Transcript
Intro
Stephan Shipe: Welcome back to the Scholar Wealth Podcast. This week, we start with a question about navigating lifestyle differences among children and what happens when those differences begin to affect shared spending and charitable priorities. Then we look at short-term rentals and bonus depreciation under the one big beautiful bill, including how material participation works and where investors might misunderstand the strategy. And from our From the Field segment, we’re joined by Ghonche Alavi of Crisis24 to discuss the evolving digital risks facing high profile individuals and family offices and why effective cybersecurity today requires more than off the shelf solutions. So let’s go ahead and get started with question number one.
Question 1 – Private Travel Family Disagreements
Listener: We have three adult kids (36, 39, 40). Two of them still travel private with us, but one prefers to fly commercial and he wants us to redirect that travel spend toward charitable giving. We’re in an awkward situation figuring out how to navigate lifestyle differences now that they affect not just the family dynamic, but the budget and gifting plans.
Stephan Shipe: So definitely an odd situation. And this is a common trap that occurs when kids start to feel, whether right or wrong, that they get a say in how the gift that was allocated to them or how the benefit that was allocated to them should get allocated if they choose to opt out. In other words, you have provided an experience to fly private. So is there the right of the child to say, I don’t want to fly private. So then that means that that money was mine. So I get to tell you how I think you should spend that money. And I’m not a fan of that belief. I believe I’m an equal opportunity gifter. And I believe that if you come up with a gift and say you’re going to provide this private travel experience to all three of your children, if they choose not to partake, then that doesn’t just mean that there’s a bucket of money there that was earmarked for their travel that now they get to choose what to do with it. You’re gifting the experience. You’re not gifting a pile of money that everyone else just so happens to be spending on private travel. So fair, between gifting or in these opportunities for participation, doesn’t necessarily mean identical outcomes of participation.
And fair means that you’re giving everyone the opportunity for that type of experience. Now, this one’s a little different because part of traveling together is the travel, right? It’s that travel dynamic. So while you’re having these plans to pull the whole family together to go on these trips and they have their own experiences and families and all of this is starting to evolve, it’s difficult. It becomes more and more difficult to find those times for everyone to come together. So this comes into a value difference there, or not even a value difference as much as it is an opportunity for you to clarify what the goal is. Is the goal that you want everyone to be there together as you travel? So you’re going to fly private and they should participate in that. And that’s great that they would like to prefer to fly commercial on their own time and on their own dime. They can fly commercial as much as they want, but for this family trip, we’re all flying together. All right. So that’s one option. The other option is to say, you get there however you want to get there. We’re offering the opportunity to fly private. If you want to fly commercial, that’s fine. We’ll pay for you to fly commercial, but just because we’re paying for you to fly commercial doesn’t mean that you now have the ability to allocate the excess spend that we are no longer spending on private travel. So the goal is really to allow you to start designing not only a structure around, but a norm of what’s expected when these types of opportunities arise, whether it’s for travel, whether it’s for gifting, whether it’s for anything else. And we see this happen a lot for gifting, especially if your kids end up having children that maybe some are going to private school, some are going to public school, some are going to go to college, some are not going to go to college. How do you start dividing that out? Then you might say you want to pay for all the grandkids to go to college. Well, what if one of your children doesn’t have any kids or doesn’t have kids that are going to go to college?
Well, now that throws a whole wrench in the dynamic. And it’s very similar to this where it’s really easy to fall back on that reallocation trap that says, well, I’m not using that gift in that way, but I still want to use the gift in this other way, or I want you to allocate that gift in another way. So I think this is a great opportunity. It’s relatively low stakes for travel to start having these conversations, to provide that clarity, and hopefully end up avoiding a bunch of conflict in the future because you set a precedent now of what your thoughts are and your reasons for gifting, whether it’s a direct dollar amount or it’s an experience like this
Question 2 – Short Term Rental Bonus Depreciation
Listener: I’m seeking information on advantages to purchasing short-term rentals and using bonus depreciation that is available within the one big beautiful bill. I’ve read some sources that say the owner only needs to provide 100 hours a year towards managing the rental and there’s enhanced depreciation available. How does this work?
