Hidden Treasure

Hello, this is Will Hardy with ManTalk Radio. We are all about breaking down the walls of race and denomination. Your chosen Truth Network Podcast is starting in just a few minutes.

Enjoy it, share it, but most of all, thank you for listening to the Truth Podcast Network. Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now let's get started with Finishing Well. Finishing Well is a general discussion and education of the issues facing retirees. CardinalGuide.com, Cardinal Advisors, and Hahn-Shile CFP sell insurance. This show does not offer investment products or investment advice. Welcome to Finishing Well with my good friend and certified financial planner Hahn-Shile. Today's show, Hidden Treasure.

And you might go, what's that? Or, you know, well, Jesus in Matthew 13, you might remember, told the story about this man. He found a hidden treasure out in the field and he went, wow. And he went and sold everything he had with joy. And he went and bought that field.

Oh, of course he did. Well, to put that in practical terms, when it comes to hidden treasure, you know, for me personally, this is Robbie's story. If you'd have known me in 1990, I was a car salesman. I worked for the crown organization of somebody and I had a Bible that was given to me actually when I graduated from sixth grade that I never could throw away because I figured there was some kind of voodoo involved or there was some hex if, you know, you actually threw it in the trash. But I had it in my possession.

And if you'd have walked up to me and you said, Robbie, I've got 50 bucks. Do you want, do you mind if I buy that Bible right there? I had to sold it to you before your head turned because from a standpoint of the basis, the value of what I would have thought that Bible was worth to me at that point in time was way less than $50. But today here in 2021, that very Bible I still own, you could not, there would be no way you could buy that Bible nor more importantly, would you be able to have any concept of what the value of the word of God is to me and my life. And it's like totally a hidden treasure. And so interestingly today, Hans, you've got what we're calling a step up in basis. That was a term that actually an hour ago, I had no idea what it meant. But once I did, I understood, wow, the Bible from my standpoint, had this huge step up in basis. But in order to do that, we got to cover our basis and start up with what's a basis.

Yeah. I mean, when you go to your CPA or your accountant or the person that prepares your taxes and you've sold something, what's called a capital asset, like a farm or a piece of land or some stock, you know, if you own some stock for several years and now you've sold it and you go to your account and say, well, I got to pay tax on the gain. The first thing the accountant is going to want to know or help you calculate is what's your basis in that stock or in that land?

How much did you pay to acquire that land? Because you're not going to have to pay tax again on the money you put into a capital asset. So the taxes are due on the amount is appreciated. You say, well, what are you talking about this on a senior driven, retirement driven radio show that's for average people, typically. And most people that are very well to do that come into me as clients, they still describe themselves as average people, even poor people.

And maybe they are in their own mind, but they're, as far as finances go, this is a big deal that I want you to learn about. Okay. And so what we're going to talk about today is the step up in basis that happens after you die.

Okay. So if you hold an asset until you pass away and then you pass it on to your children or your spouse or your nephews and nieces, if you give it to the church, this really doesn't matter because the church isn't going to have to pay taxes on the gain. But a step up in basis means that, let me just give an example. Let's say you have an office building that you bought 20 years ago for $100,000. And today that same office building is worth $400,000. And it may be a substantial piece of your assets.

Maybe you ran a business in there. Anyhow, you own it. Your basis is $100,000 and the worth is $400,000 and you're thinking about selling it. And if you sold it while you're alive, you would have a gain of $300,000 on that asset and you would have to pay capital gains taxes on that whole $300,000.

On that whole $300,000 pretty quickly after the sale. And so the difference is, is if you held that asset until your death, your children inherited this office building, their basis, tax basis would be have stepped up at your death to $400,000. So if they sold that after you passed away for $400,000 or $420,000 say, they would only have to pay taxes on a capital gain of $20,000 if it was worth $400,000 on the date of your death.

That's what basis is. The same thing with stock. If you bought 100 shares of a stock at $10 a share and you put $1,000 into it many years ago and you now sell it for $100 a share and it's $10,000 and you've had a capital gain of $9,000 and you're gonna have to pay taxes on that. If you hold it until your death and then make a bequest to your children, your children are gonna inherit that with a basis of $10,000 and so on and so forth. But they don't have to, because of the step up in basis on your death, your children were there to sell that stock for the $10,000 and there's the hidden treasure, right? Is it at your death the hidden treasure is the step up in basis that your beneficiaries get tax-free?

