Estate Tax

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This is the Truth Network. Welcome to Finishing Wealth, brought to you by CardinalGuide.com, with certified financial planner, Hans Schiel, best-selling author and financial planner, helping families finish well for over 40 years. On Finishing Wealth, we'll examine both biblical and practical knowledge to assist families in finishing wealth, including discussions on managing social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now let's get started with Finishing Wealth. Finishing Wealth is a general discussion and education of the issues facing retirees. CardinalGuide.com, Cardinal Advisors, and Hans Schiel CFP sell insurance. This show does not offer investment products or investment advice.

Well, welcome to Finishing Wealth, certified financial planner, Hans Schiel, and today's show may sound a little bit intimidating, estate tax, but I think that it'll be worth listening to as you're going to find that it has so much to do with so many different things that you may not have thought about. And along those lines, I don't know if you've ever considered, because a lot of what's going on with an estate is you're laying down your life. Just saying.

Okay. So you might remember, Jesus told us that, you know, in John chapter 10, when he was given a shepherd training that, you know, the good shepherd lays down his life for his sheep. And I don't know if you've ever connected that to the 23rd Psalm, because you might remember that in that verse where it says, he makes his sheep lay down in green pastures, or you might even know in the Song of Solomon in the first chapter, the beloved bride of Christ is asking her beloved, you know, where do you feed your flocks?

Where do you make them lay down at noon? Well, as we lay down our lives, literally what's going on there is what Jesus asked us to do is to essentially lay down our lives for our family, for our friends, essentially for God to use this stuff like our estate for eternal purposes, stuff that goes on and on and on and on. And it seems really intimidating, doesn't it, Hans, but it's not if you just talk about it. Well, yeah. I mean, I just came back from Ed Slott a few weeks ago, and I know we talked about him last Saturday, and we're talking about him again today. And this whole thing came from a presentation of a speaker other than Ed Slott, Jeffrey Levine. And Jeffrey is an estate planner, and he's a CPA, and he's a CFP, and he works with he works with a lot of wealthy people or even the financial planners for these wealthy people come to him for consultations on how to get around the estate tax. And he put a slide up on the screen that I have on my video, which you watched getting ready for the show, and it showed you the size of the exemption for the estate tax. And the whole point of this whole thing is that the estate tax right now in 2022 doesn't affect very many people.

And I'm going to tell you why. In the year 2000, the estate tax exemption was $675,000 a person. And if you were a husband and wife, that meant that you could take $1,350,000 and pretty much have it exempt from the estate tax. So back in the 90s, and in the 2000s, early 2000s, when you're an estate planner like me, you were planning that anybody, a couple that had a net worth over a million bucks, or it could grow to something substantially more, if these people were in their 50s, 60s, 70s, we had to do estate planning around the estate tax.

And we did a lot of that. What I find even today is that people are still working with these old numbers when they're unschooled about estate taxes. We don't have people come in and they have a net worth that's it could be a half a million, it could be 2 million or more. And they start saying, well, how much can I give to my kids? You know, when we're talking about giving away money when they're alive, and I think that's $15,000 a year, isn't that right? And, you know, the answer to that is, yeah, you can give $15,000 a year, and it won't count toward your estate tax credit. But did you know that the estate tax credit in 2022 is 12 million a person?

You know, and I mean, people were like, what? And so when their parents were talking about this stuff, 20, 25 years ago, there were people that you might call, they're above average, because they're millionaires, or they're half millionaires, or three quarter millionaires. And they're half millionaires. But there was certainly a lot more of them subject to the estate tax.

And so their parents would be living by these smaller numbers. And in 2022, the only way the estate tax is going to apply to you or to your estate is if you're worth more than 12 million. And when you've got a married couple, if they set up things properly, that's 24 million.

And when I say set up things properly, this is definitely don't try at home. I mean, if somebody has numbers in that amount, they need to hire some people. And I do this kind of work with consultation with others to properly set up wealth so that we can at least minimize this estate tax.

But when you start getting numbers of 12 million and 24 million, you're ruling out a lot of people in the United States of America. Yeah, I would think. Yeah. And so you had commented, Robbie, that when you watch the video in preparation for this, the video that's on YouTube, how the first five minutes of the video, I really went over the estate tax, the things I just went over, and I had this chart up there. And then I said, I flipped over the board. And I said, so what is the state planning for the rest of us? And that you had made a comment about that.

