More Knowledge More Wealth Ep 195: Potential Changes to Estate Tax
[00:00:00] Good day. This is Gabriel Shahin, certified financial planner and your host, more Knowledge, more Wealth here on every weekend, talking about all important topics of personal finance. Our goal is to give you the knowledge you need to increase your wealth Now to the listener, you can always reach out to myself or any one of our colleagues here at Falcon Wealth Planning.
[00:00:53] Our phone number is (855) 963-2526. That's 8 5 5 96 Falcon like the Bird, or visit our website@falconwealthplanning.com. That's falcon wp.com for short. Feel free to also look up more Knowledge, more Wealth under podcast, Spotify and so on, and visit our knowledge center on our website now. If you have any questions you want us to air on the show, please send it to radio@falconwp.com.
[00:01:21] That's radio. At Falcon wp.com. Now folks, I'm the president of Falcon Wealth Planning. We are a fee non-commissioned True fiduciary, goes over anything that involves a dollar sign, folks, and we are offering a free financial assessment, quite frankly, to help relate this show to your specific situation, we got ops all over.
[00:01:39] We're headquartered here in Southern California, but we can help all across the country. Folks, please give us a call. Our phone number is (855) 963-2526. That's 8 5 5 96. Falcon like to burn and we handle all important topics of personal finance. Doesn't matter where you are, whether it's you're working, you're retired, whether it's looking to buy a house, looking, buy a car, looking to start a business.
[00:02:02] Folks, we are happy. I'll give you one or two meetings, one to two hours of our time, folks at no cost. But this past week I received, uh, a question, uh, that, uh, asked specifically about estate taxes. Now, this person, uh, didn't really state where they were from, but it's such a good question. So I'm going to just really tweak the question that they asked of, of do we need to prepare for estate taxes?
[00:02:25] And they referenced in this email, uh, which was a voice recording, actually. Uh, they, uh, Referenced the fact that it's gonna, laws are gonna change now. Let me talk to you about that a little bit more. First, lemme just take a step back and talk about what estate taxes are now, in the olden days, it used to be just for the ultra wealthy.
[00:02:45] Let's just talk about now. So each person right now is allowed to have roughly 12 million of a net worth. Okay, let's just say you're blessed and your net worth is 20 million, where the government says you're only allowed to have 12. So that means you have 8 million more than what the government says you're allowed to have.
[00:03:01] So you have to pay taxes on that surplus. 8 million in this case. So on the federal level, roughly, that's 40%. Okay? Anything over $12,000, so on and so forth is 12. It's 40%. Okay? Now, depending on the state that you live in, like the state of California, They do not assess an estate tax, but there are some states that do.
[00:03:26] So from a big picture point of view, for most of us out there, a 12 million estate tax. Now, if you're married, exemption is 24 million, right? Because you have 12 million as an uh, estate tax. Exemption and so does your spouse. So that's 24 million total. So, and that's the case. If your net worth was 20, it's fine.
[00:03:45] You're allowed to have 24 million. Anything over that you have to pay estate taxes on. Now, a state like Oregon, Oregon is a 1 million estate tax exemption. Well, I mean, holy smokes. With the real estate price boom that happened in the past couple years, a lot of homes now are almost at that million dollar mark.
[00:04:03] So it's becoming more prevalent. Not just on the federal side, but now on the state side as well. So what does this mean now for you? Now you have to start factoring in planning a little bit more than before. Something as simple as setting up a trust. There are ab trusts that you can also take advantage of with credit shelter trust, a bypass trust that allows you to take advantage of one spouse when they pass their, in this case, million dollars or their side of the estate tax exemption.
[00:04:33] This is important because you still have yours and your spouse has the other. So when you factor this in, There's a few ways around estate taxes, but you first have to understand what are they counting? They are counting folks. Life insurance. They are. Even that comes after you pass away. If you don't want to account that, you have to get what's called an irrevocable life insurance trust.
[00:04:57] You have to change the trust or the, the beneficiary of that. The owner of that, excuse me. In addition to that, you have to count in all your retirement assets, even though they have directed beneficiaries where they technically don't go as part of your estate. Well, let's back up. They don't go part of probate, but it is counted towards your estate.
