Income Tax is The New Estate Tax

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This is the Truth Network. Welcome to Finishing Well, brought to you by CardinalGuide.com, with certified financial planner Hans Scheil, best-selling author and financial planner helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in finishing well, including discussions on managing social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now let's get started with Finishing Well.

Welcome to Finishing Well, with certified financial planner Hans Scheil, and today's show is that income tax is the new estate tax. And so we're going to get into all that, and we do realize that a lot of people, it's not the most popular subject in the world to talk about that eventually there is a deadline for all of us. And it is awkward to talk about, and that's why it's Psalms 90 verse 12 that Moses himself wrote is so handy, because it says, teach us to number our days that we may apply our hearts to wisdom. And if we realize that there essentially is a deadline, whether Jesus is coming back or we pass, that there are plans that we could make that would really take care of our family, our heirs, and all that, and that's what estates are all about, and that's what we're talking about today. And so wisdom's really, really important, especially when it comes to how is your spouse going to take care of themselves, and what's that going to look like, and what's the best way to maximize their resources so they can both live well but also finish well and give well, however that may look like. But also, there is a deadline, and don't forget this one, that like, man, every day that you don't live with Jesus is a wasted day.

Like, you could be making progress because, again, you don't want to end up at the end not knowing him, not trusting him, and so it's so easy to turn your heart to him to simply admit that you need a Savior, believe that he is that one who died for you, and then confess that he's your Lord. So with that, Hans, can you teach us to number our days as far as we might apply our heart to wisdom on this estate tax? Well, yeah. I mean, the federal estate tax is really not a thing but for a very small amount of people because the exemption is like $13 million per person, $26 million for a couple in the size of the estate. People that are under that, they don't pay any estate tax.

So most of us are excluded from that. Now, there is a change coming in that in the 2026 tax law, and that's another day, another show where the exemption is going to be lowered. The topic of today's show is that doesn't mean that the rest of us are like free from taxes when we die and our beneficiaries are free from taxes because there's a whole lot of tax that comes in in the transfer of money.

And so I want to teach you about that and point out some of these things that come up and then help you for your own estate to maybe plan around some of these things a little better. So the first point I'm going to make is that pre-tax IRA money is taxable to the beneficiary, and I think most of you already knew that. So when you're leaving it to your spouse, and there's two of you, and then you go down to one of you, one of you passes away, the tax situation is not changed that much on the IRA money other than the fact that the surviving spouse is now filing as a single taxpayer. So, you know, in other words, they're going to pay more taxes on the same IRA distribution when they're filing as a single than they did before you passed away or your spouse did, where you were filing as married filing jointly.

So that one is not as penal on the spouse. But when the money goes to your kids or to the next generation, they're falling under the SECURE Act. And a lot of times when people die, the money they have, the lion's share of it is still in an IRA, and their kids want to get the money to use it, to spend it, to have it, and they end up paying a large amount of tax because they pull it all out at once. So I don't know whether you want to call it an income tax or an estate tax, but it's a tax that happens to your beneficiaries right after you die. Okay?

Oh, yeah. And I saw it, you know, so clearly with my siblings, with my father's estate, because that's the way he did it, was he had a sizable IRA, and, you know, it was interesting to watch how the different ones handled it differently, because I have one brother-in-law who's a CPA, and of course he stretched it out over 10 years, did everything that he could possibly do right, but he still had to deal with that tax implication that was in that money. And of course, unfortunately, one of my siblings just took the whole check, and oh my goodness, you know, a great big chunk of it, obviously, you know, went in that one year's income and really substantially, you know, cut into the income. And the other one was sort of a combination punch of the bowl, but, you know, it just kind of makes you squeamish when you know had he had that in life insurance or in a Roth IRA, you know, it would have been a completely different story for the beneficiaries.

Well, sure. And, you know, we talk about this on a lot of shows where we're talking about Roth conversions, and that's really what this show is about, is teaching you the things you can do now to prepare so that we have better outcomes in the future. I mean, that's just, and so when it comes to your IRA, just understand that dying with a bunch of money in a pre-tax IRA is not a good situation for the beneficiaries, okay?