Stephan Shipe: So lots of things to unpack on this scenario. First things first, whenever we deal with any type of investment, I want you to ignore the tax implications and say, would you be going into short-term rentals right now if there wasn’t any bonus depreciation? The answer to that needs to be yes before we have any other discussion about anything to do with any of this investment. So if the answer is yes, you’ve been dying to get into real estate and you find that the best real estate for you to get into is in short-term rentals, if you’ve cleared that hurdle first, then the next piece comes up of can we take advantage of the big beautiful bill bonus depreciation? The advantage of the bonus depreciation is it allows you to depreciate items at a faster rate than it’s previously done under previous law. What that does is gives you a bigger tax break upfront and incentivizes more conversations like we’re having now of maybe I should go ahead and buy this property that I’ve been back and forth on because I get a big bonus depreciation upfront. Remember that the depreciation that you have on a property will be recaptured once you sell unless you do something like a 1031 exchange or there’s a step up in basis. So there’s still some ways around that, which are some things we’ve talked about before, but we want to know that that depreciation is just a short-term benefit and essentially a delay of potential gains that you’d pay tax on in the future. So it’s almost like a loan to you until the property is sold. But let’s dig into what this means for the bonus depreciation and how this works specifically for short term rentals. So the idea for short term rentals and their specific rules here, which we’ll get into the 100 hour rule in a little bit, but the one rule on short term rentals, there have to be an average — it’s somewhere between, it’s less than seven days on average — your average stay has to be less than seven days to be a short term rental.
And because of that, it opens up this possibility that it’s more active management. And the reality, or the reason you want active management in any type of real estate investment, is because if it’s considered active income or an active loss, that can be used to offset active income somewhere else. In other words, if you have W-2 income, that’s active. If you have investment income from a dividend that’s paid in a stock in your brokerage account, that’s passive income. If I take a loss in my investments, I can’t use that to offset active income. You have to have a like-for-like rule. So I can take a passive loss and use that to offset passive gains and cancel them out. I can’t take a passive loss and use that to offset active income. In other words, you can’t go and rack up depreciation — passive depreciation — and use that to knock $50,000 off your W-2 income. That’s not how it works. But it could work like that if the income that you’re generating from the short-term rental is considered active income, because then you would have an active loss that you could use to offset active income. That’s where the advantage is, that’s what everyone gets excited about. So then how do you do that?
You typically do that through some sort of depreciation. And the depreciation is unique when it comes to real estate because typically real estate is depreciated over 27 and a half years or sometimes longer depending on the type of property. So you’ve got 30 years of depreciation. You take that property value, divide it up into 30 years. It’s only a tiny bit of depreciation every year so it’s not worth it. However, what you can do is upon identifying the property and putting the property into service, you could do what’s known as a cost segregation study. And a cost segregation study says, all right, you don’t just own this property. What you really own is you own some carpet, you own some walls, you own some property improvements, you own some appliances. And now by segmenting all of this out, appliances can be depreciated at a faster rate than the whole property. The carpet can be depreciated at a faster rate than the whole property.
So now you pull everything together into a spreadsheet where you’re breaking down all the items in the house and all of them are under different depreciation rules and you’re allowed to depreciate. For instance, let’s say you can depreciate the appliances all this year as opposed to waiting five years. Well, that’s how you’re going to get this big depreciation upfront. That would be in line with the big beautiful bill. And if that’s active and that’s considered an active loss, you can use that to offset active income.
So then that goes into the big question, because you look at that and say, Stephan, that sounds great. I like the idea. Let’s depreciate the whole thing. Let’s take some huge losses. Let’s use that to offset all my W-2 income, and I’m not paying any taxes. That’s this kind of mythical idea that exists in people’s minds. The problem is you need to show that this truly is an active income scenario. And if that’s the case, there are lots of rules that the IRS has about what is considered active, because you could say, well, I go into the property sometimes and fix some things. So I’m active. And then you’d say, well, sometimes I go over and clean the properties after one of the tenants leaves before the short term rental. That’s fine, right? But there’s got to be a rule. But then maybe you have a cleaner come in some of the times and you clean them some of the times, you do some contractor work but you hire a contractor. You may have a property manager. You may not have a property manager. How do you tease all that out?