[00:05:22] See, people confuse probate and estate. Now it's all part of your value upon passing and probate means if you did not designate who the beneficiary is, the state of wherever you passed away in is gonna designate your beneficiaries on your behalf. Now, if you have kids, it's simple, easy peasy. But now creditors, people could come out and say, Hey, Joe Schmo owed me some money while back and never paid me.
[00:05:47] Now the courts have to hear it. Even they have to take in the documents that is presented to them, which costs money, court costs, so on and so forth, in addition to the probate fees. So having a trust by itself avoids probate, but does not avoid estate tax. Now, having a beneficiary on your IRA avoids probate, but not the estate tax.
[00:06:12] Having the trust avoids probate, but not the estate tax. Having a beneficiary transfer on death, uh, payable upon death. They call 'em pods, TODs, or a beneficiary, all synonyms. They all mean the same thing folks. Um, all of those avoid probate but does not avoid estate tax. You get where I'm going with this.
[00:06:33] There's two different things going on there, and it's the same thing. When you have your home and a trust, a lot of states don't allow you to add a beneficiary on title. You get what I'm saying? So folks, you wanna be careful because estate tax, I get it. For a majority of people, it doesn't matter, but come 2026, it will matter.
[00:06:54] It becomes more prevalent. By the way, folks, if you're just joining me, you're listening to Gabriel Shahin, certified financial planner and your host of More Knowledge, more Wealth here on every weekend, talking about all important topics of personal finance. And today we're talking to you about just estate taxes and how a lot of people confuse it with probate.
[00:07:09] Now trust avoids all of a sudden any types of tax. Well, it avoids probate, but it doesn't avoid estate taxes. Now, currently between now and 2025, it's the estate limit is 12 million per person. So if you're married 24 million, and by the way, the government only counts one spouse, okay? So if you're practicing polygamy or anything crazy like that, uh, that doesn't count.
[00:07:33] So you can only get, uh, one marriage. So 24 million. Currently that's gonna be cut in half. It's subject to sunset, come 2026 to go back to being cut in half. So instead of 12 million a person, it's 6 million a person. So that's 12 million is the max limit. After that, you now have to do some significant planning.
[00:07:53] Now keep in mind, technically you should be doing some significant planning prior to 2026 because a lot of the tax strategies are gone. You have to do it prior to 2026. So by 2025 at the latest, some of these plannings take six months plus to execute. You have to have that in place. I mean, here's the thing, a lot of people don't ob obviously understand their current situation now.
[00:08:21] They don't wanna put their money maybe in certain things to make it irrevocable. They don't understand their income needs, they don't understand their financial needs, they don't understand who they wanna help. They don't understand even maybe charitable needs at this stage in their life. If you're still in that accumulation stage, you should definitely still take advantage of some of these exemptions that are subject to go away.
[00:08:43] There are different things that you can be doing from irrevocable trust point of view, from annual gifting to your kids, your grandkids, your nieces, your nephews to other family or friends or charity. There are many different ways that you could take advantage of these type of strategies to help, number one, reduce your estate, and number two, maximize your exemption amount.
[00:09:08] Because here's the thing, there are accounts strategies available where you could take advantage and still have access to the income. You may be giving up part of your access to principle, but that doesn't matter so much to you because I have a situation that I ran into last year where somebody. It put 5 million into a trust that's paying 'em roughly 20,000 a month.
[00:09:32] They only spent 10,000 a month, and oh, by the way, that was just one spouse that put in 5 million. The other spouse put in 5 million, also collecting another 20,000 a month. So my point is,
[00:09:43] because of the estate taxes that we're on, the fear of changing, there are strategies that are there to be able to maximize that exemption before it disappears.
[00:09:54] This is the crucial part of tax planning. This is the crucial part of estate planning. There are so many different irrevocable trusts that are out there. And folks, if this sounds like something that you have some interest in and this has something that you just have more questions on, if you are on the up and up and if you're in a high income situation, if you are in a high expansion situation where maybe you're even investing in some type of business that you feel might.
[00:10:16] Grow really big and expand your net worth folks, give us a call. There are some proper planning that can be done, folks we can help. Our phone number is (855) 963-2526. That's 8 5 5 96 Falcon like the Bird, or visit our website@falconwealthplanning.com. That's falcon wp.com for short. There are so many different ways of folks.
