our back. And I think far too many accountants are conservative in nature. Just that's the way they were born and raised. But they aren't, they aren't aggressive enough. And so I still think there's a lot of room for some quality tax planning and 87,000 agents, if they even can find them and get them trained. That doesn't bother me. It doesn't worry me. My clients. You'll be fine. Yeah.

We're about doing good tax planning and tax strategies that work on our legit. So if you do get audited, you're fine. Yeah. I will say there are a lot of clients who are just sloppy. They're taking the right deduction expenses, they're just not keeping good records and they're bookkeeping. Correct. Because what I'm worried about for some clients.

But yeah, sloppy Sloppy Joe. Sloppy sideline. That's an Adam Sandler Saturday Night Live special. He is the lunch lady.

You like them extra sloppy.

Oh, he is so talented. For those of you that think, all right, these SNL characters are just, you know, potty humor actors. Adam's just really musically talented almost as much as his acting skills. Just like Jack Black. I mean, those guys can play the guitar and hit their notes. And even though it's comical in nature, I want to get a hats off you know, that's. That's a. That's a tough.

You need a little tip of the hat.

Tip of the hat. Yeah. There you go. Adam, text me later and to give me. I gave you a shout out. Adam, you can text me later and you're welcome.

Okay.

Legal tip. Anything good? What'd you come across this week? Anything good? Just a quick legal tip. Something to keep us out of a lawsuit or something.

It's an IRA tip, but it's a. It's a law, so that's. That's a legal tip.

Sounds like a stretch to me, but. All right. Okay.

Well, you know, this is one I run into quite a bit, is there's a misconception about moving retirement accounts. And I'm going to give you two quick ones that are kind of cause problems that are kind of out there. But one Roth I. Let me just make this tip. This is what Roth IRAs are. Forever Roth IRAs. Once you go Roth IRA, you can't go back. Once you start a Roth IRA, it's always a Roth IRA. Can I change it to a traditional IRA? Absolutely not. Can I recharacterize my Roth IRA conversion? Can't do that anymore. Can I move my Roth IRA to a Roth 401K? I have a Solo 401K. I want to move my Roth IRA to my Roth Solo K. Nope, Roth IRA and the funds in them are always Roth IRAs. Now you can go Roth 401K to a Roth IRA, but once it's in a Roth IRA, it's stuck. Now, Roth IRAs are awesome, so don't stress. But I see a lot of clients, particularly clients with solo 401ks that may have a Roth IRA, try to move their Roth IRA into the Roth solo 401k. And it's like, you can't do it. It's just not allowed. So there's a little legal tip on the. You know, my favorite account, the Roth ira.

Yeah.

And it'll always be a Roth diary.

Can I add one amendment? Senator from Arizona.

Yes, without objection.

Thank you. Okay. I would just. I had a really great call yesterday with a. I don't want to say his name because he is a YouTube influencer and he's out there and he will probably do some collaboration down the road. But what was interesting, and I think some of you listening here may be facing the same quandary, and he's had some success the last couple years and he's like, mark, where do I put my money? I can't get a straight answer from anyone. And I said, well, I'm not a financial advisor, but I can tell you what my successful clients are doing, what I'm doing, and just take that for what it's worth and do your research and make it educated decision on your own. And what's nice about that is clients appreciate that perspective because I'm not selling anything, I'm not selling a product. And so they can say, okay, that's fair, you know, there was no hidden agenda. But what we got to yesterday is like, well, what should I fund first? And this is a very successful person. And he goes, I just can't seem to get a straight answer anywhere. And I said, if there's two things you fund first before anything else, put your money in your Roth every year, max it out, whatever. And well, I make too much money. Nope, you can do the backdoor Roth. I even sent him my video on it. He's like, oh my gosh, no one ever told me this. And then I said, let's get some fees paid to your kids for helping you in your side hustle or small business. Fund their Roth and any contributions can come out tax free for college with no penalty. And then number two, fund your health savings account. So I want everybody in your family to have a Roth, everybody to have an HSA health savings account. Now there's some tricks to. And we've done shows specifically dedicated to those two topics. But when Matt says once you have a Roth, you can't get out of it. And he said, that's not a bad thing. Like Matt said, that's a good thing. And I want every client of mine to have a Roth. I have a Roth, Matt has a Roth. And you can have a day job with a 401k and still have a Roth. So there's ways to do this and I hope that many of you that are trying to figure out where to deploy your money, you start with those two vehicles. Now what we put in the backseat discussion for another show. I gave him some thoughts on what I'd invest in or what I see my clients doing. But another show. Okay, the trifecta. Yes. Not to be confused with the Pentavlet.

What's the pen tablet?

Well, my sonny boy, the Pentavlet, it's well known. Now I've got to do this in a Scottish accent. I don't know if I can do Mike Myers justice here. The Pentava is a well known organization run by the most wealthy 5, most Richmond.

I can't do it.

