The Estate Tax Wake-Up Call of 2022

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Thank you. 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 Hans Schile CFP sell insurance. This show does not offer investment products or investment advice. A welcome to Finishing Well.

Certified Financial Planner Hans Schile. Today's show is the estate tax wake-up call of 2022, apparently that could be coming our way. You know, biblically we wanted to talk about wake-up calls, or actually they look bad in a way, but they kind of, you know, what Satan meant for evil, God means for good so often. And so, you know, interestingly in the 119th Psalm, King David in verse 71 says something really interesting because he, and he's talking about the letter Tet there in that particular verse, and it says, it was good that I was afflicted because I learned thy statutes. And so sometimes when these wake-up calls come, in fact, almost always when they come, you know, what Satan means for bad, God has some good, but the good is hidden in there, which is kind of what the letter Tet means.

And so, I don't know if you're like me, but you may have had a tough diagnosis in your life at one point in time or another, but, you know, I can remember when my cancer diagnosis came, there were so many things about that that were very, very difficult, but I can always say that it was the worst of times, it was the best of times because there were things I learned about love, and there were things I learned about community, and there were things I learned about people during those times that I don't know how I would have learned them any other way than to go through some things. And so wake-up calls, as a general rule, take us out of our comfort zone where we weren't thinking about it, and all of a sudden now, oh, well, you know, like that soft-shell crab that's going to shed his shell, if it didn't start getting uncomfortable and get squeezed in there, he would never get rid of that old shell. Well, sometimes we need to get rid of our financial shells right on so that we can take a look at what's really going on inside. Well, yeah, and so this Build Back Better Act is what they're calling it, and you probably know it as the infrastructure bill, which is, there's all kind of stuff coming out of the news, and some of it is made of urban legends, and I usually don't start talking about tax provisions that are not law yet. It's better to wait until they're actually law, but this one is pretty serious, and what the gist of it is is they're going to raise taxes, and they have to raise taxes if they want to pass all the spending they're talking about doing over the next 10 years, and there's $3.5 trillion and back and forth, and you hear a lot of the discussion over the amount of the spending and the projects that it's going to be spent on. I hear almost nothing about the taxes that are going to come along with it, and I think the reason for that is a lot of these people, these Congress people and senators and committee people, they don't really understand this tax stuff and tax provisions and estate tax any better than, you know, than most people do, and all this stuff is prepared by the Congressional Budget Office within the IRS, and they're constantly looking at things to where they could raise taxes, and then they're also looking at things so they could cut taxes if there's a flavor for that. So anyhow, in the Build Back Better Act, what is of concern to me is this return of the estate tax, or the estate tax been there all along, but the exemptions and the thresholds have been so high that it doesn't affect but just a few percent of the people in the country. It's really, like, one percent. And they're talking about decreasing or lowering the exemptions.

And when they start in that direction, it's still a lot of people are going to be asking, like, what am I listening to today? Why is this a concern to me if there is right now an $11 million and change exemption? I mean, my estate could be over $11 million, and I'd pay no estate taxes, and they're lowering that to $6 million, and I don't have either one of those millions, and how does this apply to me?

Well, the fact is, is that particular part of the provision doesn't. I mean, so, but it could apply to you if you work in a small business or you work for a family-owned business or held by a few families, and when those people move on and retire and then pass away in the estate tax, one of the reasons they raised the thresholds in the beginning, and they've done a lot of this, is to effectively protect those smallish businesses from doing all this planning and having to worry about the estate taxes. You can just wipe out a small business if all of a sudden a bunch of estate taxes are due on the value of the business.

You could actually make them sell the business or close it down or something. And farms, too, right? Because a lot of small farmers, I mean, that's how we continue to have food, is that if these farms are forced to sell because of estate taxes, oh, my goodness. Farm land got into $5,000, $7,000, $8,000. Out in the middle part of the country, I think, $10,000 and $12,000 an acre. And you take a 100-acre farm at $10,000 an acre, you're at $1 million.

You take a 1,000-acre farm, you're at $10 million, possibly more. And then the revenue that that can generate and project it forward and all the expenses. Same thing for a lot of small businesses. You could think, well, how much is that business worth?