[00:10:40] Our tax code is so complicated. I joke saying if there's a will, there's way. So my point to you is just put yourself in a position of succeeding and where you're in control. And here's the thing, planning is a difficult thing to do. Now to me, it's the easiest thing to do right for you Maybe. Planning your weekend, you're probably more focused on that than your future.
[00:11:00] And I get it, and that's not a knock on you, but that's just reality. We focus on things that are fun, not delayed gratification on things that might even cost you money to plan for the future. But at the same time, you have to put time for your future. And once you start to buy a house, that's the first time you gotta start thinking about estate planning.
[00:11:19] Once you get married, once you have kids, once you start to grow your wealth. Folks, these are experience or extremely important aspects of estate planning and financial planning that often go overlooked. Folks, this is yet again why we're offering one to two meetings, one to two hours of our time. Folks at no cost.
[00:11:41] Give us a call. We would love to help with. Love to relate this show to your specific situation. Our phone number is (855) 963-2526. That's 8 5 5. 96 Falcon like the bird. Folks, we're gonna go on a quick break. When we come back, we're gonna talk about these strategies specifically of what you can do to take advantage of those and the value of doing so and how it can financially benefit your situation, especially if you're on that cusp, and how you can reduce that and take advantage of other different advantages of these estate plans that are available.
[00:12:12] Folks are gonna be right back after a few words.
[00:12:14] Welcome back folks. This is Gabriel Shahin, certified financial planner. And your host of more knowledge, more wealth here on every weekend, talking about all important topics of personal finance. Today we're just talking about estate taxes. We talked a little bit about probate, but the main purpose of this show was estate.
[00:13:17] Taxes and a lot of people think, oh, my net worth is not that much. I don't have to worry about it. But then I just pointed out how each state is a little different. I focus on Oregon that has a state tax that kicks in a million bucks. So these are things and items that you have to be aware of and strategies that you have to take advantage of, because if not, uncle Sam is the winner.
[00:13:34] So be aware. Now, I wanted to talk about just kind of some basic strategies that you can take advantage of. Number one is kind of the most obvious the government allows you to give to gift. $17,000 to an individual and you do not have to report it. On the estate, on the gifting form, uh, the 7 0 9. And so that's important because you, the government pretty much says the max you're allowed to give somebody, which is in this case 17,000.
[00:14:03] So if you ever wanted to give a wedding gift to somebody for 20,000, technically that's too much now. Of course there's always aunt or ifs and buts about it. Let me explain. It's 17,000 per person, okay? So let's say me, Gabriel, who I'm married to, Sophia, my wife, her and I can technically give 17,000 each off one check.
[00:14:23] So that's $34,000 gift. Now, let's just say, so if we have a child that's 34,000 to our child, now let's say our child is the one who's getting married. We can give that 34,000 to our child, 17 for. My wife, 17,000 from me to my son for 34,000 Let's say he gets married now, let's say his spouse gets also, uh, the 17,000 from me and 17,000 from my wife, so she.
[00:14:51] Could also get another 34,000. So technically between my wife and I, we can give to my son and husband or son as a husband and his wife. We can give another 34,000, which is $68,000 a year. Technically, let's just say they were to have kids. We can give another 34,000. Per child. So this could continue on an annual basis.
[00:15:15] So if you're extremely wealthy, this can be done. And if they are minors, you can open up an UTMA or an UGMA account, uniform gift to minors account, or a uniform trust minors account as well. So these are ways that you could take advantage of that and really be able to reduce your state tax liability.
[00:15:34] Now, that's one way that could make a lot of sense, but let's just say like you were living in the state of Oregon. And you had 2 million bucks of a net worth. Your house is a million. You have a million dollars in your investments and retirement accounts, or brokerage, whatever it may be. Well, you need that million dollars to retire and survive.
[00:15:53] So what to do then? You can't just gift $68,000 a year. Because then that's, you're giving away almost 10% of your liquid net worth on an annual basis. That doesn't make sense. But if you have two kids, I have to give 68,000 times two. Get what I'm saying? So another option that might be available is, may be an irrevocable trust.