Yeah. So the motto in this is if we can afford to and we don't need the money for something else and when we're doing estate planning for folks, it doesn't matter how small this is. This could be an inherent $30,000 gain that if you simply hold that asset until your death and then give it to your children or your spouse or whoever inherits it, that gain and the taxes due on that are gonna be wiped away through the step up in basis. So it applies to a lot of things and before I move on to your personal residence, because that's handled a little bit differently under a different exception, I just wanna talk in the political rhetoric and when you're reading about just in the news and you're reading and listening, they're all talking about raising taxes on rich people. I mean, that's a lot of the thing. Oh, we're gonna raise taxes, but we're not gonna raise taxes on anybody that makes less than $400,000 a year, okay?

And I'm just sitting here listening to this and I don't get angry or upset about any of this stuff because it's just talk. It takes a lot to change the tax code. When it was done back four years ago, that took a lot and it took a lot of people coming together and compromising on things.

So first of all, I'm bringing up some political rhetoric only because you folks are listening to it and I'm just gonna break it down a little bit. So you may have heard the step up in basis because they're talking about they have a desire to eliminate the step up in basis. And if they do that, the step up in basis at death, if they do that, it's gonna affect a whole lot of people that have way less than $400,000 a year of income. I mean, it's like your mother or grandmother who may be very old and she may be sitting on something that's substantially appreciated. You know, I got some clients that have a, you know, they inherited a beach house. I mean, these people are almost 70 years old and the lady's father passed away like three years ago and the mother passed away like six months ago. And it sounds like they had things set up pretty well but they're telling me that this beach house in Rhode Island is worth about $800,000 and it probably tells me, and by the way, their half of that $800,000 that they're gonna get is probably 80% of these people's net worth.

I mean, they don't have but another $100,000 besides their income and all that to retire so this is a big deal to them. And she's in a disagreement with her sister of whether they ought to sell it right away. The sister thinks they ought to rent it and I don't think so. I mean, just becoming a landlord all of a sudden at 69 years old is not, and then they're gonna have to put money into it which they don't have and so the sister is using the reason to do it as a rental to avoid paying taxes because she's worked under the conclusion that there's a big tax bill and do and there's not because.

The step up in basis, right? Upon the mother's death then they now have taken this beach house with a free step up in basis and so wow, they can sell it and take the income without any tax. And just take the money. We're gonna just put it in their bank account first and then we're gonna invest some of it to secure their retirement but what I want people to get out of this is this is a big deal even if you've got your mother or father or you yourself have an asset and the appreciated part of it is only $30,000 or something is if your mother or father or you were to sell it while you're alive or you're thinking of selling it, if you would hold it to your death, you're gonna avoid some taxes on the appreciation as it goes to the next generation. So this is at the very least a consideration when we're sitting down with people who are up there in years and we're doing estate planning is we want to look at what's the basis in all the capital assets and then what would the tax be do now if we sold them now?

What would it be in a couple years and then what would it be if you held that until you die? Right. Not to mention that as you're listening to these politicians rhetoric, pay close attention. Oh, we're not gonna hurt any of the regular people but we're gonna eliminate the step up in basis whoa, it's time to send out a little letter to that representative and say, hey, this isn't my idea of no raising in taxes. The biggest people that it's gonna affect are farms that are still owned by grandma or grandpa. They haven't passed yet and grandma and grandpa's basis in that thing is really low because they inherited it or bought it many years ago or a small business people. People that own a little mom and pop business or something and it may not even be a super valuable business and the kids could be in there running it but mom still owns it and then when she passes away under the current law and I don't see this really changing any time. I don't care what they're saying that the current law there's gonna be a step up in basis.

That actually could be why she still owns it because if she gave it or sold it to the kids they think there'd be a big tax tip bill due and so there are very average people that are affected by this step up in basis and it's probably just a good idea to understand it. So again today's show is a hidden treasure. I'm hoping you can see what we're talking about here. We're going to talk about it more when we come back. In the meantime you can always get Hans' book The Complete Cardinal Guide to Planning for and Living in Retirement. You can just go to cardinalguide.com, find out more about that or email us with any information that we can certainly help you with.

We'll be right back. Hans and I would love to take our show on the road to your church, Sunday school, Christian or civic room. Here's a chance for you to advance the kingdom through financial resources by leveraging Hans' expertise in qualified charitable contributions, veterans aid and attendance, IRAs, social security, medicare and long-term care. Just go to cardinalguide.com and contact Hans to schedule a live recording of Finishing Well at your church, Sunday school, Christian or civic group. Contact Hans at cardinalguide.com. That's cardinalguide.com. Welcome back to Finishing Well with certified financial planner Hans Seil.