And you thought it was good. And I was just tracking with a presentation that I saw and listened to, because it really made sense is that because these limits are so high on the estate tax, people that do know about that, so I don't need to worry about that. So I therefore I won't do any estate planning. And it's kind of like, no, wait a minute, we we still got some estate planning to do. It's just around different stuff than the estate tax. Right?

Because the government still has got a way to get their hand out. Oh, yeah. And, you know, a lot of people look at this, and they say, Well, you know, I'm dead. What do I care for? You know, I mean, people that say that are usually just trying to distance themselves with death and that kind of thing. If you pass away, and you've got just about anything, and that you have an interest in leaving that to your spouse, and or your children, or a charity, or, which is most people, you do have an interest in that, then the government is going to get a chunk of that one way or another. And what I want to really want to do on the show today is focus in on estate planning for the rest of us. And, you know, that would be people that have 200,002,800,000, you know, 65,000.

You know, I mean, just people all over the board. And then we even talked a little bit is if you're one of these people that have a lot of millions, just call me. I'm an expert in this stuff, and I'll get you with some other experts. But for the rest of us, those kind of numbers are real. And then you have an interest in seeing that your children get this and your spouse gets this. And you're interested in doing some planning to make sure that Uncle Sam is going to get some of it. But if we want to minimize that amount, that's what we want to talk about today.

Okay? Where is the biggest place that the government gets estate taxes or income taxes after a person dies? It's from the accumulated IRA account.

That is the number one spot. Darrell Bock Yeah, I could, you know, that was certainly the case in my father's estate that, you know, he thought by taking minimum distributions, and all that kind of plan that he had, that he was really doing a great benefit to his family. And so he was laying out his life from his standpoint, but the planning wasn't so good. David Morgan Well, no, because you're just creating a tax liability for your children, when you'd have been better off taking more of it out, even before minimum distributions, or during minimum distributions, you don't have to spend everything you take out of the IRA. You can take more than the minimum distributions, and you can pay the taxes and then save it. And people say, Well, why should I do that? Why did I pay taxes now, when I can pay them later?

Well, the reason you want to pay them now, instead of later, is that when you die, your kids are going to be the beneficiaries of this. And then they're, this is new money to them. This is not something maybe that they even knew about. And it's coming to them with a tax lien. If they want to draw $1 out of there, they got to pay taxes on that $1. And many of them want to draw it all out right away and do something with it. And when they do that, it's going to be all scrunched up into one tax year, it's going to drive them into high tax brackets. And half of it's going to be wiped out with taxes.

Because that's what goes on in most families. Now, there's some ways to plan around that and spread it out. But I'm telling you, most beneficiaries, they're not interested in hearing all that. They just want to know, how can I get the money?

How much tax do I have to pay? Just pay it and give me the net amount of the money. And so that's how the government is collecting an estate tax, essentially, on middle class people.

Is because it's, you know, they have accumulated IRA money, they've been real good about just leaving it there and only taking the minimum and growing it. They name their kids as beneficiaries, their kids get it. So their kids ask, okay, so how do I get this money? And you say, well, you don't want to take it all at once, because you're going to have to pay taxes on it all at once.

And they'll say, well, how much will that be? Well, you got $200,000 coming. And if you take it all at once, that's going to be tacked on top of your income. So probably, you better put aside 80,000 of it for taxes. So you get 120,000. And you know what the kids say, send me a check.

And so that's the estate tax that the federal government's getting in the state government, when a middle class person dies. Wow. And you can see there's some planning that we got to talk about. So we're looking forward to doing that.

We got to go to a break. But we want to remind you that this show is brought to you by cardinalguide.com, where you can get Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement, as well as contact Hans. If you want to get involved in some of this planning, it's right there at cardinalguide.com. So when we come back, we're going to have a lot more on some simple things that have to do with this plan that really everybody needs to just take advantage of. So, you know, something for us average folks when we come back.

Thanks for listening. 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 Scheil. And today, we're talking about estate planning around estate taxes, but all kinds of taxes. And so, you know, when it comes to this IRA thing, you know, the other simple thing people need to do is just get their beneficiaries, right? I mean, there's a real plan that a lot of people miss out on.