[00:16:15] This may be an option where you could put money into a trust to take exam, uh, uh, advantage of your exemption that's currently available on the federal level, and you're able to now have it pay you out. An amount on an annual basis for the rest of your life. Now, this is important because it is a separate irrevocable trust that's separate from your estate, that has its own tax ID number, it's own tax return.
[00:16:45] It's its own entity. You essentially opened up a new business and that business's goal is to pay you out monthly. This is an option that's available. There are many different types of trusts that can do this. Now here's the thing, the rule of it getting out of your estate is you cannot have control of this money.
[00:17:03] So I know some people try to gift to their child, but they're on the account. You can't do that because you still have, uh, access to that money. Now listen, granted, they're your child. They're not gonna want you to go broke. So if they wanna give that and use their money to start supporting you, that could work technically.
[00:17:22] But in this case, if you end up taking advantage of these irrevocable trusts, the principal are in these accounts until you pass and it'll pay you money for life. So this is also another strategy that is becoming very, very popular because that's what people want their money. They want a consistent income stream.
[00:17:42] Now, don't let this strategy fool you with people trying to sell you annuities to say, Hey, put your money into annuity to pay you a guaranteed income for life. Because two issues with that. Number one, the income can't go up. Number two, it's fully taxable. And number three, uh, to add to a third is that that dollar amount of the annuity is truly, uh, irrevocable.
[00:18:05] As in you have no other investment decision that you can do with that money and your heirs don't get a step up basis. And there's other issues as well. So there's, there's a lot of issues with annuities. Um, so that is an option. But the point is, you and your spouse, assuming you're married, are able to take advantage of that if your estate is of a larger amount.
[00:18:27] Now, another thing is most of the time, spouses don't pass away at the exact same time. So what you could do is, because you don't wanna go from being married to single and where you were originally allowed to have 24 million, now you have 12. Well, in 2026 that goes away and those numbers just seem absurd.
[00:18:42] So let's use other numbers. 12 million is max. Uh, net value. You're allowed to have net worth. It's gonna drop to 6 million, okay? Uh, that's per person. So that is 12 million if you're married. Now, if one person passes now, the net worth is only six. Now states like Washington State and California and some of these other, uh, states that have high property values, like that's.
[00:19:08] It's achievable. Believe it or not, you may have a one to 2 million net worth today. Well, every 10 years that should double. Well, if you're 65, by the time you're 85, you're right there. So the thing is, if you create a trust and you have an AB trust with even a C trust with, they call it credit shelter trust, or a bypass trust, you're allowed to take part of that money and separate it into a separate trust.
[00:19:30] Separate entity and you're allowed to take advantage of your spouse's. Your deceased spouse is a state tax exemption, so it currently has 12 million, eventually 6 million, and you can put the money in there. You now, that's important if you were to get remarried, right, that those assets stick with the heirs that are said in that trust.
[00:19:51] In addition to that, you still technically could have access to that with something called hams. Whether it's for health reasons, education, maintenance service, I mean, these are things that you could still technically have access to. The point is, if your net worth starts to grow, you could take advantage of that.
[00:20:09] You don't have to FA fund right away. You could fund over time. So this is another thing that can take advantage of which a lot of people don't take advantage of, mostly because they don't do trusts. I don't know why it's often sometimes looked at as maybe, uh, in certain cultures. I've had cultural people that said it's taboo.
[00:20:28] You, the more you talk about death, the more it's eminent. By the way, folks, if you're just joining me, you're listening to Gabriel Shaheen, certified financial Planner and your host of More knowledge, more Wealth here on every weekend, talking about all important topics of personal finance. So today we are just talking about estate planning and I wanna talk to you about specific strategies that are available to you.
[00:20:47] And folks, if you need help with this, and what we're saying is struck in accord, if you just wanna ask more questions specific to your situation, folks, give us a call. Our phone number is (855) 963-2526. That's 8 5 5 96 Falcon like the Bird, or visit our website@falconwealthplanning.com. That's falcon wp.com for short.
[00:21:09] Now, here's another interesting idea that was proposed to, quite frankly, one of our largest clients, and this was about a decade ago. They actually proposed their net worth was still quite high of doing a Roth conversion. Their whole point was this, if estate tax is 40% and their current tax bracket is 24%, why don't they just do Roth conversions today?