And there's plenty of things we can do to plan around that. But what I want to talk about is the situation that we're put in, or we put ourselves there, we weren't put there, but we put ourselves there where we have couples that are clients, or coming to be clients, but they're clients and they're people that we know and care for. And we are forced to have a pretty difficult conversation with the surviving spouse, or the newly widow or widower, which is like I had one this morning, you know, we'll just call this a case study where a lady I'm talking to, she's not a client yet, her husband died in March, and she came in to see us the first time in May, and then it just got put off till, I was just talking to her this morning, this is August, and she, you know, really has one year this year to do some things with the IRA that she inherited where she can still pay joint or married filing jointly, so she gets one more time, 2024, to file a married filing jointly tax return. And so I have this grieving widow, and I'm sitting there talking to her about taxes, or I'm getting ready to talk to her about taxes, and then I do. And obviously, we need to work on our scripting of, we're talking to people and, you know, have some feeling here. But at the same time, we got to tell people about this stuff.

We can't just worry about, you know, their feelings and our feelings. And she got till December 31, if she wants to do a Roth conversion, she inherited a sizable IRA from her husband. And now she might need to live off of that for several years. And she also had some significant life insurance that she received tax free. So she's got the money to pay for the taxes on a Roth conversion. But she's got to do it before the end of this year.

Because, you know, she does she can do up to $380,000 of income and still not pay more than 24% taxes, 24% tax rate. So it's just difficult for Tom and I and our other advisors to, you know, when we find out about death, or we find about a death that's coming up, and I'm going to talk about some other things besides IRA money, and how they're taxed, and go over some other difficult conversations as well. But we need God's help. And we pray all the time that I need the courage, you know, and to bring this up appropriately to people, and then put a little deadline on it, because the IRS puts a deadline on it. Yeah, it's an awkward conversation. But man, you know, when it's so clear that you know, you know, those conversations, similar ones that I had with my dad about certain things were really, really, really helpful when the times came, you know, where I had the power of attorney and other things that you had told us to do ahead of time, you know, to number our days so that we would apply our hearts to wisdom.

And that's what really finishing well is all about. Well, it is. And so let's talk about money, and then stocks, bonds, money in an account that's not an IRA. And let's talk about capital assets like your house, your car, some land, I mean, anything that's going to be subject to capital gains taxes. But the basic income tax has already been paid when you earn this, okay, that money or that those assets pass to the beneficiaries, essentially, tax free.

Okay. And a lot of people are shocked by this. And you know, I gave an example in the video that we did is, if like we'll use your dad as an example, let's say he owns some stock outside of an IRA, he purchased it way back when for $20 a share, but it's now worth $200 a share, right before he passed away. And when the beneficiary inherits that stock, their new basis for gain is going to be $200, not the $20 that your dad originally paid for. Now, had he sold the stock before he died, like right before he died, he would have had $180 of capital gains taxes if he sold it for $200. But if he holds it until his death, and then his request to a beneficiary, the beneficiary is going to pay no income tax, because they get a stepped up basis at the death. That make sense? Yeah, and it really it's one of those areas that you can really apply wisdom to that. Because, you know, obviously, if you if you're in declining health, and that it's not the good time to take a bunch of capital gains, we realize all your heirs would pick up that.

What's the word step up and basis? Yeah, well, and then I'll go back to the IRA. So if you're in declining health, and you have a sense that your passing is near. And that's where I was going into difficult conversations is that you really need to talk to somebody with my expertise, or make it easy for me to talk to you or your kids or whoever's doing this.

Because if if you want to know what you could do to make things better tax wise, I do a Roth conversion. I hate to jump in, but we got to go to a break. And we want to remind you real quick.

