Estate Planning

Guided Path 5-4 Estate Taxes

The Financial Call

Guided Path 5-4 Estate Taxes

With the help of this episode, individuals and families can make informed decisions about their estates and ensure a well-executed wealth transfer plan that aligns with their financial goals.

This episode kicks off with an overview of estate taxes, explaining how they are applied to the transfer of assets from a deceased person to their beneficiaries.

Zacc Call and Laura Hadley highlight the key factors that determine estate tax liability, such as the value of the estate, current tax laws, and available exemptions that could apply to your estate!

Zacc and Laura discuss:

  • How to find out if you need to worry about estate taxes
  • Some recent changes to tax laws and how these may affect your estate plan
  • All the maximum $ amounts you need to need to know when gifting or transferring funds within your family
  • Strategies you can use in your estate plan to limit the amount of estate tax you pay
  • And more

Read the Full Transcript:

[00:00:00] Welcome to The Financial Call. We are financial advisors on a mission to guide you through the financial planning everyone should have, whether you're doing it yourself or working with a financial advisor. These episodes will help you break down complicated financial topics to practical, actionable steps. Our mission is to guide motivated people to become financially successful. Welcome to The Financial Call. I'm here with Laura today. It's just the two of us. Last time we had Kelsey online with us and we talked about naming beneficiaries. We're doing all of these completely out of order based on our work schedules. So we're, we're taking a minute to just remember where we are. So if you're listening through these in order, this is season five, episode four, estate taxes, and we're hoping to make this as straightforward as possible to understand estate taxes and what's going on there and why people care. The other episodes that we've gone through so far, if you are thinking. Gosh, I just wanna understand the basics about estate planning. You should go back and listen to episode one, two, and three of this

[00:01:00] season. So one is the estate plan, everyone should have. Two is wills and trusts. Three is naming beneficiaries. At that point, you have tackled 99% of estate planning for most people the rest of this season, which is estate taxes advanced. Trust strategies and preventing a family disaster. Those three are much more complex and deal have to do with high net worth individuals. Typically. Now, I mean, everybody has family issues. I was gonna say, that might apply to everybody. Yeah. I guess it's season four and five. Estate taxes and advanced trust strategies are really, I can't say that. I can't say it. Advanced trust strategies, that is difficult. Well done, well done, Laura. Try that at home. That took a lot of work. We're keeping the title now. Uh, anyway, so today is estate taxes. Okay? So the goal is to help you understand this at the most, like simple level possible, because it can get pretty complex. The first thing to

[00:02:00] know is most people shouldn't worry about estate taxes, but the few that should worry about it, it's a big deal for them. So we have to really understand it if you're there. Okay, so what is an estate tax? This is weird to me that it even exists, but I guess we can understand why someone dies and somehow the government feels like it's their right to just take a certain amount of your money. If you have too much. People are probably thinking, that's about right. That sounds like our government. Is that so bizarre? It is. It is. And it's only if you have a certain amount of money, they're like, okay, we want a piece of it. You can afford. To give some taxes away. So keep in mind as we're talking through this, we're not talking about income taxes, we're not talking about Capital gains tax. We've already covered that in the tax season. The reason that we're covering the estate tax in the estate planning is because it's in addition to those other taxes, and it's only for, uh, certain. Type of person right now, that amount, if your estate is over

[00:03:00] 12.92 million, then you have to worry about estate taxes, and that's per person. So if you have a household, you can double that number. Those are the people that are subject to this estate tax. If your net worth is less than that, most people don't need to worry about it, and you can move on. But they can change that number, that amount, that exclusion amount. So keep that in mind. You know, if you are. Assets are in the 5 million range, I think, I don't know how many years ago back. Yeah, that's about right. So it was the Trump error tax cuts pushed this way up. Right before that, I had a lot of clients because it was scheduled to go down to 1 million. And if you think about how many people have over a million dollars in wealth, When you consider the home and their retirement accounts and things like that together, it's a lot. But it was scheduled to go down to 1 million and then they passed the law to push it back up, and it got pushed to, it was like 11 something million, and then it was also adjusted for inflation. It was scheduled to adjust for inflation at that time. So right now we've gone up to