[00:21:38] Pay 24%. Money's in the rough, so their net worth is worth less, but now the tax quality of their estate is worth much more. Let me explain. If you had 4 million in a retirement account, if you were to pull out 4 million out of that ira, that traditional 401k, traditional ira, you're gonna pay 2 million in taxes depending on where you live.
[00:22:01] Now, You would rather, instead of having 4 million in a ira, you may rather have 3.5 million in a Roth ira. Why? Because you can pull out that 3.5 million and pay zero tax and not just, you will pay zero tax, but your heirs will pay zero tax. And in addition to that, if you inf fact add 4 million in a traditional, which is a fully taxable retirement account, your heirs now have forced to withdraw it over a 10 year period.
[00:22:32] The most logical thing to do is 400,000 a year, which still kicks in a crazy high tax bracket. So two benefits. It reduces your estate. Let's just say you had 4 million, obviously you would've converted the whole thing in one year, and you convert 50,000 a hundred thousand dollars a year over time to dwindle down.
[00:22:51] Number one, your estate. Cuz it's gonna cause taxations. You have to pull money out, pay for the tax, but it's better to pay that 24% than it is to pay 40% in estate tax and your heirs also save money on the tax. This strategy folks, I've seen save people tens of thousands of about hundreds of thousands of dollars, probably just an income tax alone, which is not a death tax, which is estate taxes.
[00:23:16] Folks, there's just so many ways to take advantage of this, and this doesn't even include taking advantage of charity. There are charitable lead trust, charitable remainder trusts. There's donor advised funds, there's family foundations, there's charitable gift annuities. The part that just kills me, no plan intended is that some people give their money to charity after they pass away.
[00:23:40] I'm like, what's the point of that? I mean, excuse me, but, uh, rude to say, but wouldn't you rather get the tax deduction while you're living, while still give the charity what is given to them at your passing? So they, you win both ways. They, charity gets their money no matter what. But the biggest loser in this whole thing is, by the way, the i r s.
[00:24:02] Because what you're essentially doing is telling the IRS, I'm gonna give money to them eventually and they'll give you tax benefit today. Well, that reduces your income. What you can do the very next day as it reduces your income. Heck, you say you donate a million, some of 'em might give you a $500,000 write off.
[00:24:15] Some may be a hundred thousand dollars. Write off. My point is that write off, you're able to do a Roth conversion from your 401K traditional or your IRA traditional, and then convert to arpa, not pay any taxes at all. I'm telling you, I love this business. There are so many ways to outsmart the irs.
[00:24:33] There's so many ways to outsmart the estate taxes and in general, just for you to do something better. This is why folks were offering a free financial assessment. There are so many legal ways, allowable ways. To be smart with your money, and this is why we used to have a saying, can't afford to be cheap.
[00:24:53] My point is, well now you just can't afford to be lazy. We're offering a free financial assessment, one to two, meeting one to two hour hours at no cost. Folks, give us a call. We would love to help. Our phone number is (855) 963-2526. That's 8 5 5 96. Falcon like the Bird, or visit our website@falconwealthplanning.com.
[00:25:13] That's falcon wp.com. For sure. Folks, that was a Fastas show. I wanna thank you for tuning in with us this weekend. Feel free to reach out to myself or any one of our colleagues here at Falcon Wealth Planning. Our phone number is eight five five and 9 6 3 25 26. That's 8 5 5 96 Falcon. Like the bird, or visit our website@falconwealthplanning.com.
[00:25:35] That's falcon wp.com for short and go visit our knowledge center as we have all of our previous shows on video casts. Along with you're able to see our knowledge center where we answer a bunch of more questions through videos in much more detail. Feel free to take advantage of that and look up our more knowledge, more well on your podcast or Spotify.
[00:25:55] You can get this show and feel free. If you have questions specifically that you want us to, a answer on air send, uh, email to radio falcon wp.com. That's radio falcon wp.com. It can be an audio message or just a straight up question. Folks, I wanna thank you for tuning in with me. I want you to have a fantastic weekend.
[00:26:13] Have a great week, and God bless.