Well, it could be a lot if they're profitable enough to pay 40 or 50 or 60 or 70 people to work there year after year and pay them bonuses and to provide a service. And then the likelihood of that continuing on for several years, I mean, small businesses are worth a lot. And so that's why these thresholds were raised. At least that was the politics behind it, is let's get the thresholds or the exemption amounts up high enough that smallish businesses don't need to worry about that, or small to medium-sized businesses. And what's happened now is they're cutting it in they're cutting it in half. If this new legislation passes, it's going from $11 million to $6 million. And they're also, go ahead.

I was just gonna say, and we're not here to discuss the politics of the issue as much as the wake-up call to looking at these things in our lives, right? Yeah, well then, and you talk about the way most of these folks plan for the estate taxes is through the use of life insurance, is you buy a $2 million or a $3 million life insurance policy on the owner or the primary owners. And then you use the money that comes from the life insurance to pay the estate taxes when the people pass on.

I mean, that's about as simple as it gets. But then you got a problem if, say, you bought a $2 million life insurance policy, and then the people die. And if they own the policy, that increases their estate by $2 million.

So that's a problem. And they've set up these grantor trusts, people have, people like me have done this over time. And, you know, then a specific kind is called an individual life insurance trust, which it's a way to hold the life insurance outside of the ownership, the person that's covering. And so when the death benefits are paid out, and they're paid out to the beneficiaries, they're not included in the estate. Well, they've got a whole bunch of provisions to really make those useless, or where they're just going to claw those back into the estate. So they're really going after these middle-sized estates. And the reality is, is the billionaires are the people with hundreds of millions of dollars.

This is really kind of a non-event to them. That just means they're going to have to pay a little bit more in estate taxes, if they're not successful in avoiding it somehow. This is really going to affect, you know, those family farms and small businesses.

And if you work in one of those, I mean, this is a, this is a consideration. I bet you that your owners are a little concerned about this, and they have questions. You know, I've certainly been around those situations a lot, but it really gets back to some of the basics of estate planning, really, just even beneficiaries, right?

Well, yeah, I mean, so if we take the wake-up call, this should be a wake-up call for everybody. That is, do I care about my estate? Am I concerned what happens to my, we're concerned about what kind of legacy that I leave, and leave behind in my children and grandchildren?

And what, from a financial standpoint, what am I going to leave to them? And, you know, if that's not of concern to you, then okay. I mean, just in many times, that's a concern to most people. And when it gets as simple as somebody having a life insurance policy with a named beneficiary, and if you just pay the premium on that thing and have provision to pay the premium for the rest of your life, that's simple estate planning. You just name a beneficiary, and your children or grandchildren or whoever you name is going to get that amount of money tax-free after you pass WEC. And they're not changing that, okay? And life insurance is still going to be income tax-free. Life insurance benefits are going to be paid to beneficiaries income tax-free. Nowhere in any of this language are they going to mess with that. This is talking about estate taxes.

And so when there's a wake-up call about this, that would be the very first thing. The second thing is, is right now under the law, there is a step-up in basis for capital assets or things that you own, like land, a home, just stocks, just anything that's a capital asset that you own. And then when you die and you leave that to the next generation, they don't have to pay tax on the gain of the business as the law stands right now. They don't have to pay estate taxes or income taxes on the gain or the amount. So for instance, if your father owned a piece of land that was some sort of investment that he had paid $100,000 for, and then when he died, it was worth $800,000. Well, if he'd have sold it before he died, he would have had to pay tax on that $700,000 by holding it until death and passing it to you. You inherit that at a basis of $800,000.

So if you subsequently sold it, you wouldn't have to pay much at all of income tax or capital gains tax on the sale of that. They're talking about doing away with that. Unfortunately, we've got to go to a break right in the middle of step-up in basis. But that ends up being a really, really critical term I'd really never heard about until a previous show. That's why, you know, it's important that you listen to these and get the helpful videos that are under Cardinal Advisors at YouTube, as well as cardinalguide.com and Hans' complete book, The Cardinal Guide to Planning for and Living in Retirement.