Today's show, Hidden Treasure, we're talking about a step up in basis and hopefully if you're just tuning in you might want to go back and get the podcast to listen to what a step up in basis is. But carrying on on the conversation, you know we don't want to confuse folks that this doesn't have to do with their primary residence. Yeah I mean I take many clients coming in, I don't want to use the word most, but many clients they own their residence. I'm talking about people that are 65, 68, even some people in their early 70s that are getting around to financial planning. They own their residence or they own part of it because they got a mortgage but a lot of them own the whole thing because they've planned well. And then they generally have some IRA money or they the money the money they do have is typically in an IRA or a 401k or something. And neither one of those assets apply to what we talked about in the first part of the show. So in other words you don't get any step up in or freebie for taxes or hidden treasure.

If you die with a substantial balance in your IRA, if your beneficiary wants to get anything out of there, they're going to have a big tax bill of ordinary income taxes. But the same is not true for your house. So if you sell your primary residence during your lifetime and that's defined by the IRS as if you that has been your primary residence two of the last five years and then you sell it while you're alive you don't owe any taxes on the first two hundred and fifty thousand dollars of gain. And for couples it's five hundred thousand?

It is because they each get it. They have to have both lived there two of the last five years. So couples they get a five hundred thousand dollar exemption and many clients I have that really weren't looking at taxes they just wanted to be rid of the house or they're moving in with their kids or they're relocating to a much less expensive home in a different area. These people have all kinds of reasons to sell their home in retirement and they're thinking the way homes have appreciated especially lately they've just been thinking all along that you know this home I know it's going to bring three hundred and fifty thousand I only paid a hundred thousand for it or a hundred and twenty five or something and they're just thinking there's a big tax bill coming. And I'm telling you there's nothing because you can earn two hundred and fifty thousand dollars of gain on the sale of your principal residence and you could do this every really essentially every two years. There's a bunch of builders that this is part of home builders that they actually move in and live into one of the homes that they built and then they live there for two years and at the end of the two years they sell it and they have a five hundred thousand dollar exclusion on the gain. I mean it's a little people in the home building business actually work this but we're not really talking to them today we're talking to people you just live in your house and now you're going to sell it you don't have to get into this hold till death basis and all this kind of planning you can sell it.