So there’s a few different rules. There’s even a 500 hour rule that you can get to. The 100 hour rule is very misunderstood. It’s really easy to throw around the 100 hour rule and say, if you work on that property 100 hours a year, then that must qualify for active management. That is not the case. What the 100 hour rule is meant to be is to say, you’re spending at least 100 hours on this property and you participate in this property and work on this property more than anyone else involved.
So what this eliminates is you saying, well, I worked 100 hours on the property, but you’ve got cleaners in there that have worked 250 hours and you have a property manager that’s been working 250 hours through the year. Then the 100 hour rule doesn’t really work. Is that really active if there’s other people in the business that are running it more than you are, spending more time on it than you are? So if you’re going to follow the 100 hour rule, technically it’s that you’ve been spending 100 hours and there is nobody else that spends more time on that property than you do. Now spouses can be added in here. So that’s possible, but that’s where the 100 hour rule really sits. And the goal there is to have some sort of test to show the IRS — and you want this well-documented — that you are substantially the one doing the work. You’re doing more work than anyone else. There’s no question. This is active income. So in this type of scenario, anytime you are going to do something that ends in a really big tax benefit to you, your documentation needs to be flawless. If you’re going to do this and you’re about to take this huge bonus depreciation against active income and save tons of money in tax, then I want to make sure that not only do you have every single hour documented to get you to 100 hours, but you’re documenting everybody else involved so that way you can truly show that you’ve done substantially all the work or substantially more work than anyone else in meeting one, if not two, of the different rules that the IRS has to show that this is active income. The benefits are there if you’re taking the steps to make sure it’s done in an appropriate way. But always step back to that first factor that we had talked about, which is, is this the business you’re wanting to get into? That has to be yes first before you determine whether or not there’s a cherry on top with some bonus depreciation.
From the Field – Ghonche Alavi, Crisis24
Stephan Shipe:
Next in our From the Field segment, we explore how wealth visibility and digital exposure intersect and what families can do to reduce risk before a crisis surfaces. Today we’re joined by Ghonche Alavi of Crisis24, where she works with high profile individuals and family offices on the evolving digital risks that come with wealth, visibility, and complexity. So Ghonche, welcome to the Scholar Wealth Podcast. To start off, why don’t you tell us a little bit about your background, the type of work you do. We’ll go from there.
Ghonche Alavi:
Yeah, absolutely. Well, lovely to meet you. So my name is Ghonche Alavi. I lead the cyber practice at Crisis24. I’ve been with Crisis24 now 10 years. And initially, my main area of focus was in helping enterprise clients build out their cyber resilience. So everything we can do to help organizations reduce the likelihood of a major cyber event occurring, or if it does occur, reduce the operational impact of downtime. And now I’m working primarily with Private Strategic Group or the PSG division within Crisis24, which is really the division that is focused on family offices and ultra high net worths. They have a very unique cyber footprint and visibility that warrants its own level of support. So I’ve been shifting my focus to primarily cater to that demographic over the last 18 months or two years.
Stephan Shipe:
So how does that change? Everyone’s aware of kind of the cyber risks that are out there and everything and it’s change your passwords and make sure you don’t give access to your phone. But I imagine there’s a different level and a shift that starts to happen when visibility increases or when wealth increases. Can you talk a little bit about how you see that shift and what that means to have a shift in digital risk that’s out there?
Ghonche Alavi:
Absolutely, I mean, that’s a great question. The attack surface of an ultra high net worth individual or a family, I would say, is dramatically larger than the average person and much larger than perhaps we would realize because it’s not just the number of devices you own, it’s not about endpoints necessarily, it’s about every single person and system that you’re then connected to.