Scottish accent. I need Brightwires. Where is he? They meet Trion Lee at the secret mansion in Colorado known as Dove Meadows. And that's the Pen Tablet, the five most wealthiest people in the world.

Who are those people?

Well, I think it's the Queen, the Vatican, the Rothschilds, the Gettys, and Colonel Sanders before he went tits up. So anyway, so if you. If you haven't seen.

So I married an expert.

Yeah. Yeah. So Marian Axpert. Yeah, It's a classic. 1990s classic. And I made my millennial kids watch it the other night. They're like, that wasn't too bad. I'm like, you're right. Your dad has good taste. So anyway, that was the impetus for Mike Myers using that voice for Shrek because his wife. His wife said he'd get in the bathtub and start talking Scottish. Want some haggis? Make me some haggis, woman. And then he came up with the ogre, the Olga, and Shrek. So. So a married expert, or was the impetus for Shrek? All right, okay, so here's the. The trifecta. Matt, why don't you describe it while I draw? Let's do a little Pictionary here.

Now, trifecta, meaning three parts. Now, the first thing to realize if you're looking on a piece of paper or just you want to sketch one out for yourself, is draw a line down the middle.

Okay.

We got left side, right side, and we're gonna talk about what stuff you put on the left side versus stuff that goes on the right side. And there's a tax and asset protection reason on why we're gonna put stuff in one place to the other.

Okay, now, let me say. Let me say for those watching, for listening, you can watch this on YouTube. So just go type trifecta in YouTube and put Sorenson or Kohler in there, and it'll help narrow it down. If there's other trifectas out there, I don't know, but to me, there's no other trifecta than this. But for those listening on the podcast, don't stress, you can watch this on YouTube and. But I'm going to. We're going to describe it as visually as best possible. Okay, keep going. So I got a line down the middle.

Yeah, you can think through it conceptually as we're describing it here, just on. Even on audio.

So. Okay.

Okay, so we got the line down the middle, and now you've got a left side and a right side. We're going to put different things on each side here in a moment. But underneath it all, your trust, okay? This is your estate plan, your trust, your revocable living trust is gonna own all this stuff on top, whether it's on the left side or whether it's on the right side.

Got it? So there's a box. That's a box at the bottom. So you think of it like a bucket at the bottom or a box with a line at the very top of the box in the middle going straight up the paper. Okay. All right, there you go.

Now, if you don't have a trust, this is just you personally just draw yourself a cute little stick figure, you know, and. And it's you. And maybe you. And, you know, you add in the trust later. You know, it is estate planning special right now at KQS Lawyers, where you can get a few hundred bucks off your estate plan. We get to a whole trust, powers of attorney, living will, you know, kind of the pull the plug document will, all that stuff all included. 300 bucks off our regular pricing for that. Good for like another couple of weeks, 10 days.

We do it once a year. It's our 11th year and running. And so I'd like to think of water flows downhill, money and ownership flows downhill. And you need a foundation before you build a house, before you build a building, before you build your. Your empire. Everybody wants to build an empire, large or small, and you want to leave a legacy, and you want your own little empire. And so the foundation is critical to get going as soon as possible. Now, we're going to talk about the benefits of the trifecta in a moment and how we're going to use this trust strategically. But if you're watching on YouTube, I put a second little smaller box of equal width below revocable living trust, put 1040. I also put a little small box, but below 1040 that says personal bank account. Because I want all of your investments and your whatever you're doing up above on this left side and right side that Matt's going to describe to flow downhill. I want to let. When you're ready to buy underwear and groceries, it comes out of your personal bank account. And all the money you're making up above flows down through your Trust onto your 1040 into your personal bank account. Okay? That's the foundation.

Okay.

All right, Matt.

All right, now let's distinguish between the left and right side. Okay? On your left side, we're going to call that operations.

What type of income is that?

Okay, that's going to be ordinary income. All right, so this is ordinary income. So we Think of operations. Think of a business. You know, maybe you're a service business or you sell goods. You're getting a 1099 for driving Uber. You have a, you know, you have multiple businesses over here. Whatever.

Yeah. Or your W2. Let's think of this as your money. You're making every day to cover the nut, whatever that monthly nut is. How do you pay the bills? And we're going to divide this left side into some sub. Sub areas. But really we're making money to pay the bills. That's the left side. We're making money to invest money.

Yeah. And I, you know, and I had a. Well, I'll come back to this. I have a good question, a client raised about the trifecta.

Okay.

So, okay, now on the right side, we have assets. And this could be sometimes called passive income over here.

Okay.

Love it. And now the. Let me say a couple reasons why we're trying to distinguish between the two. First, assets, we want to have asset protection.

Right.

We want to keep our assets separate from our operations. Because if I have operational businesses, let's say I'm a contractor. All right. And we have a lot of contractors doing well right now, you know, busy. Yeah. And, you know, something goes wrong on a job, you get sued. You don't want to be holding that. All of your assets in the same company that you do, your operations. So we want to separate these two things out. So we're going to push assets, maybe your rentals or other stuff over here on the asset side.