We're going to be right back with a lot more of this wake-up call. 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 and today's wake-up call for estate taxes with this new bill that's, you know, headed for, we hope not to be passed, but it could be passed pretty soon, or you have the sense that it probably will be passed, Hans? Yeah, I think they're going to negotiate down the spending. They're not going to negotiate down the taxes to pay for the spending. And so that's really what the delay is right now, and they're back and forth. But I think they're going to arrive at a number and it's going to go through. But let's say it doesn't go through. This tax stuff isn't going away. They're just going to take it up again next year. And it's the same business that, because the people negotiating this in Congress, they didn't write the tax part. Those are the people deep inside the government that are just, they got these studies waiting and it's all funded and it's, you know, you could do this, you could do this, you could do this, and you could do this, and it's going to raise you this amount of money over the next 10 years.

They've got that stuff going on all the time. And so what I think is this, even if it doesn't pass, this isn't going away. So let's use it as a wake-up call to, first of all, understand a little bit of what's going on behind the scenes, and then certainly apply it to your own situation and your own family's situation. And I think if you're like most people, you're not one of these high multimillionaires that's even thinking about estate taxes. But I'd like it to be a wake-up call where you think about your own estate. And so we were just on the step-up in basis, and we had the example where we had, you know, like a father who had paid $100,000 for a piece of property and it just sat there, and he knew it was worth quite a bit more, but he held it until he died. And then his son, who inherits it, sells it right after his death or soon after or at some point after, and he gets $800,000 for selling it, is under the current law, the son would not owe any income taxes, because when we talk about step-up in basis, the basis was stepped up from $100,000 to $800,000 when the father died, and so the son can sell it now with an $800,000 basis. And we were able to do that with some real estate that my wife inherited from her mother. And we paid no taxes on the money we got from selling the land, which her mother expected us to do. So they're talking about messing with that.

Well, before we go to that, I mean, the thing that just jumps out at me is, wow. I mean, people need to be aware of that, and where would they go to get that kind of tax help if they were inheriting property and they were going to fix them to sell it? Well, I mean, you go to a financial planner. It sounds pretty self-serving, but, you know, that's what I do as a CFP and certified financial planner, and I'm also a CLU, a Chartered Life Underwriter, and I've studied all of my life estate planning. Now, we're going to get an attorney involved, and I'm going to ask some questions of the attorney, because I'm not an attorney and I don't practice law, but many times attorneys aren't going to really, they're just going to look in a very narrow window around getting the property sold, that sort of thing, getting the deed properly, and they're going to look at the estate taxes, and then they're going to say, well, you need to get over to a CPA, you know, to figure out those.

And so we as a financial planner, what I do in my business is people bring me problems, hopefully before they become a big problem. So when we're planning an estate, when we're planning, well, the father's still alive in our example, we're going to sit down and lay things out and make good decisions so that we know what's coming and maybe point this out to the son. Well, that's really, really helpful to know, because I mean, I wonder how many people out there, you know, didn't have any idea that there was a step up in basis, they sold the property, and then they reported it as income, and they didn't necessarily, you know, who knows what kind of mess, you know, they make for themselves without just getting professional help. Yeah, or the heirs, excuse me, the father in this situation, maybe he sold the property, where he knew he was going to pass away in some reason, you know, short period of time. But the son went ahead and encouraged him, let's just sell this property. Let's get this handled before you die. And so he sells it for $700,000 and pays taxes on a $600,000 gain on this one asset, whereas if they'd have just held it until after his death, there would have been no taxes.

So, you know, the value of information is really important. And, you know, what I want to stress is that a big part of this is they're messing with life insurance, and they're not messing with the life insurance itself in terms of any income taxes due by beneficiaries. They're doing it within the context of the estate tax, because if life insurance, if your life insurance is owned by you, it's included in your estate.

And if you have a small estate under these thresholds, it doesn't really matter for the estate tax. But if your life insurance is owned by some other entity or some other person, then the death benefit isn't included in your estate. For the average person, life insurance is a wonderful way to do estate plans. We can sit down and say, okay, well, first of all, we've got to know how much premium you can afford, and if you can afford $100, $200, $300 a month, then we can sit down and we can say, okay, if your health is good enough to buy this, or even if your health is poor, or wherever we want to put it on the grid, there's still life insurance plans available for people. But in any case, we can sit down and figure out an amount of life insurance, an amount you'd like to leave, name some beneficiaries, set up a policy. As long as you pay the premium, voila, we got an estate plan. None of this legislation is going to have anything to do with a simple estate plan like that.