Public visibility is definitely one of the areas that we see come with a significant weaponization by threat actors. That could be things like media coverage, depending on the profile of the ultra high net worth individual. It could be their own social media footprint and it might not be themselves. I always give the example of my mom, when she discovered on Facebook, she can geotag and bring in the entire visibility of where the family is by checking in. So the social media footprint that not just you, but family members might have, and also your travel patterns too. And I think in some jurisdictions, some geographies, primarily in the States, property records are very visible in public. All of these crumbs, digital crumbs, can be used by threat actors.
And then there’s the latest trends we’ve been seeing, one I’m sure we’ll go into some more, but things like AI driven social engineering attacks that threat actors will use and leverage these digital breadcrumbs to then use as almost a primary vector into targeting this profile. The other big trend we’ve seen and area of focus I’d say over the last year or so has been the risks around crypto wealth.
So the visibility of the blockchain and just how expansive it is and how much it can direct threat actors into better visibility of your own physical residence too, and those links are not always understood. And so if there’s a perception of crypto wealth, we’ve seen an increased targeting of those individuals as well. And some of that translates not just into the physical, sorry, into the cyber domain through digital attacks, but unfortunately, more targeted physical security attempts as well.
Stephan Shipe:
When you have to tailor these types of, I guess, risk mitigation strategies, is that kind of the thought process there? How specific do you get into the lives of the individuals and their families? Because I imagine even within one family, the types of risks that each family member has are completely different, right? From the types of business they do, the types of travel. Can you talk a little bit about how you go about it? If I come in today and I’ve got my family and I say, I need you to help me protect all this. Is there an intake process if you’re just trying to find what are all these risks? Because I don’t think I would be a good person to ask of whether or not I knew of all the risks that are associated. That’s why I would be hiring you to figure that out for me. Find all the risks and then mitigate.
Ghonche Alavi:
That’s a great question and you’re absolutely right. Every individual has a unique profile and you can’t really apply sort of a cookie cutter approach. There are themes and patterns that are consistent with this demographic, but understanding their digital footprint, understanding their pattern of life, their lifestyle, is really important. So the best way to do this is twofold. So we start with what we call digital footprinting, which is essentially where we’re mapping out the entire digital exposure of the individual and looking outside of just the principal, but also the spouse, the children. Typically, we’re also looking a generation up because there are discrepancies in, I’d say, privacy literacy, depending on various generations and how comfortable they are with technology. They might not be aware of the dangers of how they are using or configuring their devices. And with ultra high net worths and family offices, you’re also looking at that layer of trusted individuals outside of the family who, it might be a chief of staff, it might be a housekeeper, it might be select individuals that are very, very close to the family and have access to a lot of important information and credentials in some instances too.
The digital footprinting gives us an opportunity to profile just their level of exposure. So what are the vulnerabilities that a threat actor could potentially use and leverage in either posing a direct physical security risk or posing a more digital risk or identity theft or instances of information security risks. And here we’re looking at surface, deep and dark web.
I gave the example of my mother and how she was using Facebook, but it’s understanding everybody in your family. How are they using the devices? How are those devices configured? Are you using a combination of corporate and personal devices? How are those being managed? How are you patching each of those devices? How are you traveling? Is it private? Which additional vendors therefore have access to some of your personal records?
And it’s just building all those layers of understanding to see from a threat actor perspective, how much exposure is there and what could that level of exposure, what risks does that pose to you? Could it be used? And we’ve done this quite successfully for numerous families now in identifying where the kids go to school, where the spouse goes for a morning run, where the holiday homes are, all these sort of digital breadcrumbs could then be leveraged to pose a more direct physical security risk and kind of directly impact their pattern of life. And then of course, on the identity theft side, if you’ve had credentials that have been exposed on the dark web, perhaps not each of those credentials can be used in isolation, but if you bring them together and piece them together, can they be used to try and take out a line of credit in your name, for example. And so the makeup, the composition of each family and those trusted individuals around them is different. The devices they use, the way they communicate, all of those variables exist. But ultimately, the risks are the same. It’s just understanding the severity and the literacy of those individuals around digital hygiene and privacy in particular.
Stephan Shipe:
Where do those concerns typically show up first? Is there a certain area where somebody says X happened so now I need to bring in some professionals to evaluate this? Or is there usually a trigger point there? Or is that just a known thing that people are looking for? What has your experience been?