Okay. Now, for those that are driving down the road or on a treadmill, I have just overemphasized this line in the middle of the paper. Just colored it in. It's like Pictionary. I'm just over emphasizing and bolding this line because this is a wall. We want to treat this like a wall. I want to keep assets on the right and I'm putting a little arrow pointing to the right and operations on the left. I don't want to set up an LLC to own my rental and also run my construction company or my realtor business. I don't want the restaurant to be in the same entity as the building itself. I want separation.

Yep.

Okay. Now, okay. So, yeah, and it goes from there. That's it. That's the basic trifecta. Operations, assets, holdings. Yep.

And assets could be a brokerage account in your personal name. It could be. It's going to be your retirement accounts are over here too. Okay. Going to have a little area here on the right side for Your retirement accounts and HSA like Mark talked about. So. But there's another reason. It's not just the asset protection nature of it.

Okay, hold it. Okay, so, Matt, what you said. Let's focus on that for a minute. The number one. Well, I don't know. Number one reason. There's a number of reasons to honor and respect the trifecta. Number one, I'm not saying is the greatest, but it's. We're going to go through this list, so I'm going to put this down below. Number one reason for the trifecta is asset protection. Okay. Do you want to say anything more about asset protection before we go on to reason number two?

Yeah. Bottom line on asset protection, keep your assets separate from places that can create liabilities. That is what asset protection is all about. How do I keep my assets in a place where, if I get a liability, no one can get over here? That's what we're doing. You keep this line here. Do not connect them. The only way that these assets are connected to your operations is that underneath the trifecta here, you happen to be the underlying owner. But that's not going to cause your assets to be subject to a lawsuit from something you're doing on operations. So.

And I want to add to that asset protection comment by saying this. A revocable living trust does not give asset protection.

Oh.

Or there's some good reasons for a trust and why it's part of the trifecta, which we'll come to. But one of them is not asset protection. In fact, asset protection is on the left and right side. For example, I'm going to put a little circle here on the left.

Yeah.

That we're going to come to in a minute. But this might be my Inc. I'll just call it Inc. S Corp. Llc, taxes and S Corp. Whatever. This little company has a veil around it, too. So that if I'm out operating, I've got a veil of protection. There's an entity there, and then on the right side, I might have an entity to hold an asset, and that'll have a llc, for example, to hold an asset. But they're owned by the trust. But the trust itself does not create asset protection. So I would want to create. Provide that distinction. Okay. Okay, Mr. Sorensen.

Okay. Do we want to get into the second reason? Not in order of importance. Again, you know, I don't even know

what you're going to say.

I don't want asset protection and tax planning to feel like, well, you know

better than the other okay, so you're going to go taxes. Do you just set it? Is that number two?

Yeah.

Okay. Okay.

Taxes.

Okay. Why do we need to trifect for taxes?

Your operational income is taxed differently than your asset income or your passive income. There's different strategies and reasons. You're going to run things through different types of entities. So if you're being sloppy and lazy, not respecting the trifecta.

Sloppy, sloppy joe.

Yeah. And you're, you're running operational income, let's say the contractor example again, into the same entity that owns a rental property. Well, not only have you done crappy asset protection planning, you've also kind of cut yourself short on your tax planning. You're gonna be overpaying on taxes by not treating those things differently and running them through the right lane.

Yeah. Now some of you accountants out there like, well, in my S Corp on the K1, I can distinguish passive income from ordinary income or income subject to self employment tax. I can still distinguish that in my entity that might be doing operations and holdings. Yes, that's true. But you've also muddied the waters because now we have audit protection issues which I think go hand in hand with taxes. Because if you're going to put all of your operations and holdings through the same entity, even with some tricky or more complex bookkeeping, you could separate them. Fair enough. But now if you get audited, they're looking at everything. You're opening up your whole kimono, where 90% of audits are very targeted. They're looking at one entity. Well, by separating my tax planning into two sides, I've also separated the audit exposure. Also, a 1031 exchange is much more complex in an S corporation, if not difficult or impossible. Where I could do a 1031 exchange in a more creative format with an LLC on the right side. I don't want building gains. I don't want to face the utilities doctrine. General utilities doctrine. I'm talking to you accountants out there now. Some of you are like, what the crap is Mark talking about? I'm talking techie for my accountants out there. Because they may go, well, Matt, I can put them all in the same entity. Sure, but you've just created problems on building gains. 1031 exchanges, you've got more complex bookkeeping, you've got audit risk all in one entity. And I know you accountants are shaking your head going, okay, Mark, I get it. So there's a lot of good tax reasons to separate.

