The Generations Legal Group Podcast
“Aging” or “Growing Old” has to be better than dying young, right?? Join Certified Elder Law Attorney, Todd Whatley, Founder of Generations Legal Group as he dives deep into the complexities, sensitive topics, and how-to’s of becoming an “aging individual” or caregiver of an aging loved one. This podcast covers senior-related caregiving issues, legal/financial issues, when to stop driving, late in life marriages, grief, death, and other end of life concerns. If you struggle with what to do next, how to cope, or simply the basics on what lies ahead as you or your loved one ages, this podcast provides solutions to your questions.
The Generations Legal Group Podcast
Unlocking Estate Tax Secrets: Strategies to Minimize Your Tax Liability
This episode centers on understanding various types of taxes that impact individuals and families, including estate, gift, capital gains, and income taxes. The discussion provides valuable strategies for minimizing these tax burdens and emphasizes the importance of proactive financial planning.
• Overview of the four major types of taxes
• Insights on estate tax implications for most individuals
• Importance of yearly gift tax exemptions
• Explanation of capital gains tax and its effects on asset sales
• Strategies for managing income taxes effectively
• Call to action for proactive financial planning and consultations
Information to help you answer all of your questions about aging.
Welcome to Answers on Aging, the podcast dedicated to helping you navigate the complexities of growing older. Your host is Todd Whatley, a certified elder law attorney with a passion for empowering the aging community and their families, From finances and legal matters to health, long-term care and beyond. We've got you covered, Because every question you have we aim to answer. Dive into today's episode and let's uncover the truth about aging together.
Speaker 2:That's right. This is the Generations Legal Group podcast Answers on Aging, and I am so glad that you are listening and we're here today, and I am not alone. I am here with my financial planning buddy, ian Winder. Man, how are you Doing? Well, tom, how are you? You're my buddy now, and so we were recording this the middle of January. So we've got through the holidays, the happy holidays, and we've got through the new year and hopefully you've set some New Year's resolutions, and the next big thing is taxes. Oh boy, taxes. We love taxes.
Speaker 2:The tax man never sleeps, and so, actually, we are recording this on Inauguration Day, and so, regardless of your thoughts, things are going to change, and so we're going to just this is going to be very basic and introductory, to help my estate planning clients understand the four different types of taxes, and then Ian's going to talk a little bit about each one. We could honestly do a one-hour podcast on each of these individually, but let's just kind of go through this and just introduce these four types of taxes and some different things that you need to think about, all right?
Speaker 3:So let's get into it, let's do it. Well, this is always an interesting topic. This is a great one to make just about everybody mad. So hang with us here. We make everybody mad. It's true, it's interesting. I know it's interesting. I'm, you know, going through. Can I tease this? I was writing the chapter for one of the chapters for the book this weekend.
Speaker 3:And one of those chapters was on taxes, about this, this issue, and you know I was thinking about how we talk about this, and I think it's important that it's our belief that your goal should be to avoid I said avoid taxes as much as possible, absolutely as much as legally possible, which means that you are focused on reinvesting that money in your family, your retirement, your community, because we think that you should, that you can, can spend money better than our friends in Washington can. This is our, this is our belief. Okay, and if you want to donate, that's fine. You can donate directly to the treasury. That's, that's something that you have the option to do, but I want to, I want to have that be the foundation of what we're talking about, because I think it frames the conversation the right way.
Speaker 3:Why do we need to learn about this? Well, if you're knowledgeable about how the system works, you can play by the rules better, and the truth is we don't make the rules. This may surprise you, todd and I are not making the rules, but our job is. And it's not fair, and we can't make it fair, but our job is to teach you how to leverage the rules to get what you want and how to play by those rules, and that's what we're going to talk about today.
Speaker 2:Yeah, and so yeah, I mean, and we're talking about four different types of taxes and sadly, this is not all the taxes. I mean, this is not local taxes, it's not sales taxes. Yeah, sales is just one of it's four taxes that we can talk about, and there are some pretty interesting ways you can avoid it. Okay, and so number one, let's talk about estate taxes. Okay, so at this point it's always funny. People say, well, I don't work with anyone, that's just super rich. Okay, it's always funny People say, well, you know, and I don't work with anyone, that's just super rich. Okay, meaning, you know, $25 plus million is in my mind, that's super rich. Most of your clients aren't there.