Ghonche Alavi:
I’d say it’s a combination of both. I mean, in some instances, clients are coming to us because they are suspicious of something odd happening or something peculiar has already happened. Usually it would be increased traffic. It might be a social engineering attempt. It might be more phishing emails that you’re getting. It might be some odd attachments, peculiar communications often. So that could be one reason clients come to us.
But there’s also a realization, particularly with AI driven cyber attacks, that there is an entire wave of new attacks that might not have been applicable 12 months ago that unfortunately are a very dangerous reality now. And that could be particularly when they’re seeing things that are close to home. The network and the circles that these individuals operate in, when these things impact your peers, I think it’s much more likely that you recognize it as a realistic risk to yourself versus just, you know, hearing an anecdote at a conference, for example. So I’d say that in the last 18 months or so, we have seen more families who have not necessarily been impacted by a cyber event, but are looking to be more proactive in understanding where those exposures might exist. But I would say there are plenty still who come to us because there has been an incident and therefore they need the support and they need to be reactive in terms of their response and the way that we try and tackle the problem.
Stephan Shipe:
And you’re bringing up some really key things here and I’ve had at least more than a handful of conversations with clients over the last couple of weeks who’ve had something unique happen that was suspicious and being able to talk through, was that a genuine email or was that a problem? Where’s that email originating from? And I’m curious, do you see a spike during tax season? Because it seems like tax season seems to be one of those times where all these unique things end up coming out more than other times.
Ghonche Alavi:
Yeah, that’s a great point. I mean, first I’d say that there are spikes around certain events or key moments during the year where people might have their guards down. So for example, historically holidays. You’re not as likely to flag something if perhaps you’re on holiday or you’re just used to getting a lot of booking confirmations. So there’s a level of seasonality to attacks.
And definitely things like tax season where you’re expecting communications on these very specific topics. And obviously, because those tend to be private in nature, you’re likely to engage quickly. Anything raising that element of urgency, I think, or importance. Even bad grammar now does not necessarily always flag as a red flag because with AI, frankly, the quality of the text that is being used in these attacks is generally quite good, which actually makes it a lot harder to identify when something is unusual.
Stephan Shipe: Have you seen there actually being just a huge shift even in the last 12 months of AI being able to produce new levels of sophistication around these attacks?
Ghonche Alavi:
AI is an interesting one. I think, I will say, the threat actors are probably many more steps ahead than anyone in the security field in terms of leveraging AI, unfortunately. The volume of attacks that we’re seeing, the way that it’s being leveraged in sort of deep fake attacks and social engineering attacks, unfortunately, that continues to rise. And I think that change isn’t going away. But to your point, it can definitely also be leveraged on kind of proactive cyber security controls and checks and balances that we’re doing. I mentioned the rise in sort of crypto thefts and issues around security of crypto assets. We’ve successfully leveraged AI in a number of investigations of crypto assets to be able to track and trace how the layering has been deployed by threat actors in hiding and moving the money. So definitely AI can be used as a way to supercharge the cyber threat intelligence community. Our team leverages it on a day to day basis. So yes, it can definitely be used for good.
But unfortunately, as we’re working through it, so are the bad actors. So it’s a bit of a cat and mouse game.
Stephan Shipe:
And if one of your clients is going through something like this, one of these situations, what do you find is the kind of the advice you give of how to handle these type of difficult situations under pressure? How do you make decisions under that type of scenario?
Ghonche Alavi:
Great question. I think with decision making, what you want to be able to do during a cyber crisis is to be able to make decisions quickly and effectively. We come from a crisis management background. Crisis24 manages kidnap for ransom cases, piracy, extortion, all sorts of security perils.