Yeah, See, we want to, by doing this left and right side, we want to use the right entity and structure as a tool for the specific thing it's built for. Right. Like the S Corp is built for the small business that's selling goods or selling a service. It's made for that. The Congress intended it for that. The tax planning around it is built for that. It works. Don't make it clunky by putting the rental property in it. That's what the LLC is really built for. It's made for that now. Yes. You know, like, I mean, there's lots of other tools you can use in your life for the wrong thing, but it's not made for that. It might get the job done, but, man, it's gonna be harder. People are gonna be like, why the heck are you doing that? You know?

So anybody that's worked on a. In an auto body shop or on a farm knows the bfh, that's the big freaking hammer. And they're like, bring the hammer over here. Bring me the BFA and the hammer. They try to use the hammer for everything and that. It doesn't always work. We don't want to just. And this is where LegalZoom, which has done some good things, in some ways, they've done some bad things in that they, like, the LLC is the one size fits all. All you need is an llc. Now just come here. We can set them up fast and easy. And all of a sudden, clients get into it and they're like, well, the LLC is nice, but it's trying to use the. The hammer for everything, and it doesn't work.

Yeah.

Okay. Can we stay with taxes for a minute?

Yeah.

Because I'm a geek.

I know.

Yeah.

You know?

Yeah.

You can't get away with that at a party or in any other place. Can you say that? And someone would say, oh, yeah, please. Yeah.

Well, I hope some of you have an opportunity to get to YouTube. And it'll be a link in the show notes. If you're able to get to YouTube and watch some of my masterful artwork here. But everybody focus on the left side for a moment. That's the operational side. Now, what I've done here is I've divided it into actually three sections. That's actually been an evolution of my trifecta over the last couple years. Because what I've discovered is there's really three parts to operations. There's the day job in column one, and if you're married, one of you might have a W2. If you're single, you might have a day job. And in column two, a side hustle. A side hustle is kind of the gateway drug to full time entrepreneurship. Some people pick up a side hustle because they can't make ends meet and then realize, oh my gosh, I'm really a small business owner. I kind of like this. And when Covid hits you, now, make the side hustle your full time occupation. Not out of choice, but out of necessity. And that's okay. Some people say, well, having a small business is risky. I'm like, not having a small business is risky. We should one in three Americans now have a side hustle or more. Some statistics show 40% or more of Americans working Americans have a side hustle. That's a good thing. So column one is day job. Column two is side hustle, which could be a simple llc. But column three is the full time entrepreneur. And again, if married, one spouse may be the full time entrepreneur while the other spouse is the day job. So we've got those three columns feeding into our revocable living trust. So I want your trust to own your S corp or own your LLC side hustle because we want to tie it all together for other reasons that are coming in our list. But tax planning is really three pieces on the operations side. Matt, why don't you talk about tax planning on the asset side? Because I know there's a column over here that you really enjoy.

Yeah, yeah. So on the asset side, for many people, one of the biggest assets you're going to have over here on the asset side is your retirement account. So this could be your day job 401k or spouses. This could be your side hustle solo 401k or your full time entrepreneur solo 401k. For those of you who are self employed with no other employees, this could be your Roth ira, your hsa, your kids accounts, you know, your spouse. This could be Coverdells. I mean, lots of accounts are fitting over here. And these are tax favorable vehicles, right? You're getting tax deductions in them. You're getting tax no growth as they're growing. And the Roth accounts are coming out tax free. So there's all a bunch of tax planning and tax favoritism on building wealth in these accounts on your asset side.

Okay? And so what I did for those, visually, I took the right side and created two columns. So there's a little mini line on the right side dividing that side into two subparts. The first column is called tax free or before tax. And that's all those little vehicles Matt was talking about. This is an area that every American is going to have by the time they retire, they're going to at least have something over there. Now our goal is to make sure you have a lot of something. But there's something. So this is the tax for your before tax. The second column on the right side is the after tax column. And, and that's going to be money that we make in our day job or in our small business that we don't defer into a tax preferential vehicle. And we might buy a rental property. This is a little rental we own down the street or maybe that brokerage account or our little cryptocurrency account or just little investments that are making money that need their own little llc. And so I've got a little circle here that says llc. And I've got rentals, I've got investments, I've got farmland, second homes, Airbnb. Because an Airbnb is a great cash flowing vehicle that you get to benefit from and create cash flow from and wealth. That's a perfect fit over here on this second column on the right side. Okay, Matt, what would you say you want anything you want to add to the tax reasons before we go to the fourth reason we like the on the tax reason?

What I'll say is another common asset that's gonna be on the asset side is gonna be your rental properties. All right? Or maybe it's a personal brokerage account. All right. Now those are passive assets. We don't need to do too complex of planning in terms of an S corp or something like that. These typically are gonna flow through onto your personal return. There's no company level tax, there's not a payroll report you're doing. You know, they're typically flowing through onto your personal return and they're already tax tax less. Right. Rental income and your rental properties, you know, you're getting all these expenses on it. You're getting depreciation, there's capital gain income when you sell it. Same thing with your personal brokerage account. You know, you're getting dividend tax rates which are lower and you're getting not subject to self employment tax and you're getting capital gain income when you sell those. So these things don't have self employment tax involved in them, which is one of the taxes we're trying to plan for and minimize over on the asset side.