Right. But unfortunately, for those who have businesses and things like that, this is kind of where this legislation really does affect it greatly. And even those of us who work in those businesses obviously might consider talking to the owners about it.

Do you guys have, if you thought through some of this and the financial planning that goes around it? Well, like my business, if I were to pass away, it has a pretty substantial value to it. And it's got some very important people who work in there. Not just me, some of my family members and just all my employees. And we have a plan in place where two of my employees own life insurance policies on my life. And they pay the premium. And then I separately pay them in their salary, but it's not directly, so I'm not paying the life insurance. I pay them enough extra in their salary to pay this premium.

So when I die, they're going to receive a significant amount of money each. And what they're required to do with that is pay that to my wife for the purchase of the business, or it'll be a down payment on it anyhow. And the whole idea of that is business continuity insurance. I mean, it's like, and we're planning around this estate tax. And we don't want that life insurance to further increase the value of the business. And where I'm not real happy on the step up and basis, is if they actually pass that, my wife's probably going to have to pay some income taxes on the growth of the business. Whereas if they don't get rid of the step up and basis, she's going to be able to sell the business for whatever she wants to them. In other words, she's not going to have to pay any tax on the gate sale.

It's kind of written into a state plan. You know, for a lot of folks out there that are working in these family owned family owned companies or farms, the wake up call itself, what would you essentially just have them call you? Well, what I would just have them do is to just understand this a little better that these aren't just rich people that live in, you know, some other states that run around in yachts and Ferraris and stuff. I mean, a lot of these people that fit into these thresholds own the very businesses that you work in, or perhaps you trade in, or you very much want to stay in business, these are right here in your community. And so they, they're lowering this threshold substantially. And they are probably going to lower it more. I mean, once they realize whatever it is, it's gone up from 600,000 to the 11 million it is today over 20 some years.

It was 600,000 when I was doing this back in the 90s. And it's just gone up and up and up and up and up and up. And that, you know, it's made its way, they just kept raising it so that they would exempt more and more businesses. But now they're going the other direction, they're cutting in half.

And it, it could go lower over time. So it's just a good time to get a wake up call that you really need to do some estate planning for yourself, even if you're not anywhere near this category. So Hans, again, as we, you know, kind of put a summary on this, for all of us, it's sort of a wake up call. And so what are some of the steps that we should do as we hopefully wake up to this estate issue? Well, the very first thing you could do is get out all your beneficiary forms on your life insurance, on your IRA, on your 401k, same for your spouse, and any annuities that you own, anything that has a beneficiary on it, we can just look at them and see who's named and possibly update, that'd be a good start of looking at a state plan. We could look at the balance in the pre-tax IRA and 401k money, and say that when this beneficiary receives that pre-tax money, they're going to owe taxes on it. So that's, that's really like a hidden estate tax, is income taxes that are due on beneficiaries to beneficiaries of inherited IRA money. So we could plan for that. We can look at your life insurance, and really just take a look at how much you have, if you want to purchase more, and like who specifically you want that to go to. You can look at your charitable contributions. So just generally speaking, I think that this whole business of investing with the estate tax, this could be a blessing, that it forces people that are in the know about what they ought to do to really get out the estate tax.

Do to really get out their estate plan, and consider some changes. Yeah, times they are changing. So this, we're so grateful that you listened today. Again, shows brought to you by CardinalGuide.com, where you can find Hans's book as well as Hans's email and contact information if you're thinking, gee, this business thing, you know, something we need to contact him and, and get some financial planning done. There's, you know, the wise steward in Luke 16, certainly, you know, we need to be about our business when we get these kind of wake up calls. So again, it's Cardinal Advisors, if you're looking at the YouTube channel to see further videos on the subject. And we thank you so much, Hans.

Great show. Thank you. Finishing well is a general discussion and education of the issues facing retirees. CardinalGuide.com, Cardinal Advisors, and Hans Schleil 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 Hans'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 Hans'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.

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