And there are definitely nuances around cyber crises where there is a prolonged period of uncertainty where you don’t have all of the information, where the forensic investigation is either inconclusive or slow to reach an end. And therefore, you still are in a position where you need to make decisions and communicate. When we do this on the enterprise side for organizations, a lot of the focus is on being able to communicate effectively to your stakeholders so that you’re in charge of the narrative. When we look at family offices and ultra high net worths, it’s different. They don’t need to be communicating necessarily to many stakeholders. There will be some legal contractual obligations to notify if there’s data that they hold that will impact data subjects, for example. But it’s knowing who to bring in at what point. So our advice typically to family offices and or directly with the families themselves is to have a cyber incident response plan. Who are the people that you’re going to call to support you and what is their role? The forensics is one piece of the puzzle, but it cannot be led entirely by forensic investigation. You may need legal support. You might need breach lawyers to support you in any of those notifications that you need to make.
You may wish to engage law enforcement, but knowing when to engage them, at what point, what level of information are you giving them? You might need crisis communication support. How are you messaging this? What reputational impacts is this likely to have? You might be on the board of several other organizations. You might hold leadership positions in various other organizations. How is this going to impact your reputation? And therefore, how do you communicate this effectively?
There’s lots of pieces to this crisis management and most of it can be addressed in principle in a cyber incident response plan that maps out who those stakeholders are and what you need to be accountable for. The more you do upfront, the easier it is during a crisis because the last thing you want to be doing during a crisis is trying to just figure out, who do I even need to call? The more work you do in preparation, it tends to pay off.
Stephan Shipe:
Of course. And I guess to add to that as we kind of wrap up and everything, is there anything else you’d add to that or any of the statements you made today of just what you’d like to share when someone’s trying to think about how to thoughtfully prepare for these types of events? And I think you just nailed a really key part that it’s always the planning beforehand is a lot better than trying to plan after an event and try to have everything in place. But anything that you’d like to add today?
Ghonche Alavi:
I’d say the key points I’d want to reiterate is understanding your digital footprint and the risks that that poses to you directly and by extension to your family members and understanding that that isn’t just an information security risk, but the physical security risks of it too. The other thing I’d emphasize is the importance of training.
Every family member has a role to play. And the more you’re able to openly share with them why privacy is important, why cyber hygiene is important, and how their actions will have a domino effect on the wider family unit is important. And I think engaging the family members, regardless of which generation, which age bracket they fall into, they each play a role.
We’ve seen unfortunately some trends around ultra high net worth family children being targeted in things like sextortion campaigns. So bringing in the children early to understand not necessarily how bad the world is and to scare them, but to give them concrete ways of using their devices, understanding security around why you shouldn’t be using public Wi-Fi, for example, or when you’re traveling abroad, you shouldn’t be getting maintenance work done on those devices when it’s not a vetted provider, for example. So these types of very practical handrails to help the family members and reiterate how the cyber threat landscape is changing and their role in protecting not just themselves, but the wider family, I think is really important.
And the last point I’d make is that these things come together in the same way that the digital footprint piece is both physical and cyber. Cyber no longer should be seen as just purely an IT issue. It needs to be considered as part of a holistic risk management framework. And yes, we do this for enterprise and organizations have been doing this for years and you have risk registers and audit committees that look at this.
A smaller scale version of that does need to exist in the family office space and even in the family unit space to understand who is addressing these risks and how does it seep out of just the cyber domain into say the physical security domain.
Stephan Shipe:
Perfect. Thank you so much. I really appreciate you coming on today and sharing this. This is consistently a gap, I think, in a lot of people’s finances and just their overall mindset of what type of risks that are out there and concerns of how to handle that. So I really appreciate you sharing your expertise today and giving us some tips to live by there when it comes to the digital footprint security.
Ghonche Alavi:
Thank you so much, it’s been a pleasure.
Outro
Stephan Shipe: And that’s our show. Thanks for listening and we’ll see you next week!
Disclaimer: The information provided in this podcast is for general informational and educational purposes only, and is not intended to constitute financial, investment, or other professional advice. The opinions expressed are those of the hosts and guests and do not necessarily reflect the views of any affiliated organizations. Investing in financial markets involves risk, including the potential loss of principal. Past performance is not indicative of future results. Before making any investment decisions, you should consult with a qualified financial advisor who can assess your individual financial situation, objectives, and risk tolerance.