Now let's review and I've got number one reason for the trifecta is asset protection. Number two is tax planning. Number three is audit protection. And before I say number four, I want to just Throw out a quick thought. I had a phone call two days ago with the client with some substantive assets. I mean, this was a $10 million client. No, now I have phone calls. I had a phone call with a client on Friday that was like college student. It was a young couple just getting married. What do we do? And I brought up the trifecta $10 million client. I started with the trifecta and I started building this diagram with little on PowerPoint, on a Zoom call, which all of our attorneys will do in a consult with our clients. And he said, mark, in all the law firms and accountants I've ever met with, I have never seen someone diagram it out where it made sense. I love this. And he said, can I get a copy of it? I said, of course you're going to get a copy. That's what you're paying for. And can some of you believe that? Isn't that amazing, Matt? I mean, just having a picture says a thousand words, you know?

Yeah, yeah, it really does. You know, I had an interesting question from a client who came to the self directed IRA summit. I loved it when he explained how he came for. He's like, I came to kind of learn about, you know, doing a Roth IRA for my kids maybe. And he's like, then I sat through and I heard about the trifecta and solo case and all these other things. He's like, man, I came, I came in for the snacks, like the Roth IRA for the kids, and I left wanting the whole Thanksgiving dinner.

I love that quote.

Oh, my gosh, it was good. And. But this is a client has quite a bit going on, you know, good, good income, lots of stuff moving around, business, assets, you know, and where, where you can really put it together and it can make sense. But also you see the efficiency of it and you see the rationale behind it. You see the asset protection tax planning we're talking about. But one of the questions I got, I can't remember was from him or someone else, but I had a question from someone that says, how do I manage? Like, where my money? If I'm doing really good over here on my operation side, how do I get stuff over to the asset side? Like, what's the process? Oh, my gosh.

How should I be planning that? I love it. Matt, do you know my number four that I was going to say was right on this? Gosh, okay, I love you, man.

They love good partners.

We are, we are. Oh, my gosh, I love you. Okay, number four. You may not think this is going to answer your question. But it is number four reason for the trifecta. It defines our bookkeeping. Defines bookkeeping. And bookkeeping is the heart of how money is moved around. I have a little example, Matt. Some people see the trifecta and they see, oh, my gosh, I need an account for this, I need an account for that. My kids are gonna have bank accounts, and I'm gonna have a bank account for the LLC and a bank, oh, my gosh, Mark, you're making my life more complex. And I go, no, no, no, no. Now, let's say you went home and said, I am sick of all these chest of drawers in my bedroom. There's too much going on in here. And you started to just try to organize your clothes on the floor. You're like, I don't want any Chester drawers. I don't want all this furniture. I'm not going to go to Ikea. Screw it. Even though they have good Swedish meatballs, I love those Swedish meatballs. I'm just going to go. I'm just going to go throw everything on the floor and organize it. How would it feel? It'd be a nightmare, right? You wake up the next morning, you're looking for socks, you're looking for underwear. Where's my T shirts, where's my jeans? Bookkeeping are the chest of drawers of a bedroom. The bookkeeping lets us know where all the money is. And if I need to move my shirts over to this drawer or I need to move my socks over to that drawer, I can do it and understand where they go. Bookkeeping actually sets you free. You come into your bedroom and you're like, oh, my gosh, I know where everything's at. And with online baking and apps for Chase, B of A and Wells Fargo and many of the big banks out there, you can go to your app and look at where all of your clothing is on one app. Where are all my accounts? So if I need money on the right side, I take a draw. I just move money from the Link S Corp Operation account down to my personal account, and then I move that personal account money up to fund a new LLC or to make a contribution to my HSA or to go put money over into an investment account or to buy a new home or to buy an rv so that the. The personal bank account is kind of this, the transactional center where everything goes through that train station. So all the money goes down and then it goes over. And if you're making money on the right side and you need more operational money, it goes down and then back up to operations. We rarely want to move money from left to right without letting it take a pit stop at our personal account. That's where we organize everything. Matt, thoughts? What do you.

I love that. I love the chest of drawers. I think that the. The bank account thing, and that's, you know, this is the pushback some people may have because they're like, I just want one llc, and I'm just gonna jam everything through it.

Okay.

How well are you gonna track the performance of your business? Like, you're not gonna feel what's going on in that business if you got too much stuff messed up into it, like the rental property owned in there? Are you really tracking the income and expense on it? No, but if I got an LLC with the rental property in it, and I know the rent coming in goes into it, I know the expenses are coming out of it, I can see pretty quickly, and I feel month to month, whether that property's doing well or not. Right. But if it's all mixed up and jumbled together, it's harder to see on the fly. And as small business owners, we don't have the benefit of having a finance and accounting department that's run these numbers for you and telling you where your. What's performing in your business and what's not. It's freaking you. Okay. And your bank accounts. And by separating these things up, it also keeps you more in touch with your business. Not just good bookkeeping for tax purposes, it's good bookkeeping and planning for performance of the assets you have and the operational businesses you're running.