Of course, we're going to talk a lot about this in a minute. But I want to remind you the show's brought to you by Cardinal guide, cardinal guide.com. So if you go to cardinal guide.com, there's the seven worries tabs. And today's show is really under the estate tab. So if you want show notes, or you want to see the video on the same subject, if you go to the estate section of the seven worries, you know, you can find the information there as well as how to contact Han so that you can finish well, as well as of course, Hans's book The Complete Cardinal guide to planning for and living in retirement. We'll be right back with a whole lot more of the income taxes, the new estate tax investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor, BCM and Cardinal advisors are independent of each other.

Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to finishing well and today's show. The income tax is the new estate tax we've got some applying our hearts to wisdom on how we might number our days and make some good planning. As far as our assets, when when we were to pass them on to the next generation, that's generally your state.

So take it away, Hans. I mean, it's, it's really interesting when I have a lot of times I'm dealing with the heirs and either knew them beforehand or certainly knew their parents. And for the parent that has passed away, and we're in a lot of are just shocked is that say, Well, now, okay, $100,000 that's in the bank is when we're ready to close out the state. You write your sister a check for $50,000 and you write yourself a check for $50,000. And well, how much taxes do I have to pay on that? And the answer is nothing.

You know, it's just it is because the taxes were already paid on that it's not IRA money and people are all times just shocked. Same thing with the house. Okay, so we're going to sell the house and the house is worth $350,000. And there's no mortgage on it.

And so we're already got it sold and we're going to do that. How much taxes are we going to have to pay on that? And, you know, again, it's a it's a big nothing because it got a step up in basis, even though mom and dad might have paid $30,000 for that house 40 years ago or 50 years ago.

That's the benefit of a step up in basis. So people are always shocked to learn that they're going to get assets tax free. They're also shocked on the IRA side, when they find out how much taxes they're going to have to pay on that IRA. So I mean, it just it goes both ways.

Yeah. What I want to tell people when you're looking at your own estate, like if you're going to give money to the church, which I highly recommend, or you're going to give money to charity or to missions or to some non taxable entity, make them the beneficiary or at least the partial beneficiary of your IRA. And just because they don't pay taxes, so they can receive that IRA money as just the same to them a nonprofit organization as the other money. So leave the other money that already paid the tax money to your kids and grandkids and leave as much as you were going to leave to church and missions out of the IRA.

You can do that. Yeah, it's simple and, and, you know, so effective, like $200,000 in IRA and, you know, somebody has to pay tax on it's really what 130 maybe something like that, that that's going to end up being paid in tax. It's, that's a lot of a lot of wisdom in my opinion. Well, it is and it's, you know, it's best when you're just planning your estate. That you think about these things, and we can get you lined up so that maybe you don't know when you're going to pass away, but you can, you can plan these things out. So when you do pass away, everything's going to be handled in the most tax efficient way. And it's just that way you can leave more to your kids.

And you can leave more to the charity and the missions and the church. So I want to talk a little bit about couples again, and I want to talk about an example or a case study. And I want to be back on having these difficult conversations is that, you know, with this one particular couple, they got a little of all of this going on where they have a sizable amount of stock that they've bought over the years. They haven't traded it very much. They bought stock and they've got a tremendous amount of pent up capital gains.

Okay, so anytime they got to sell some of this stock, they have to pay a lot of capital gains because then we help them do that because they also have very large IRAs. And all of this is, this guy's a wonderful Christian man. He was a pilot for flu the long range deals and he had to retire at 65. And he was just a saver. And he had the courage to invest in some things that have done very, very well and then just to hold on to it. So where this becomes number one is he is going to pass away in the next year or two. He's got lung cancer and he just does. And he's very good with it and he is a wonderful, I learn a lot just reading his Caring Bridge and all of the effectively preaching that he does on there and writing.

It's just amazing. But the conversation that we need to have with them is, okay, so the year that you pass away, which we don't know whether that's going to be this year or next year, it could be the following year, but it's probably either this year or next year. And we need to accelerate these Roth conversions, which we've already done.