[00:04:00] 12.92. I think at the time it was around 5 million. Was the number that it is scheduled. Okay, so after the Trump era tax cuts change, they, sunset is the word at the end of 2025. So in 2026, all of those rules go away, and that affects income taxes, Capital gains tax, but how it affects estate taxes, it drops that down to about five and change plus inflation. Somewhere in the $6 million range, I'm guessing. Something to think about. Okay. The word you'll hear is exclusion, exemption, unified credit. All of these are different ways of explaining that there's a big chunk of money you can give away. Either during life or after death with no estate tax. That's it. So that's what we're talking about today, is there's this exclusion limit. And right now to Laura's point, 12.92 million in 2023, gosh, I can't remember what year it was. It might have been 2010. The

[00:05:00] exclusion went away, and I can't remember who it was, but someone died with an insane amount of money and paid zero estate tax. Oh, interesting. Because there was no exclusion. Other way of putting it would be, there was no tax because any amount could pass on. Interesting. Yeah, it was, it was pretty crazy, but it was a little over 12 million last year, so it went up by almost, almost a million dollars. Not quite. Okay. So there's no limit. Like if you pass away and your spouse survives you, you can give whatever amounts you want. If you had an estate that had a hundred million dollars in assets, you could pass that to your spouse with zero estate tax. And it used to be that when your spouse died, they could use their 12 million. Dollars to almost 13. Can't we just call it 13 million from here on now? Yeah. I think that'll simplify things. Yeah. Okay. It's 12.92. You know that It's 13 million now for the rest of this conversation.

[00:06:00] So if you pass away, your spouse could then inherit all of your money, and then when he or she passes away, then they could avoid a estate tax on 13 million. And then they'd have to pay like up to 40 plus percent on everything over that. So you, I mean, imagine a 20 million estate. And you have to pay three and a half million dollars, almost three to three and a half million dollars in taxes. That's painful just to give that to your kids. Super painful. So that example of a 20 million estate, that's where we're gonna talk a little bit more about advanced trust strategies in a future episode because. In the past, the spouses would say, okay, let's assume both spouses are alive. One spouse dies, and they would set up a trust that put their money in that trust. In other words, they got to use their 13 million and then when the second spouse dies, She or he uses his or her 13 million and so they got to use

[00:07:00] 26 total. And so the government actually made this easier by something called portability. So instead of having to set up a fancy trust, the surviving spouse can just say, I'm going to claim my spouse's exemption. I just wanna port that over to me, the 13 million. So when I die, we can use 26. So that's super helpful. It's made estate planning a lot easier. However, if you have an old estate plan, then your plan is probably upside down in terms of what you should be doing, like the language in your trust says to create these two trusts when it's completely unnecessary. You should just do portability of the exemption and be good. So that's something to be aware of. If your trust is old enough, let's call it, it's 2023 right now. If your trust is more than 10 years old, you for sure should be looking into it because the language is probably upside down. If your trust is more than five years old, you should be looking into it because your life has probably changed, and

[00:08:00] it's worth talking about who gets to make decisions, but that's another conversation for another day. Estate taxes, so you can give away up to 13 million without having to worry about estate taxes and spouses, if they use both of those exemptions are up to $26 million. That's a lot of money. Very few people are going to have to pay estate taxes. So if you are thinking like, let's say you inherit money from your parents and they pass away, they have two or $3 million. You're good. You don't need to stress about this. And I think a lot of people, because two or 3 million is a lot of money, I think a lot of people assume that they're going to have some massive death tax, which is the same as the state tax, that that verbiage is the same. So I think a lot of people assume they're gonna have this terrible tax bill associated with it. You won't pay estate taxes, but if that money is inside an ira, You will have to pay income tax as you

[00:09:00] take it out and put it in your bank so you change it to your own name so that you can control it from there on out. And then as you withdraw and put it in your bank, then you have to pay income tax each year and you can control that. It can be spread out over a period of time. We talked a little bit about that in naming beneficiaries. And something to keep in mind is this estate tax exemption or exclusion amount, it applies during life. It's not like you can give away 12 million right before you die, or 15 million before you die, and avoid the taxes on that 2 million. You have to add up everything that you've given throughout your lifetime towards that 13 million amount. You may have heard of something called the gift tax. There is an amount. That you can give away without even needing to report it, meaning it's not adding up for that 13 million, it's not using any of that 13 million right now in 2023, that amount is 17,000. So you can give away $17,000 to somebody without that even being added