Oh, yeah, it's a shame. So I can't say enough that the simplest form of estate planning is make sure all your beneficiaries are in order. What we were really talking about is estate planning for the rest of us, for middle class people, upper middle class people, lower middle class people, wherever you whatever your number is, if you've got money in an IRA, when you die, and you have a beneficiary, the only way they can touch any of the money unless it's a Roth is they're going to have to pay taxes on it. And unfortunately, a lot of beneficiaries, they need the money. I mean, that's what beneficiaries do is they need the money. And it's new money. They're at middle age or a little past middle age, they have bills, they have kids to educate, they have things to do.

And they, a lot of them will come and they'll say, How much can I get? And then, you know, if you load up a beneficiary or IRA distribution, right after death, all in one tax year, the taxes are high. So let's just so let's just put the IRAs aside for a minute and just know that we're going to develop a plan. If you feel so inclined to develop a plan to reduce that taxation to your beneficiaries, there's lots of things we can do with that. And let's move over and talk about capital assets. So the people that own capital assets, it's not only rich people that have capital assets, I'm talking about a farm, even a small piece of land, or a rental house, or maybe a largest farm, a small business, a person's primary residence, a beach house, that type of thing, is people are always worried heirs are when they all of a sudden have come into this and mom or dad has left them these, what are big assets, and they're thinking they're going to owe a whole bunch of taxes. And capital assets are probably some of the best things to inherit, because they get a step up in basis. You know, and what that means is the date that the person died, the date your mother or father died, whatever the property was worth on that date is your basis for tax purposes, if you later sell it. So if you sold that beach house, that was worth $800,000, and you sold it for $850,000, you're only going to pay taxes on $50,000. Even though your parent may have paid $100,000 for that thing 30 years ago, all that growth up till the time they died is tax free. It's called step up in basis. Yeah, and I love that word.

I never heard that word up until maybe a couple three years ago when you started talking about that. But what a wonderful thing that, oh my goodness, how many people bought houses 40, 50 years ago, and if you were to pay tax on all those capital gains, it'd be crazy. But here is a way for you to pass that over, and the person immediately is getting it at the value of the time. And with the way the houses are going up right now, that's huge. Well, yeah, and this is why you may not want to give things to your kids while you're alive, like a beach house.

You may want to hold it until your death, and then give it to them in a bequest. They're going to inherit that with a much higher tax basis. Same is true with rental properties. Same thing is true with a business. You know, a lot of businesses, you know, you see the old guys kind of like me, I'm going to be in this business where I'm not going to get out of here until they run me out of here or take me out of here in a box. And, you know, the just and some of that is just whatever this business is worth when I die. And whoever inherits it is going to not have to pay any taxes if they subsequently sell it on all of the value that I've added to this business over my lifetime. I mean, it's a huge tax break that, you know, wealthy people are real aware of this. But middle class people or people that have, you know, have something in the family that's going to pass, they have no idea. So now Hans, what are we going to do with this?

Well, the first thing we're going to do is we're going to go back to the beginning of the presentation. And we're going to say, okay, are we in this category of the people that have millions, you know, multi multi multi multi millions, I mean, not even three or four or 5 million doesn't qualify. And the answer for most people is no. But unfortunately, I hear a lot of people when they're in conversations with their parents, they're still thinking that there's an estate tax looming out there, that's going to come and buy them. And they kind of make decisions that way. So that would be the first thing I'd want you to get out of this is, are we even subject to the estate tax?

And that's probably no. Then, how can you benefit from this? Well, in planning your own estate, and get away from estate taxes, unless you're in that category, and start thinking about where do you have most of your money, you know, like money, money, it's in an IRA, or a 401k, or it's in an account where the taxes have not been paid. And if you're like a lot of retirees, you're going to hold that money close to the vest, you're not going to spend it because you don't want to pay taxes, you want to let it accumulate for your kids. And to some degree, that's the worst thing you can do because you're creating a tax bomb for them. So how can you use this in your own situation is go ahead and enjoy and spend, or at the very least convert to a Roth, some of your IRA money, or all of it over time, in little bits paying taxes in little bits, in smallish amounts, so that by the time you reach a natural debt, that you'll be able to transfer assets that the taxes have already been paid. It's kind of like that simple.

And I can help you with all that. Darrell Bock Yeah, one of the things that just occurs to me is that here sits this money in this IRA, and I know for certain the reason I've got this money, and this is the plan as I'm laying down my life for my kids or for my church, wouldn't it make perfect sense if the idea is that I'm going to bequeath that money to buy life insurance with that? Because if I die quicker, that really pays off. And at the worst-case scenario, they're still getting more than I put in, right?