Oh, my gosh. I just added number five, performance evaluation. I just. I took your words and I kind of.

If you're okay with that, I consent. They can be used with the permission of Matthew Sorensen, Inc. Not to be used without, though, by the way, with

the prior express written consent. Yeah.

And Major League Baseball, too. They want to stay on.

All right, so we're defining our bookkeeping, and it allows us to evaluate the performance of our different operations and assets. Because it's not muddied, it's clean. I'm going to say number six. It actually relieves stress, provides. Relieves stress and provides organization. Okay, now let me add something for those that are able to watch on YouTube. I used a red line, and I started to show money flow options. I got a red line going from the S Corp down to my personal account, then out and up to an LLC to invest in some real estate or a brokerage account or some unique gold Silver crypto. I also took money and showed oh from the llc, I can take money out of my side hustle and go and put it in my home for home improvement. I can take money from my S Corp and directly contribute to it. A solo K, an HSA, or a Roth. So when you meet with one of our tax attorneys in just maybe an annual checkup, we're going to pull up your diagram every. Guys, here's what's cool with our estate planning special. With our estate planning special, we build you a diagram. You're going to get a consultation with an attorney that says, how do you want your estate distributed if something happens to you? And what do you have? Because if we don't know what you have, how can we fund the trust? And we're going to hand this off to one of our paralegals for additional support after, if you need it, for what's called trust funding. If we create a trust and just put it in the drawer, it's not worth anything. But we want to use it, we want to fund it. And if we have a diagram, when you do an annual checkup with your insurance agent, your accountant, our office, if you choose to do so, we want to build a relationship where every year you do a checkup and you go, hey, look at what I bought. Look at what I sold. Let's update my diagram. We print it out. We have a copy, you have a copy. And a picture again, says a thousand words. Okay, now, you took two on the list. I don't think that's fair. I'm not.

Well, I mean, it is my birthday, so plays the birthday card.

Unbelievable. I did not expect that response.

Okay, it's only good one day a

year, so might as well use it for what it's worth.

Okay, we're pretty much gonna walk around doing whatever I want to be like, well, it was my birthday. Yeah.

Okay, I'm gonna add number seven. Number seven. And I'll read these all again at the very end. For those on YouTube, you're seeing the page written up there on the screen. Number seven is estate planning coordination. Estate planning coordination. Now, I'll say a couple words about this I'm sure Matt can add to it. There's a lot to be said here, but as you can see back to the diagram here, I'm going to add some lines from the revocable Living Trust. I want your trust to own everything, not you. Now, when I say everything, I mean any sort of entities, titled assets, recorded assets, maybe even DMV assets, like a car an rv, a houseboat, a ski boat, a cabin, ranch, land, whatever you're buying. I want your trust to take ownership, not you. So I'm adding some lines from the trust over to a personal home. Matt mentioned brokerage account, so some little dollar signs over there. I want the trust.

Yeah.

Yep.

It could be on as the owner or it could just be the beneficiary, you know, in the event of your passing. So same thing for your retirement accounts also. So you may not. You may list your spouse first on beneficiary designations and your trust second. That's actually more common for those that have a spouse, but that's coordinating. The trust is even on, like, the bank accounts and retirement accounts. The trust may not own it, but it's the beneficiary after your death.

Personal home, bank accounts, retirement accounts. And I'm going to add li life insurance. Now, there's a place and a purpose and a reason for life insurance, but it's going to depend on your situation and age as to what type of insurance you're going to get. Whole other topic. We are generally believers in some degree of life insurance, and you can look at some of our prior podcasts to go over that topic. But if I do have life insurance, I want the trust to be the beneficiary of it. And like Matt said, spouse first, then trust. So all of these assets, if you're able to view this now on YouTube, you'd see all these assets with little arrows going down into my trust so that I don't own anything. My trust is the real owner, and that coordinates things. So if you pass away, become disabled, you're in a car accident, your trust can take over just maybe for a short period of time. Maybe you're six feet under and it's time to distribute some of your assets. You choose, no probate, no court, and your trust takes over, brings all your affairs together. So the lawyers get less, the government gets less. Biden wants to fiddle with the estate planning exemption. Should be respectful. President Biden wants to play with the estate planning exemption. So we've got all these assets that we want to coordinate. So I called it estate planning coordination. That's number seven. You want to add anything to that?

Yeah. And remember, the estate plan is going to avoid probate by using the trust and outlining what you want to happen to your estate when you pass away. And by having it all organized in a clean way like this, it's easier for your loved ones when you pass on to come in and be like, oh, well, we're going to sell this asset. We're keeping this, you know, and they're all segmented out in these different entities, whether it's your rentals, in your operational business and on your bank accounts or retirement accounts. So by using the trifecta, you make it easy on whoever your trustee is when you pass on for coordinating your estate, selling the assets, moving them around to your beneficiaries and heirs, and not having to go to a probate court to get this done.