[00:10:00] towards your exclusion amount. 13 million. And we see this all the time. We see people say, what if I give a hundred thousand dollars to my kid for a down payment on a home? Well, technically you're only supposed to give them $17,000, so everything over $17,000 is part of you using up. Your lifetime exclusion, but people think that everything over 17,000, so the $83,000 is going to be taxable. So they either think one of two things. One, they think it's not the government's business. If I give away a hundred thousand dollars to my kids, which do I agree with them? Yes. But is that technically right? No. And so, so anyway, a lot of people either think it's not the government's business. Or they think they're gonna have this huge tax on the other 80, $83,000. Neither are the case. The government does legally have the ability to make you report that, but it's only $83,000 of your 13 million that you can give away tax free. So you're

[00:11:00] fine. You just report it and then it, it goes untaxed and, and just counts up towards the 13 million. And you can give 17,000 per person. So if you and your spouse wanna split the gift, they call it gift splitting, you could give, you know, double that 30. 34,000 math on the spot, and that's per child. So if you gave away 34,000 to five kids and you know, five grandkids, 10,000, you can give away a lot of money without even needing to report it. Right? So let me give you an example. And by the way, let's say that you are married and your kids are married. Then father can give son, 17. Father can give daughter-in-law. 17. Mother can give son 17. Mother can give daughter-in-law 17. So $68,000 total can be given to that couple as a whole. And okay, so the example that I have, I had a, a family and the husband had passed

[00:12:00] away and the matriarch of this family was a little bit less comfortable with finances in general, and her husband knew it. So when he set up his trust, he actually put his kids, his adults. He had three children that were adults at the time when he built his trust. Five children total. The two youngers were minors, so the three older children were named as co-trustees. If he passed away, which happened, he passed away. The money was set aside for mom during her life, and then if she passed away, then it went to the kids. But even during her life, those three oldest siblings were the trustees. And so they did, they did a really good job of planning. They thought this through. The dad did a lot of good planning and they had set it up so that. Every year, and by the way, the exemption back then was 12 million, or sorry, 12,000. That annual amount that you could give away, the annual exclusion exemption, whatever we wanna use. But the annual amount you could give away without reporting was $12,000. So each of the

[00:13:00] five kids was married. So mom, she would give $12,000 to each of her kids, and she would give $12,000 to each of their spouses. Every year. She was able to give away $120,000 to her kids without it being included in her estate. And her assets were large enough that she was going to be subject to estate tax. So that was a concern for sure. So every year, and this, this may sound crazy, but the attorney and accountant actually recommended you do it in January every year, because if that was the year that she passed away, you need to do it before she passed away in that year. Oh God. But that was really fascinating that they were thinking that carefully about it. Interesting. But anyway, you can do that every single year. And at that time it was 12,000, so that's why those 10 people got $120,000 total. It's now $17,000. So it worked out really well. And I've even seen people use this as a limit to their kids. Even though you could give more, they'll tell the kids like,

[00:14:00] listen, I can only give $17,000 a year without having estate tax problems. And it kind of turns the spigot off, so to speak. You know, with kids that keep coming back to the well for more and more and more. Okay. So the reality of these gifts though, in real life, most people do it and then don't report it, and it's also confusing to me a little bit. Now I'm a father of kids. I have a, a daughter who will turn 15 here shortly. I. And twins that are 12. So it's also hard for me to know, cuz I know I spend more than $17,000 a year on them. Mm-hmm. I wish it was just $17,000 a year. They're expensive. Yes they are. Laura's finding that out now. Lots of diapers. Your mom. Yep. So the, the thought is okay, at what point. Does my spending on them become a gift versus me being a parent? And as they get older, those numbers get bigger, it's easier to cross those lines. So I don't know. The reality is most people don't realize that this is an issue. They