And that was a pretty easy conversation because we had already done conversations about that. But the more difficult conversation is that all of this non-qualified or not IRA stock that they held or they are holding has a huge amount of capital gains taxes that will be due. And he, by the way, has been giving to the church a significant amount of that appreciated stock every year because you don't have to pay the capital gains tax.

That's another show. But what I was explaining to him is we need to give the IRA money to the surviving spouse or the church. And we need to give the not IRA money and the stock that's held in the brokerage account to the surviving spouse and then the kids.

And then at the ultimate second death, when she passes away, we need to give the remaining IRA money all to the church. And we need to give the stock to the kids because they're going to get a step up in basis. I mean, that sounds pretty simple when I explain it. But to do all this and engage in a conversation with them around – he was much better with it than I was, okay? I was just kind of mumbling around. But anyhow, we had the conversation and it went very well. And he's begun acting on all the different things to try to make this as good as it can be.

Yeah. And again, if you're one of those children to be included, I know how good it felt when my father would actually enter into, okay, this is what's going to happen when this happens and this is where you know to go to get this. And all these conversations, they're awkward, I'm sure. But interestingly, Hans, I've had a lot of these already with my kids, you know, I'm only 16 to 8, but you know, they know where the briefcase is with all the power of attorneys and all these different things and they know where your accounts are. All those things are stuff that has to be discussed.

I don't really have a lot of difficulty with these. It's just when somebody is sitting in front of me that I know a lot of and do business with, and a couple, and then I'm introducing a conversation about money when we're talking about the timeliness of their death. And that's just, it's just, it's a special place that I guess I'm going to get better at it. But I'm 66 already. And so there's another piece of this with this same couple because they, if he transfers the stock, or essentially, if he gifts, or she gifts her share of the stock to him before he dies, and then a year passes because a year has to pass after this. And then he gets a full step up in basis of all that stock. So in other words, she inherited back has to be after a year.

Yeah, if she would subsequently sell it no capital gains taxes. Okay, the way it stands right now. It's half in her name, half in his name. That's the way things are supposed to be set up for a married couple.

And when he dies, assuming he dies first, which we think is going to happen. Only half of the stock gets stepped up in basis. Does that make sense to you?

Right. So you lost me a little bit into how does she get hurt him hit her half of it. She's giving it to him.

She's selling it to him numbers. Let's just say their basis in the stock is a million dollars. Okay, a whole bunch of stocks, but what they paid for it originally is a billion dollars. And let's say that the stock has grown to $3 million. Okay, so they've got $2 million of pent up capital gains, capital gains. Okay, so they sold all stock, they'd have a $2 million capital gain. And they'd have to give 20% of that to the government or 15% plus some to the state. Okay, which they're not going to do. Now, I mean, he's just never sold any of this stock because they don't need it to live.

They live a simple life. But now, if he dies, and they don't change anything, that million dollars of basis in their stock is split. Right. He's got 500,000 a basis. He's got 500,000 a basis. And, you know, he is then in a position where he dies, and then his 500,000 gets stepped up to a million and a half, but her 500,000 stays there.

Again, we've run out of time before we've run out of show. But you can see there's a whole lot of stuff that you got to go to cardinalguide.com. That's cardinalguide.com. And of course, there you can contact Hans.

You know, that's the whole idea is to finish well, right? Is to use wisdom into the best way to manage these assets in order to, you know, get the church the most money, your heirs the most money, and all those things. Of course, this is under the estates tab, seven worries tabs there at cardinalguide.com. If you look under estates, you're going to find this show as well as a video, a wonderful video with all sorts of information along the same lines.

And of course, if you need more, which we hope you do, you'll go to cardinalguide.com and order Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. Great show, Hans. Thanks.

God bless you. The opinions expressed by Hans Scheil and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such.

Any statements or opinions are subject to change without notice. Investments involve risk and unless otherwise stated are not guaranteed. Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you. Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation.

Finishing well is designed to provide accurate and authoritative information with regard to the subject covered. Investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. 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' bestselling 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.