Robert Chisholm Well, it does. I mean, we do a ton of this for people that can really see the light with that, because we can make small distributions, maybe small to medium distributions that don't have a huge tax effect every single year. So we're winding that thing down as they're getting older. Then we take those distributions, we pay the income taxes, and the net amount we use to buy life insurance. And then the life insurance goes to your heirs tax-free.

And then you also can use QCDs when you mention the church. So IRA assets are perfect assets to leave to the church. So and they're also perfect assets to when you're making distributions during your life, if you're over 70 and a half.

And if you're not there now, you're going to get there. And then at that point, you can start leaving substantial amounts each year to the church under a QCD, a qualified charitable distribution. And then you can make the ultimate beneficiary, the church, and you could buy life insurance with these distributions, like I spoke of earlier, so that your kids get a tax-free inheritance.

Darrell Bock Right. In my mind, I guess the way I think is like, okay, well, I buy a half a million dollar life insurance policy, and I'm paying so much of my IRA every month. And two years later, I pass away. Well, yeah, I left my kids this big tax bomb, but now they got the life insurance to pay the taxes with. So they're not going to be so quick to take the money out, right?

And they can – they can take 10 years or something like that to get it out? Robert Chisholm Well, yeah, but if they got the life insurance, you can leave the IRA to the church. The church is not going to pay any taxes on that. They receive money tax-free. So, yeah, I mean, there's all kinds of options. So – and then when we take this in terms of your parents, I'm going to bet you that many of you have parents, they have IRAs, they're still alive, and they're just taking the minimum, and you're the beneficiary of that money, you and your brothers and sisters.

And that money is just sitting there, and there's a tax bomb right in the place. And you can sit right down and give them this – at least talk about this, play on the show, like on the podcast, or play it again for yourself, and get on the phone with me, and I'll explain it to you. Or I'll explain it to all three of you.

All three of us will have a conversation. And there are some smart moves you can make with people that are even in their 80s. You know, it's probably not going to be life insurance, but they can certainly do things to lessen the tax bill for you, and to increase the gifts to the church, which is we all want to be able to do that. And then I want to talk about holding assets, because a lot of people, when they get up in years, they want to start selling their stuff, and they want to start making it simple for their kids, and that's a worthy thing. And a lot of times, the taxes are not a huge heel, depending on the size of their income, and their estate, and that kind of thing.

So I'm not even saying that's a bad thing. But it can be a bad thing when people sell stuff when they're up there in years, and then they got to pay capital gains, taxes, if they sell it while they're alive, when they could have held that asset till their death, and then request it to their beneficiaries or their children, and then their children will avoid the capital gains taxes, let them sell it. And that's true with stocks, which we haven't talked about either, right? You get a step up in basis on those if somebody bought some, you know, whatever, you know, Microsoft, you know, stock back in the 50s, or something, you know, the capital gains would be on something like that.

But if they hold it till they pass away, right, then the kids get the step up in basis on that. As long as it's outside of an IRA. That's correct. But if it's inside an IRA, capital gain taxes and step up in basis don't apply. Really?

Yeah. Oh, yeah, you if you're holding the stock inside the IRA, well, that's what most people have their IRAs in stocks and bonds. That's ordinary income taxes all the way.

And it's going to be due on the whole amount. So when you're talking about stocks, because that's a wonderful thing, if you own stock, or your parents own stock, and it's outside of an IRA, it's just in a brokerage account, and it's substantially increased in value, and then you die. And then your kids inherit that stock. They inherit that, that it's a value for basis of what it was when you die, just like a piece of real estate. So you're making a true statement.

But if it's inside an IRA, that's not true. Again, going back to, you know, what we talked about before, but as usual, we've run out of time before we ran out of show. But it's, it's, it's good to have these talks, right, and not be intimidated by them, but just actually enter into the discussion. And so, you know, again, just contact Hans at cardinalguide.com. You can even get his book, The Complete Cardinal Guide to Planning for and Living in Retirement. It's all there at cardinalguide.com, as well as a whole video on the subject.

It's there at Cardinal Advisors on YouTube. And so again, thank you so much for listening. And thank you, Hans. Good show. Thank you.

Thank you. Finishing Well is a general discussion and education of the issues facing retirees. Cardinalguide.com, Cardinal Advisors, and Hans 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 Hans' 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' 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 Truth Network.