[00:15:00] spend more because the gifts are actually, like if I gave a $50,000 car, which I wouldn't, but let's say someone really, really generous and wealthy, gives a $50,000 car. To an adult child. Some high school parking lots these days are crazy. It is so true. I think I drove the oldest car in my high school parking lot, but that's all right. What kind of car was it? A Toyota Camry. I wanna say it was a, a 1986. And That's old. Yeah, it was old. That's old. I had an 87 Subaru Brat. Okay. Two-door car with a truck bed, but it was really small about the width of a sidewalk. I could touch. Oh my gosh. I could touch the other window with the palm of my right hand. Oh, that's hilarious. The, the passenger side window. Yeah. It was really, really small. I had four gears and did not get above 55 miles per hour. Freeways were scary okay. Going back. We derailed a bit there. If somebody gave a $50,000 car to an adult child, technically that's a gift over $17,000. So they actually count the value of things

[00:16:00] as gifts, just like monetary transfers. So that's tricky. Most people don't report this a whole lot. I'm not trying to say you should do it one way or another. I just want you to be aware of how things work in the real world. And also there are some expenses. That can skip this whole consideration if you pay them directly. For example, if someone had really, really high medical bills and you have an estate that is really like that, you are going to be subject to estate taxes and you want to pay your grandchild's medical bills. Maybe they ha have a baby in the NICU for a really long time. They're on a super high deductible plan. Maybe they're out of pocket total costs for the year $20,000. You could obviously give 'em 17 and there's no issue there, but you could pay those bills outright. And just pay it straight to the hospital. And that's not considered a gift if you don't give it to them to then pay. So, and the same for education. Yes. Right. You can pay

[00:17:00] for just the payment, the tuition for tuition. That's the word. Thank you, Zacc. Yes. You can pay the tuition. They, they say that when, right when you have a baby that some of the, that stuff happens. It's true. Do you think it happens? Oh my gosh, yeah. Before and after having a baby words. I can't think of specific words, but that's funny. Thank you for your help. Okay, Some expenses may skip that entire consideration. And healthcare and education are two that are, are pretty common. Let's talk a little bit about an example. So if you have a piece of property, so I talked about not just cash, but like property itself. This is a big thing in the farming and ranching communities because they have a lot of real estate that's passed from generation to generation to generation, but they are cash poor and tractors are super expensive, and so they throw all their cash into really heavy equipment and then the rest of their wealth is in land. If you have land, That you operate in its original use for 10 years after the person passes away, then

[00:18:00] you can say, well, this land isn't really worth 50 million like it would be to a developer. It's only worth 2 million or five or 10 million. Based on the revenue, or maybe I'll use different words, but based on the amount of income you can get by shearing sheep and cattle and, and the things that actually are done in that business. So that's an important exception because otherwise it would cause a lot of farms and a lot of, a lot of land to have to be split up and sold just to pass from generation to generation. Because they don't have the income or the assets, the liquid assets to pay the taxes on a 50 million piece of real estate, for example. So, so if you wanna keep farming, grandpa's land could save you some money into taxes. Yes. And there is an example, I don't know exactly which one, but I hear there's a theater on Coronado Island by San Diego. That it is like totally, I've heard it's run down like, oh, maybe not run down, but really small. I mean, everything on

[00:19:00] Coronado Island's actually quite nice, but I've heard there's this theater and the real estate on Coronado Island is so, oh, I can't even imagine. Yeah. Yes. But the family keeps operating it as a theater and they had to do it for, it might have passed since, cuz I learned this a long time ago, but they had to do it for 10 years. After she died, so that they could say that that was worth the cost or worth a theater's value and how much they got in movie tickets and not what the real estate on Coronado Island was really worth. So yeah, they, it's funny to get into the theater like a a cinema business in order to just save millions of dollars on millions taxes. Millions though. Yeah, that's a big deal. They could run that thing at a loss for the whole decade and it would probably still be worth. The estate tax savings in the valuation they got because of them, them using that rule Section 1252. If you are in that situation, there's a lot of land in Wyoming that my family. Had passed from generation to generation to generation, and this is happening