Speaker 2:Most, yes, most of my clients definitely are not there, and so they're like so are my kids going to have to pay a state tax? I'm like no.
Speaker 3:It's always the sweet lady with like the house, yeah, and $7,500 in the bank.
Speaker 2:How much are my kids going to pay taxes? I'm like none, because you don't start paying taxes until you yourself pass almost $14 million and, as a couple, $28 million. So estate taxes really are not a big deal for the vast majority, but— Maybe not this year. Yeah, not this year, but talk about what's going to happen next year.
Speaker 3:So, unless Congress acts at the time of this recording, we're going to—the current tax system that we have what's called the TCJA Tax Cuts and Jobs Act sometimes colloquially—I always try to say this and I never can called the Trump tax laws will sunset at the end of 25.
Speaker 3:Now, at the time of this recording, we do expect that that will probably be extended and some of those changes will be made, but we don't know yet.
Speaker 3:And so what we expect to happen if they can't get that done, is that the estate tax limit goes down to between five and seven million per person, which is to say that it gets cut in half effectively, or less than in half, and that includes life insurance, that includes real estate, that includes all of your IRAs, all of your other assets, and so people can get to that number a lot faster and a lot of the time. What I see is when people go oh no, we're not worried about estate tax, they're looking at the current value of their estate. They're not thinking about, over the next 20 or 30 years, how much that's going to grow to, and we have to project that out and really think about that. And so, OK, do we need to make some decisions now, and so the way that the estate tax works is, if your estate is above that threshold, anything that's included in your gross estate that's above that threshold is taxed at basically 40%, yeah, which is Almost half. That's an insane amount of money, approaching half.
Speaker 2:Yeah, and some states have state estate taxes. That's true. Thankfully, arkansas does not, but a lot of my coaching clients they're in states where, yeah, we have to deal with that and typically the state estate tax is a much lower number yeah, much lower, and so that is a concern. But thankfully, most of our listeners are in Arkansas and we do not have an estate tax. And so what are some of the ways you can avoid or help pay less in estate tax?
Speaker 3:So there's really two ideas here, and so you have to understand what is included in the estate. What's included in the estate, for simplicity's sake, is things that you own or have control and benefit of. So your IRA is going to be included in your estate because you own it and you have control and benefit. If you have a brokerage account that you can access, well, or if that's in your revocable living trust, you have the ability to change that. That's inside of your estate. And so the way that we avoid paying estate tax is that we don't have a gross estate that's above that amount. And so what that means is that means giving up control and benefit, or being able to pay the estate tax if we're not willing to do that. And so there's kind of a checklist One are you willing to give up control and benefit? And what that would look like is gifting.
Speaker 3:I'm sure we'll talk about gifting in a moment, but that's one way to avoid the estate tax is to gift assets away. So you might be the matriarch of the family and you want to give to your two kids. Well, instead of doing that at death, you could do it proactively, freeze the value of those assets, and any future growth would happen outside of your estate. That's one method. The other method is and there's lots and lots of different strategies but the other method is having liquidity to pay that expense. And so sometimes, when we work with family businesses or complex assets real estate, business assets that are they're worth a lot, but you couldn't convert them to cash quickly. The estate tax is due in nine months, basically and this is something that a lot of folks don't realize and so, whether or not you sell the asset, you still have to pay the tax, pay the tax, and the federal government is not an entity that really is very flexible on their payment schedule. Oh, you can't pay, that's fine.
Speaker 2:You know what?
Speaker 3:They'll just file bankruptcy. There's no bankruptcy on this. They take your stuff.
Speaker 2:We'll come back in three months and see if you can pay then.
Speaker 3:That's not happening. No debt collectors really like that, but you know. And so this is a situation where if you have an asset like that, we have to, that you're not going to be able to sell, not going to be able to liquidate, or it's too complicated for a lot of reasons to gift controller benefit, or you're unwilling to gift controller benefit. We need liquidity to come into your estate at the time of your death to be able to pay that. We need cash, the way we do. At the time of your death to be able to pay that. We need cash. The way we do. That is a special type of life insurance trust and so generally, without going into it here, the purpose of life insurance is to pay liabilities and so to create liquidity in the event that liabilities happen. The estate tax is a liability, and so this is a way to do that, for pennies on the dollar, depending on your age and health, sure, okay.
Speaker 2:So let's go to gift tax, which is very similarly attached to the estate tax, because it's the same number, that same you know, basically $14 million People. The same Miss Jones, you know, who wants to give her kids $1,000. It's like, well, who's going to pay the tax on that?
