The WAY to WOW Shows
Strategies to Minimize Taxation
September 16, 2024
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[0:00] hello and welcome to trust and Estates weekly I'm your host Kevin bemel and we're here every Monday at 10: a.m. Pacific time to talk about all those matters related to Estate Planning and administration as well as trusts Administration and from both from your your personal uh planning perspective as well as being a professional who helps people with these matters and uh today for those of you who are Wall Street Journal readers like me there's been an interesting sort of Confluence of events

[0:37] um because my topic for today is state tax planning made it into the Wall Street Journal um and uh it it is interesting because um as we get uh closer to the presidential election the issue of estate taxation is is a significant one excuse EXC me because of the um candidates um very very different positions on what's going to happen so just and as you know

[1:12] I don't I don't do Politics on my shows so um I'm my purpose here is to explain the situation uh I certainly have um you know my view as as to which is better which which I'll share for you um but you know I I'm not looking to wade into to the political moras so uh setting up some background in 2017 when President Trump was President he passed uh a a tax reform well not he um the Congress passed a tax reform Bill and there were

[1:48] a number of changes in that bill one of which was a significant increase in the estate tax exemption now um as of uh this year that exemption amounts to $13.61 million so if the taxable value of an estate is less than that 13.61% uh dollar value uh no estate

[2:23] taxes at least the federal level are are levied on that estate and by the way if the uh if it's a a married couple so basically the exemption is doubled to 27 million 27.2 two million okay um now the legislation that was passed in 2017 expires at the end of next year on December 31st 2025 if and and if it is not renewed in

[2:59] some way at least if let's just say specifically the estate tax provision if that's not renewed in some way then the estate tax exemption will drop considerably so the estate tax exemption for next year 2025 is projected to be about 13.99 million or what would amount to million for for a married couple okay so almost $28

[3:34] million if there's no change in the 2017 legislation and it does expire and it it does expire on December 31st of next year so it's it's projected that the exemption will drop to to about $7 million or $14 million for for a married couple and that that um that's about half of what it would be next year in so doing the number of Estates

[4:09] subject to taxation would increase or not would but are projected to increase from about 4,000 or so this year and next to about eight or ,000 so more than more than double okay now if if your estate is you know significantly less than 7 million doll so you know you you you probably have nothing to worry about having said that depending on who wins the presidency and which party takes um which party

[4:45] controls Congress the the changes could be more than simply the 2017 tax legislation expiring so if um if uh president Trump wins election and and Congress and and Republicans win control of Congress so one of the um one of the issues being discussed is that um the estate tax or what what Republicans often times call the death tax would be

[5:22] completely eliminated okay now exactly what that would look like uh I I I you know I don't know um currently when someone dies The Heirs get a step up in basis so so for example if when someone is alive an asset is he you know an asset has a basis of let's say $100,000 and when when he dies the property is worth a million dollars as of his date of death so The Heirs the

[5:59] the air basis in that property will be a million dollars it it will be stepped up to a million dollar now the justification for that step up historically was that since Estates paid taxes they were essentially paying taxes on the current value of the property and so the heirs were entitled to a basis based on the current current value or at least the value as of date of death if the state tax is done away with will that include heirs still getting a step

[6:35] up in basis or will that mean that heirs will merely inherit an asset at the whatever the basis is currently on the books you know don't know can't say but but that's that's one sort of end of of of it that if if Republicans you know control the government the federal government of course we're talking about um after uh as a next year then they may completely do away with the estate tax and and whatever form that would take the flip side is if uh kamla Harris wins

[7:11] the presidency and Democrats control Congress so they may lower the estate tax exemption even more um so while it's projected to be around $7 million as of um if if the 2017 legislation expires you know they may seek legislation in 2025 that would lower it even more than that maybe they would lower it to who knows $2 million five mil5 million something like that um you know we don't know

[7:47] so from an estate tax provision what happens in the election is is important because it almost for sure it's going to mean some kind of sign ific change from where we're at right now um the only the only uh well I shouldn't even say the only situation um you know if there is some sort of divided government where one party controls the presidency and another party controls at least one house of Congress so then it's very hard

[8:22] to say what will happen because some kind of solution would have to be negotiated and and we all know how um difficult that has been um since we've faced divided government quite a bit over the last whatever it's been 10 15 years so so it's very hard to see what's going to happen so for for those of us or those of you who for whom this issue is potentially important it it is going to be difficult for you and your advisors

[8:57] to decide what to do now minimally what I would recommend you do is at least talk to your advisers and and investigate the issues and what might possibly be done I think the worst thing you can do is just ignore it and then something changes and in retrospect you realize well I could have done something to to make my position better but I didn't so you may r things and just decide you're not going to take any