Both of us being at this age I mean we both realized something we didn't when we were 40 is that you don't need all those rooms anymore you know you you're like why am I maintaining all this space and stuff yeah you know so why what why do I need all that why do I want to pay you know property tax on all that and so you know. This too is a hidden treasure like man I can get up to five hundred thousand dollars in tax exemption if I sell my primary residence and what a time to do it by the way because homes are just going for like never before. Well sure and a lot of people are considering that if somebody's listening I don't want anybody to go out and start making financial moves based upon listening to this show. The the real thing we're doing with the show is I wanted to teach you today what the step up in basis at death what that really is and how it affects just average people and then how it affects what what I would call well-to-do people but many of them don't like me calling them well-to-do because they consider themselves very average normal people but they've just accumulated some stuff and if they have something other than their home and other than their IRA that has some substantial appreciation to it we may want to consider I'm not saying in all cases hold this thing till death and then your kids won't have to pay any capital gains taxes that's not what we're saying at all what we're what we're saying here is as a consideration in estate planning and financial planning retirement planning we may want to hold on to some things other than the home and the IRA till death. Now I'm going to completely flip gears on you is if if you have a married couple who files jointly and their income is their combined income is lower than eighty thousand dollars a year do you know what the capital gains tax rate is for those people? I don't I know you're shocked. It's zero percent. I definitely didn't know that another hidden treasure I like that. So if grandma's income is forty thousand dollars a year and she's got a capital asset that she's holding on to till death and maybe the inherent capital gain is fifty thousand dollars or something she can sell that now and when we do the calculations at tax time she's going to have a fifty thousand dollar gain if you know that's what it was and then her tax rate on that her federal tax rate is going to be zero. Now North Carolina's if she lives in North Carolina is going to come in and get her for like five percent or something but still there's other ways there's many ways let's put it this way to avoid capital gains taxes or to keep the rates low splitting up sales but in estate planning this is a consideration it's a big consideration and then it's not real clear what you should do with certain things tax wise and I found myself as I was preparing to do the radio show you know as you know Robbie I prepare a video which later goes on YouTube so like this one will be up next week and it is the preparation for the show and I found myself talking to myself when I was reading it this morning or watching it and I'm thinking that what I was telling myself essentially or telling all the listeners in which I tell clients all the time don't let taxes and tax consequences tax strategies drive your decision making that this really shouldn't be the first thing we should talk about like if we're talking to grandma about selling her house taxes should not be the whole reason we do that or even a big part of the reason I mean if she wants to sell the house she's got to have a reason for wanting to sell the house like you mentioned maybe she needs a smaller house maybe she doesn't need it anymore maybe she's moving into an assisted living or some senior housing I mean there could be all kinds of reasons that's what we want to drive the decision making when I get clients that come into me and they're just all taxes that's all they want to talk about and they want to pull out of me these tax strategies to you know minimize taxes and when because everybody wants a little bit of that but when I get the sense that that's the end-all be-all I sit down and have a conversation with the client let's think about why do you want to do this particular thing what do you want to have happen to your money how do you want to handle this who do you want to give it to who do you want to donate it to who is there possible for you to enjoy this while you're alive or just that needs to be the priority what their goals are and when I found myself talking to myself I'm really thinking I wish I had said you know what needs to be the priority is God and what God wants and what God tells us to do so I was I was almost wanting to add words to my mouth on the video so now I'm doing it on the show well I love it I absolutely love it and I also think that that that I found out this week that that one of the definitions of weak biblically in Hebrew is that it has to do with the way you talk to yourself so if you put Jesus in front of your mouth and you got Jesus talking you're strong but most of us most of our weakness comes from what we've talked ourselves out of and when it comes to money it's really a place that we're weak if we allow ourselves to talk ourselves into a strategy without first asking Jesus what it is the would be the strong thing to do yeah and you're doing that when you're you know you're asking yourself or your financial plan what do you really want to do what do you want to accomplish with this money with this asset I mean what would selling it do for you what why do you want to do that what's going to come as a result of that and then how are we going to invest that what are we going to do how's that going to benefit you how's that going to benefit God how's that going to benefit your family and then once we get through all that part of it then let's sit back and say what's the tax effect of that and then we might sit down and say whoa you know we don't want to do that because if we you know if we waited till after your death and then we gave it to your kids then your kids are going to pay substantially less taxes there's nothing wrong with that it's just it becomes wrong when it becomes the main event yeah I I have some people that I've really not taken on as clients just just because I mean they they watch my stuff and they think man this guy knows how to beat the tax deal I mean and just and I do have some pretty nifty strategies they're all legal they're all above board and they're all intended by government but if that's all somebody wants to talk about they're not going to get very far with me right because again it gets back to the main event is to you know have life and life abundant and that includes God in every aspect it's a it's a beautiful thing but also I just love the whole idea of hidden treasure you know when you find these things that that you see wow this this is of of great worth especially for that family that that thought they had this hurdle that they didn't know how they were going to climb and then all of a sudden wow you know they can sell like in the case of the two sisters that don't get around you know and oh man if we pull this hurdle out of the way then they can take this asset out from between the two of them and they can work on their relationship rather than argue over what's going to happen with the property absolutely family farms is where this stuff applies small small businesses families where the last generation was welled off enough to own a beach house or a mountain house or some type of vacation home and those have gone berserk and so a lot of older people as they're doing a state plan they want to give this to the kids and then the many times they're talking about selling it because they know it's worth so much and you know then then I'm going to sit down and I'm just I'm going to say that you know that we we got to look at the tax effect and the tax bill that's due depending upon when we sell this because we could rent it until your death and create a bunch of cash flow that'll come to you and then it'll it'll it'll then when you pass away then your kids will inherit that place as you wanted and they'll not have to pay any capital gains taxes it's hidden treasure and as always this is brought to you by cardinal guide go to cardinalguide.com you can see the the video at youtube and and again just go to cardinalguide.com it's got all your stuff right there thanks for listening thank you finishing well is a general discussion and education of the issues facing retirees cardinalguide.com cardinal advisors and han shile cfp sell insurance this show does not offer investment products or investment advice we hope you enjoyed finishing well brought to you by cardinalguide.com visit cardinalguide.com for free downloads of this show or previous shows on topics such as social security medicare iras long-term care life insurance investments and taxes as well as han's best-selling book the complete cardinal guide to planning for and living in retirement and the workbook once again for dozens of free resources past shows or to get han's book go to cardinalguide.com if you have a question comment or suggestion for future shows click on the finishing well radio show on the website and send us a word once again that's cardinalguide.com cardinalguide.com this is the 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