Speaker 2:Well, thankfully no one, nobody is no one's going to pay the tax on that because you're giving away less than $14 million and you can give away. It's $18,000 this year, $19,000. This year it went up to $19,000. So you can give away $19,000 per person per year. No taxes, no paperwork, no anything. The government doesn't want to know about de minimis gifts. If I gave in a $100 bill to go do something, we shouldn't have to report that to the IRS. It's just transactions of business and thankfully that number goes up so far so far.
Speaker 3:Yeah, there is some indication that they want a little bit more insight into our financial lives.
Speaker 2:So this year that number, before it becomes a problem, is actually $19,000. And so you can give your kids $19,000 a year, and their spouses and your grandkids, and you can do all that up to $19,000.
Speaker 3:No taxes no, it doesn't go against your lifetime limit, is the idea so?
Speaker 2:yeah, that $14 million basically is your lifetime limit and it's either you give it during your life above that limit or at death and so kind of the same things like you just talked about. One way to avoid those taxes and to decrease your estate is to give away $19,000 per person per year.
Speaker 3:That's a way to do it, and the way to think about this is it's kind of like a gift card. I used to say coupon, but I like gift card better because the value of the gift card is based on the year that you use it. And so let's say the gift card or the exemption amount is 14 million this year. Let's say it drops to seven next year. Well, if you didn't use your 14 million Bummer.
Speaker 3:It's gone, and so you know the $19,000, that doesn't change. We don't expect that to change. It tends to go up by $1,000 a year basically. But this is kind of tied to generation skipping. So you can't go well, we'll just give it to the grandkids and that doesn't, then we don't have to pay the tax on it. They went wait a minute.
Speaker 3:We've got to tie those numbers together there, and so one way that you can avoid this limit is by gifting, and it's per person per year. So if you're a married couple and you have two children, you can each give each of them $19,000 per year, which on one hand, doesn't sound like a lot. On the other hand, that adds up quite a bit, and so there are some rules about how that's done, and there's also some strategies around doing that in a thoughtful way. You can't give minors property, and so that's a situation where you you can't give minors property, and so that's a situation where you use a special type of trust for that to where we can make sure that they get the benefit of those, but that's gift taxes. If you hadn't paid enough tax. They want to limit the amount of money that can pass through generations. This is their plan.
Speaker 2:I think this is a good time to bring up maybe in the income taxes but we can bring it up now and also bring it up under income taxes is the idea of particularly IRAs, pre-tax, pre-income tax money giving it to charities tax money, giving it to charities.
Speaker 2:So I'm working with a family right now that he wants to give, say, 10% to the church and then split everything else between his daughters, and so he's thinking he will just go through and every account, everything will be, you know, 45%, 45% and 10%. And I said, wait, wait, why don't you rethink about this? If you give an IRA directly to a charity, no one pays income tax on that, and so why don't you add up the whole estate and come up with dollars and then make that IRA estate and come up with dollars and then make that IRA? Maybe the IRA only goes to the church and then the girls keep 100% of all or 50% each of all of the other assets, and that way they get after-tax money. They don't have to pay tax on it, and then all of your IRA goes to the charity, and so that's a gifting estate tax way to avoid not estate tax but income tax.
Speaker 3:And it can be also estate tax depending on the size of the estate. But I love that you bring that up because on one hand, you know it sounds so simple just to give the stuff to the kids and the charity you know. But this is a mistake that people make, you know, and so this is one of these things where it's like you get what you pay for. If you take advice from your uncle's, cousin's, ex-barber I mean, maybe he's a nice guy, but just because he did it a certain way, or grandpa did it a certain way, doesn't mean that's the optimal way that you should do it, and it's important to work with professionals who understand the nuance here. I mean that's probably saving. You know well, whatever their effective tax rate is, that could save 20 or 30 percent. I mean that's a big number. It's whatever they paid you, they're going to save more than that.
Speaker 2:So it's important. Okay, let's talk about capital gains tax real quick, one of your things that's possibly on the chopping block.