Yep. Love it. I've got an article in my blog that's actually gotten some pretty good traction. It's interesting. It gives everyone an update on Prince, the famous 80s singer, Purple Rain. Does he 99 song like the 99 we're going to party in 1999. Is that his 2?

I think that might be, yeah. More of a little red Corvette fan, but yeah.

Little red Corvette Prince. Anyway, he died about five years ago without a will or trust. Still in probate, the IRS is now going at it for a tune of about $34 million. And it's been a huge mess. The biggest probate case in Minnesota history because he had no plan. Now, not all of us are going to face numbers and craziness like that, but any craziness can really be a challenge for the family that you leave behind or friends, whoever. If you don't choose, it's going to be a mess. Okay.

Yeah.

Now, number eight. Can I add number eight?

Yeah.

I love this one. This is a big one. I'll. I'll say it and then you can describe it. You ready for that? This is.

Put you on the spot.

Ready?

All right, I'm ready.

Number eight. Privacy. Why would privacy be a benefit of the trifecta? Do you have anything or do you want me to help you out, birthday boy?

Well, why don't you go? Because this is. You're the privacy. You know, you're more of a camouflage kind of guy. You know, I am. I'm more of a bulletproof vest kind of guy, but that's true. Yeah, they're more of a camouflage kind of. They are different. Yeah.

So, okay. Privacy is a part of asset protection. It does not replace asset protection. It enhances asset protection. Now, when you have the trifecta, it makes privacy even easier because this trust is not going to be the Mark and Jennifer Kohler living Trust. Heck, no. I might name it Purple Rain Trust. Get that from.

Yeah, yeah. I don't think that name got used. I think.

Yeah, I was wide open.

Prince didn't use it.

You're good. No, it could be Blue Horseshoe Trust. What's that from?

I have no idea.

I'll give you a hint. Michael Douglas, Wall Street, 1988. Blue horseshoe. That was the company. Yeah. Yeah. Blue Horseshoe.

Horseshoe. It was blue.

No, it wasn't. You Google it while I finish. Okay, that was Blue Horseshoe. Okay. Okay. But you're gonna name your trust something anonymous, something that's indiscriminate, it doesn't relate to your name, because anything that's on public title is actually going to be owned by your trust. So it may be harder for someone to bring a lawsuit and find all your assets. Now, if you're a bad enough person and the lawsuit's big enough, they're going to find all your assets, but it's going to take some work. And it doesn't allow you to hide from the irs. It doesn't allow you to commit fraud. We're not talking about laundering money, but we're trying to hide what we don't want easily found. Now, in my operations side, I, Mark J. Kohler, Inc. Go ahead. You know, find it. I want you to find my company on the left side, but you want to go find my rental property that's owned in a state that I will not mention. You could start searching, and you'll never find the name because it's not going to have Kohler in it. So I'm going to use privacy for entities that hold assets and privacy for my trust. But for operations, I want branding, I want trademark, I want it out there. And privacy is going to allow us to use addresses and mail forwarding to create additional privacy where people can't find where these assets reside. Okay. Was I right? Blue Horseshoe? What's the verdict?

You're right. Blue Horseshoe loves Anacott Steel.

There you go.

Good old Gordon Gecko.

Yeah. Okay. All right. Is there a not. Boy, I wish we could come up with 10 reasons. We've only got eight. Do you have another good one?

Yeah, we do need to have 10. Yeah, I like it. I like it for. I mean, we kind of said planning, but it. It keeps you organized. It keeps your other professionals organized.

Oh, I got one. I kept. I put. Relieves stress. Provides organization. How about it? Provides understanding.

Yes. So now I know Understanding and clarity.

Understanding and clarity.

So your, you know, your lawyer and your accountant knows what the heck's going on. And your financial advisor, if you have,

oh, ooh, and I got number 10.

Saves money.

Ooh, boom.

I mean, boom. Yeah, you gotta. You gotta end with that.

Yeah.

Gotta eat with that money, exclamation point.

Yeah. And I, I bet you you can come up with a reason why it saves money.

You know how much time you're gonna waste trying to do this? Well, we already said it saves taxes.

Okay.

That's money, right?

Yeah.

The number one business expense for any successful business owner is taxes. Like that's your number one expense. That's the silent partner you never asked for, but you got, that just gets a cut, whatever you're doing. Okay, but, but so that, that's a given. But there's a lot of other savings you're going to get here in terms of efficiencies. This thing's way more efficient. It's going to take less time for you to keep this organized. Obviously, you're saving money from an asset protection and a lawsuit and assets getting, disappearing because you've got your assets and operations in the same thing here. Something happens in the operational business, it's contained over there, that liability stuck. It ain't getting over the asset side. That just saves you some money. Your professionals that are going to see this and you know, your accountant or anybody, you know how much time they spend that they probably bill you for to try and figure this crap out. Especially a lot of you that are very active and change things year to year. You're paying for that.