[9:32] action okay that's fine um but at least you'll have been made you'll have made a positive decision rather than letting events overtake you so what I'm going to talk about now are some of the strategies that can be used to minimize estate taxes so you currently these are being used obviously by just the 4,000 or so um Estates that are you know likely to be taxed but that number um if if just the 2017 legislation expires

[10:09] that number is like I said is going to more than double and so it's going to become more it's going to become relevant to a lot more people number one and as advisors we need to have it on our radar so I know I'm dealing with a situation like that right now where you know we met with we meaning the advisers on the estate planning team met with the the client last week to talk about these and generate some ideas about um how we might um you know handle the uncertainty and the risk going forward

[10:46] so um I'm gonna talk about um uh five uh common uh strategies and I'm looking at my thing here for some reason there there's some weird oh I see what it was for some reason this one didn't change I I have my notes here and and uh it went from four to seven and then back to six which is which is weird numbering so um so I'm gonna like I said I'm gonna talk about um the you know five uh strategies um that you can use I'm going

[11:22] to mention a couple of others they're these the other ones are rather complex um but so I'm not going to get into the details of them okay so first of all number one I mentioned the estate tax exemption excuse me it's terrible having postnasal drip so I can tell you so um when so so first of all you know if you if you fall under the estate exemp tax exemption limit so

[11:58] then you you don't have a problem problem as I mentioned before now if you're a married couple and you and and therefore qualify for essentially double the limit so let's look at um next year where the limit for married couples is uh is is just about $28 million project to be just about $28 million well let's say that one spouse dies but only uses 10 of his $14 million exemption so his

[12:34] spouse due to something called portability gets the benefit of the $4 million in unused exemption so going forward the spouse um if we're talking about he who died she supposedly I guess or I guess now with the same-sex marriage it could be either but anyway if if he dies his spouse would still have available $18 million in estate tax exemption and and again that's the portability rule whereby the surviving spouse gets to use

[13:11] any unused portion of a spouse's um estate tax exemption so that's one thing you can look at how will that affect your estate going forward now under the lower the projected lower limits starting in 2026 where the limits are 7 and 14 million again this is projected we don't know for sure so presumably well not presumably portability will still exist okay so if uh a spouse under the

[13:47] 2026 um uh estimated limits uses only $5 million of of his estate tax exemption so that his spouse would have 9 million available under portability because the 2 million unused would attach to the surviving spouse's 7 million for a total of 9 million okay so portability is one thing that you can take advantage of okay number two you can make lifetime gifts so currently each individual can

[14:22] give an unlimited number of gifts um up to a maximum of 18 ,000 a year uh and and those gifts then will not be included in the value of the estate okay so let's say that you have an estate worth a million do well a million dollars doesn't matter because it's not taxable let's say you have an estate worth uh $30 million okay and so you're you're roughly $2 million over the 2020

[15:00] projected limit so one thing you could do is make a number of $18,000 um gifts and and and by the way that limit is projected to increase to 19 I'm sorry not did I say 18 million sorry you can make a number of $18,000 gifts and that limit is projected to increase to about 199,000 next year and to a number of recipients so if you did let's say 10 of them that would be $180,000 that had been removed from your

[15:36] estate and and so that would reduce the the the taxable amount of your estate by the same amount and you would save the you know 40% um marginal tax on that part of your estate now by the way if you're a married couple so each one of you can give $118,000 so in other words a total of $36,000 this year or potentially $38,000 next year so if you have three children and you give as a married couple you give each of them

[16:12] $36,000 so that right there is going to take $100,000 out of your estate if you do it for two years that'll take $200,000 out of your estate okay so um you can you can consider using the annual diff gift tax exclusion okay and and that is one way of starting to transfer your wealth in a way that will ultimately uh reduce your estate tax liability now uh one of the things mentioned in the Wall Street Journal article is um Senator Elizabeth

[16:51] Warren um has is is considering legislation to reduce the um annual gift tax exemption to $10,000 and limit the number that anyone can give in any one year to $220,000 that would be a a very very drastic cut back from what is currently allowed um and you know I it's to the best of my knowledge um Democrats in general have not opined on whether they support this

[17:28] idea by Senator Warren um but again you know on the other side of the aisle um to the best of my knowledge no Republicans are suggesting anything in the annual gift tax exclusion um which is by the way index for inflation that's why it went from uh I think it was $177,000 last year it's $18,000 this year projected to go up to about 19,000 next year and it will continue to increase as inflation increases right so it's it's a tremendous uh benefit and

[18:06] and by the way in the annual gift tax exclusion is is a benefit even for people whose Estates um may not be subject to estate taxes because it does give you the ability to transfer some of your wealth prior to your death in a way that could potentially benefit your children or other people okay so by the way a gift can be given to anybody the person does not have to be related to you so if you have a friend for example you can give that person um uh money up to the annual gift