Speaker 3:You know this is going to be interesting to see how the previous administration, their plan, was to really dramatically change the capital gain system and even what's called the step-up in basis system. It's going to be interesting to see how the incoming administration deals with this. So capital gains are, there are different types of taxes for different types of income. Okay, so we have ordinary income, that's like your W-2 job or interest income If you have bank CDs, or this is just. This is the income that is the product of your labor directly, and this is these are taxed at ordinary income rates, or these are the highest taxed items. Don't you love that? Yeah, that's a great way to make the working man. Anyway, don't get me started. Capital gains they get preferential tax treatment. They're taxed differently, and the idea here is long-term capital gains and qualified dividends get taxed differently. Short-term gains are taxed as ordinary income.
Speaker 3:The idea here is that they want to incentivize certain behaviors. Investment is a behavior that they want to incentivize, and so a capital asset could be something like a building that you own, or even your home is considered a capital asset, could be something like a building that you own, or even your home is considered a capital asset, and so the difference between what you've paid for it and your cost to update it and maintain it and what you sell it for would be considered the capital gain. So a quick example let's say you bought a property for $100,000 in the 80s and it's worth $1.2 million now and you put $100,000 into it over that time. So you're in it for $200,000, and you could sell it for $1.2 million. The difference would be $1 million. That would be the capital gain on that asset, and so under the current rules for a house, you can exclude up to half a million dollars of capital gain from your primary residence.
Speaker 3:One of the things that the previous administration wanted to do was to make that a higher number to where you would pay, not a preferential rate. Up to 23.8% is the top tax bracket there right now. They wanted that to be tied to the top income bracket, which was twice that 43% essentially and so capital gains are treated differently than other types of income, and the other thing that they wanted to do is, under the current rules, if you pass an asset that has a lot of capital gains to your kids or to whomever someone other than a charity, if you pass that to them when you die. When you die, not a gift. The transfer occurs because of your death. Because of your death, another way to say it, you get a.
Speaker 3:They don't have to pay the capital gains, right? So one of the things I talked about was eliminating that. I don't know if they will or they won't. It's interesting to hear about it. But capital gains are another type of tax and you'll hear a lot. We want to get a step-up in basis on these assets. Hear a lot, you know we want to get a step up in basis on these assets. There is I'm hoping that the incoming administration is going to expand some legislation on what are called opportunity zones. They're trying to get incentives for investors to invest in areas that are economically underdeveloped and there's some cool deferral rules around that. I'm hoping that they expand that. That would be really nice and that's a way that we can avoid paying capital gains tax. So that's capital gains when you own something and it grows in value. They want a piece of that action as well.
Speaker 2:So, just on a personal note, what I see is when people, or when they go to a non-elder law attorney and they want to protect their house from Medicaid, the attorney's suggestion is oh well, let's just give it to the kids and that'll make sure Medicaid can't get to it. Well, that's true If done properly.
Speaker 1:Yes.
Speaker 2:If done properly, after five years, and you lose the kids, lose their step-up in basics. That's right, and so it's really a horrible idea. When there's a tool, that's terrible advice. That will I mean. I've done it. But it's in very, very, very unique situations, and it's part of why you hire an attorney is to look at the situation and figure out what's best, and so what you probably meant to do was a beneficiary deed and there's I'm podcast on that and so I won't go into it but what you really should do is a beneficiary deed that avoids the Medicaid lien, it avoids the gift and it gets a step-up in basis. It's just the best of all worlds. That's beautiful, yeah, Okay, let's talk about income tax.
Speaker 2:One of Ian's and I mean anyone out there working- and even someone applying for Social Security still needs to be concerned about income tax.
Speaker 3:Yeah, this is well. Our friends in Washington are clever in the way that they have designed the tax system. I mean, this is how they make money, and so they're going to pay a lot of attention to this Ordinary income tax. We talked about this a little bit. It's taxed at your highest marginal bracket, and so the tax that you pay is based on how much income you have. Now, at a certain level, we have a difficulty avoiding this tax, because the only way you truly avoid it is if you don't have any income, and that's not ideal.
Speaker 3:But there are a couple of significant planning opportunities, I believe, around income tax, and particularly related to retirement and retirement accounts. Think of your IRAs, your 401ks, your 403bs. The money that you take from those accounts is taxed as ordinary income and, as a refresher, ordinary income is taxed at your highest rates. You don't get capital gains treatments most of the time in assets in those types of accounts, and so planning around when to take income from those accounts, how much you're going to withdraw and when, there's significant opportunity to reduce taxes if we do it thoughtfully. And so the other thing is that social security under the current rules. Now the incoming administration has talked about changing these rules. We'll see if they do. Your social security is taxable based on your other income, and so what's called your provisional income, and so figuring out how your income works and when you're going to take income is actually. There's actually a lot to it, and it's a huge planning opportunity.