[00:20:00] right now within my family to preserve land up in Star Valley, Wyoming. Yeah. So there my uncle runs the ranch and inherited most of it. And I mean, I'm not super involved cuz I'm couple layers down in the generations and it's just sometimes best to, to not get involved with, with too much of that. You don't wanna be your anti up there. Well I also don't wanna be making a lot of financial decisions and have it be. Viewed as like me meddling or anything like that. Right, right. No, I'm just teasing. But when I did learn about this in studying for the cfp, I did call my uncle who I knew was going to be running it, and I'm like, Hey, just be aware. Like, I don't know what you guys are doing, but be aware that this exists and it could save you millions of dollars in. His estate taxes. He's a super smart guy and he already had estate planners helping him through it all. I'm assuming they knew, but he was really interested to understand it more and so I gave him that info and I think, yeah, I think he took it to his estate planning crew. Yeah, cuz what if he did it for eight years and then Right. Sold it or something like that. Right. Interesting. Yep. Okay. So then complex trusts are also a solution. We talked about this example

[00:21:00] of giving that matriarch who had five kids and five kids in law. She also had multiple trusts to set it up, and she set them up before her death so that if you put a portion of your estate outside of your ownership, so let's say she takes 10 million and moves it outside of her estate. Well, she used up 10 million of her exemption today. But what if it grows to 30 million by the time she dies? Then that entire 20 million grew outside of her estate. So that's an important concept that we'll talk about in future episodes as we go through more complex trusts or advanced strategies. But the main thing we wanted you all to get out of today is one, not that many people have to worry about estate taxes. Two, the threshold is about 13 million per person, or 26 million for a couple three. That number's coming down. So maybe think around. Five, 6 million per person to 10 to 12 per couple. And if

[00:22:00] you are in that range, it's worth looking at your estate plan to be ready for that. And then three, you can do annual gifts up to 17,000 per person per year. So that's a strategy that frankly, if we use that plus some basic planning, most people don't have to worry much about estate taxes. And then to what Laura's point earlier, giving away money before or after you die does not change it. It's still subject to the limits, a lifetime amount. You know, you use it before or after you die. It's all the same summed up number. Just to clarify that last example you gave, moving it into a trust that's not your typical, you know, revocable trust, that's a special trust. You don't have as much access to it. That revocable and irrevocable makes a difference. So just keep that in mind. Don't think, oh, well, we have a trust. We're good. That's a good point. It has to be a completed gift as part of your estate planning. So in other words, You can't retain all the same rights or else you didn't actually complete the gift. So

[00:23:00] it's, it's a little bit tricky. And I've seen, I had a gal, so back when they were taking the exemption down to 1 million, she got really nervous and she had about 6 million in assets. So she gave 5 million to an irrevocable trust and kept a million in her own name and put her kids as the trustee on the 5 million and. Made a ton of planning changes there, and then within a month after she finished it, they pushed the exemption up to oh, 11 million or so and shoot. So it was a little bit tough for her, and I remember. She did not like all that control that she had given up and didn't like that her kids were more in charge at that time, but she was so worried about estate taxes. So we always talk about it. Don't let the tax tail wag the dog. And then in general, hopefully this helps you understand it. If you just slow down and think about it a little bit, think about am I going to be subject to estate taxes? If not, do the basic planning and call it good.

[00:24:00] If you're close giveaway, it's up to the. 17,000. You want a year or start to think about these advanced strategies that can solve it for you, and there are some good strategies we'll talk about in the future. We're bringing on Eric Wing, he's a really good estate planner locally and he does a great job strategizing for estate taxes. So he'll give you some ideas that are probably more comfortable than the example that I had with that client. Yeah, that'll be awesome. Thanks for joining us. This podcast is intended for informational purpose only and is not a substitute for personal advice from Capita. This is not a recommendation offer or solicitation to buy or sell Any security past performance is not indicative. Or for a future results, there can be no assurance that investment objectives will be achieved. Different types of investments involve

[00:25:00] varying degrees of risk, including the loss of money invested. Therefore, it should not be assumed that future performance of any. Specific investment or investment strategy, including the investments or investment strategies recommended or proposed by Capita will be profitable. Further Capita does not provide legal or. Tax advice. Please consult with your legal or tax professional for advice prior to implementing any strategies discussed during this podcast, certain of the information discussed during this podcast. Is based upon forward-looking statements, information and opinions, including descriptions of anti anticipated market changes and expectations of future.

[00:26:00] Activity Capital believes that such statements, information and opinions are based upon reasonable estimate. Eight and assumptions. However, forward-looking statements, information and opinion are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, Undue reliance should not be placed on such forward-looking statements, information and opinions. Opinions. Registration with the C S E C does not imply a certain level of skill or training.

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