Oh, I've had so many clients say, can I show this to my accountant? Yes. That's what you're supposed to do. How about showing it to your insurance agent? Oh, now I know where the umbrella goes. We need to have insurance coverage here. We can get rid of insurance coverage here. And your family better understands your affairs. If something happens to you in our binder that you're going to get with an estate plan, say you choose our service. Let me just tell you right now, we're typically $1,500 for an estate plan in any state. That's with an hour or more with one of our attorneys designing a diagram for you, getting your information and drafting a will trust and all these bells and whistles during the special. 300 bucks off. I know many of you are maybe watching this video or hearing this after the Memorial Day special we hold annually. So it's $1,200 during this one month period every year, 11th year running, but still $1,500. I have people go, it can't be that good. I paid four grand for mine. I paid three grand for mine. You guys are cheap. So therefore you must have a crappy product. Nope. We have spent 20 years crafting a binder with tabs and sections and pieces and parts. Mine and Matt's blood, sweat and tears, literally is in every paragraph of our document. We have been through it over and over, over 20 years. And that's what you're getting the product of, the byproduct of is all that work trafting this thing. So the point is.

And all those other clients who have used it and have passed on and have actually implemented the trust. Right. That's all in there too. What matters, not just some template that was found online.

Yep. And the COVID where I was going with all this, the first sheet, in a little plastic cover sheet at the top of your estate plan binder is your diagram. Drew. Our paralegal, we instructed her in our any client file, find their diagram, print it out in color, put it in a. In a plastic cover sheet, and that goes on top of your estate plan. So this is just so I. But it just saves money because it's not a big mess. People set up entities they don't have or need or. Oh, well, what about this entity? Oh, my gosh. Is it on the diagram dupe? Let's see where it fits. Yep.

Okay. 10.

Wow. Sorry, I yelled out a little loud. Corey Producer, you're gonna have to fix that.

Yeah. 10. I love it. 10 benefits. 10 benefits of the trifecta. And I like how you said it is to be honored and respected. Okay. You know, we're not. We're not asking you to worship the trifecta, just honor it and respect it. And I like it. And I think if you. For those of you that have a lot of stuff right now and feel overwhelmed, this helps you keep it organized. It helps you keep your brain focused on where. Where stuff goes. All the 10 reasons we talked about. I just. I just want to encourage people to keep planning this way. And even if you don't diagram this out, okay, we want you to do that. We think so many of you are visual, but just implement the basic concepts of it. Operations on the left side, assets on the right side. Don't mix them into the same thing. Gets clunky for taxes, and it screws up your asset protection planning.

Okay.

Just that. That one concept right there is what we start with, with most clients is separating those two things out.

Man, I had some. So many good analogies and jokes here I didn't use during this. For example, the left side is dating. The right side is marriage. See, left side is all operational. You know, it's kind of little white man overbite dancing at Night you're out on the dance floor looking at the real estate. Am I gonna, you know.

Yeah.

And so right side is marriage reading the dough.

You don't want to be out here. You don't want to be out. Just keep it tight, keep it tight.

Also, I was going to say what's funny, Matt said some of your visual. What Matt really meant to say is guys are visual and they want to see this. It'll make sense to them. They're going to get googly eyes seeing this. The women, they're going to feel secure. You're gonna feel like, oh my gosh. I feel so much more secure because you communicated with me here. This communicates with me. The guys are like, ooh, lines, bubbles, charts, color. You had me a diagram. Alright, well, that is our show today, people. Hopefully you enjoyed that. We hope that you have a professional that can help build your diagram. If not, give us a shout. We do love to help bring it together for you. Just do an annual review at the least, take it to all your professionals. We sure appreciate you. We're grateful you're here. We know we're dorks, we ham it up, try to have fun with it. But please, if you don't have a picture and your plan, estate plan in order, give us a call. You can easily Google us. Kkoslawyers.com kkoslawyers.com make an appointment. You might be out a couple weeks. That's okay. There's no rush, no bungee jumping or skydiving. What else is off limits? You can't. No.

Yeah.

What's dangerous?

Can't climb Everest, you know, or pretty much high adventure stuff is off the table.

Yeah.

Race car driving,

I don't know.

Not wearing your mask in public. I'm just kidding. I want to get into that topic.

Let's not go there, everybody.

Yeah, just thanks everyone though. Yeah, thanks everyone for listening and give us a five star review or like or subscribe or however you're watching it. It helps us help other people find the show. And we'll be back next week with Open Forum. We'll be fielding your questions. So if you're like, guys, I was hoping for Open forum or you know, get your questions in, go to mainstreetbusiness.com submit a question, click that link and just type it in. You can even audio record one if you, if you feel so inclined. And then we'll be hitting questions next week on the Open Forum show.