Speaker 3:Now I'm going to contradict myself. You can avoid paying income tax on your assets If we do what are called Roth conversions. We pay the tax on IRAs, and then any future future growth as long as we play by the rules is done is tax-free, and that, that, even though it's a distribution from an IRA or a 401K because it's a Roth 401K or IRA, the taxes have been paid on it. The distributions are tax-free. They're actually excluded from your taxable income in the calculation, and so this is like the most powerful, one of the most powerful tax moves, and it's relatively simple. Anyone can do it, but you have to have money in IRAs, and so this is something that we're focusing on a lot right now. If the incoming administration extends the tax system that we have, it's my opinion that this is going to be a good opportunity for people to pay these taxes at lower rates, so this is a huge opportunity to plan around.
Speaker 2:I did some research while you were talking. What percentage would you think of the total US revenue is income tax? Oh, boy.
Speaker 3:I would say my guess is above 40 percent, if not 60.
Speaker 2:Okay, 48.
Speaker 3:Oh, okay.
Speaker 2:Almost half of all taxes in this country come from in Social Security and Medicare taxes. I think that's what they take out of us working, not the people who pay. That's 36%, wow. So almost all of our taxes come from income and Social Security and Medicare.
Speaker 3:Kind of stinks Boy. That's really interesting.
Speaker 1:Yeah.
Speaker 3:Boy, what I would love to be able to opt out of Social Security. That would be anyway. That's a they won't let you, no, they won't let me.
Speaker 2:Everybody will, and then they won't save money and then they're broke. I'm broke, I don't have any money. Yeah, I get it. So, okay, all right. So, all right. So how would you summarize this for people thinking about? It's about to become tax season? Can you do anything about last year's taxes?
Speaker 3:It depends. So it depends on the situation. There are a couple of things that you can do, and really it's more what you can do is really more geared towards folks who are self-employed. Those are the biggest moves that we can make. Really, and that's related to retirement accounts. You can contribute to an IRA through the tax filing deadline but really, if I can be really transparent, that's not moving the needle a ton. If that's the best planning idea we got, we got bigger problems.
Speaker 2:So can you do things for this year's taxes Absolutely, and next year's?
Speaker 3:taxes, and who is the best person for that? So it's my opinion that you want to look at taxes from a long-term perspective, not just the current year, and so it's also my opinion that you should have a financial planner and a tax professional that are working together on this, and so we need to have one of our partners on the podcast soon. We'll do that, but this is not something that you just. I guess I do it myself, but that's because I'm a freak. You don't just hope that it works.
Speaker 3:This is an area where spending a little bit of time and a little bit of money can get an outsized return over the long run and this is an area to prioritize, to build a team and to make sure that you are proactive, not just like, oh bummer, well, maybe next year will be better. No, you got to actually plan and look, maybe you've got a great team. That's great, that's fun. If you can save more money on taxes, wouldn't that be worth having a second opinion? In my view, absolutely, it would, absolutely Okay.
Speaker 2:So, yeah, okay, Well, I hope that helps. I hope you learned a little bit. Probably didn't learn a lot, but just kind of a quick summary of okay, these are the taxes we need to be concerned about and there's some things we can do. I think the big thing here is know that there is something we can do about it.
Speaker 3:Yeah, just, in every single one of these areas, we can either avoid, defer or delay taxes, and if we're thoughtful about it, we build a plan to do it. We can get these numbers down to zero and potentially even below zero, and that's a conversation for another day.
Speaker 2:Okay.
Speaker 3:So, based on your ability to plan, we're all subject to the same tax rules, but our fair share is variable based on how well we plan. So if you want to pay more, that's fine, but you don't have to If you would like to pay less.
Speaker 2:give us a call. Give us a call, we'll be happy to talk about it. Thank you all very much and we'll see you next time.
Speaker 1:And that's a wrap for today's episode of Answers on Aging. Thank you for joining us on this journey of discovery and understanding. For more resources, detailed show notes and expert advice on the many facets of aging, don't forget to visit our website at wwwanswersonagingpodcastcom. Remember, growing older might be inevitable, but doing it with grace, knowledge and empowerment is a choice. Until next time, stay informed and keep those questions coming.