[18:43] tax exclusion and neither you nor the other person pays taxes on it okay that's the benefit so so again another way of of um avoiding estate taxes is to um use the annual gift tax exclus illusion the next way is to set up an irrevocable trust so there are several different types of trusts there's something called an eyet and irrevocable life insurance trust there's a grantor retained annuity trust um and and a qualified personal residence trust I'm not going to get into um the the details

[19:21] of these trusts what I am going to talk about is irrevocable trusts in general now when you set up an irrevocable trust and transfer assets to it what that does is it pulls those assets out of your estate and and they are legally owned by a separate entity okay so one of the ways of dealing with having to pay estate taxes let's say you have a a $50 million estate okay so unless the estate

[19:59] tax is is done away with or the uh the estate tax exemption is significantly increased at with a $50 million estate even if the 2017 legislation is extended you're still going to be subject to estate taxes so um like I said next year the exemption is projected to be about $28 million for a married couple so you can see a $50 million estate could still be subject $22 million of that estate could still be subjected to estate taxes

[20:36] roughly at a at at roughly a 40% rate now the rate is stepped but it steps up pretty quickly and so on $22 million of um taxable value uh the estate taxes are going to be somewhere between probably about eight and8 and5 million doar maybe a little bit more more in other words on a $50 million estate roughly uh 16% of the value of the estate is going to go to estate taxes assuming it's

[21:13] owned by a married couple now by the way if that estate were owned by an individual so uh $36 million of that estate is is going to be taxable so that's roughly between 14 and5 million and so now we're talking about closer to to 30% of the value of the estate being lost if there's no Provisions made to pay the estate taxes okay and that's that's why the estate taxes are such an

[21:50] important issue let's say that that $50 million estate is comprised primarily of business worth worth $50 million maybe maybe the business is worth $45 million there's another $5 million in assets so even if you sold the entirety of the other $5 million in assets there's still more taxes owed and so now the business is faced with either a borrowing money or B being sold in order to pay the estate taxes and this this is the the

[22:27] the you know the burden that estate taxes creates and especially if it's an ongoing business so you know putting debt on a business can be difficult especially if it operates on small margins okay so this that's and again that's why this is such an important issue so one of the ways of dealing with this is to create an eyelid and and irrevocable life insurance trust and what that what that eyet does is it buys life insurance that um provides liquidity for the

[23:02] estate to pay the estate taxes but because the life insurance is not owned by the estate itself the value of that life insurance is not included in the value of the estate okay that's it has to be an irrevocable trust okay because that that takes control of those of that of those license uh life insurance proceeds out of the state of the person who's died okay I'm this is I'm giving a relatively simple example okay and and as you can imagine the costs to buy uh to pay the

[23:39] premiums for that life insurance policy are significantly less than the um the the proceeds of the policy if it ends up having to be used okay so you know you might end up paying a million dollar premium for let's say A you know a five million um insurance policy I'm just making up numbers um nonetheless you now have $5 million available to pay taxes at a cost of only $1 million okay so you see how the eyet works right so again

[24:17] another a third way of of minimizing estate taxes is to set up an irrevocable trust of one type or another okay number four is to is charitable giving and you see a lot of people um look at this so you can leave part of your estate to a charity and generally speaking th those those donations to the charity number one they transfer the wealth out of the estate and number two they're tax free both for the donor and

[24:54] obviously for the charity which is a nonprofit um organiz a okay and there there are different ways to do it there are things like charitable remainder trusts there are a Donor advised funds again I'm not going to get into the mechanisms um I'm I'm hopefully I'll we I'll get a lawyer on um who who can talk specifically about the details on some of these um as you know I'm not a lawyer so I don't want to start you know getting into all the you know the the individual legal issues but again another way

[25:30] to reduce your taxable estate is through charitable giving now by the way you can set up a a foundation and again if that Foundation is separate from your estate that will remove assets from your estate and lower the uh taxable value okay so um the there's and and we think of we think of like foundations as having you know hundreds of millions of dollars that kind of thing uh while that's true for you know big ones like the Pew foundation and those kind of things there are um you there are ways to

[26:05] create a smaller Foundation um so for example here in Los Angeles we have something called the um Jewish Community Foundation I think it is it's it's part of the sort of larger Jewish social social services that exist in LA and within the umbrella of this Foundation you know a person can set up a a smaller Foundation that then is administrated um by it's just we call it the foundation um that so it's administrated by the foundation and and

[26:41] because they're administrating a whole bunch of them um they can do so in a very economical Manner and so you know you could set up a foundation with with you know maybe five or 10 million dollar um and and still and and you you know you don't have to worry about hiring a full-time manager which would you know dramatically def um decrease the um the funds available for making uh you know charitable contributions um and and so it becomes you know a viable Foundation at that

[27:17] point so again a number of ways to do charitable giving and and so um you know this is this is something for for you and your advisers to take a look at or if you're an adviser to you know look at with with your clients okay another way of um of reducing um tax liability is is proper titling of of assets so look at your beneficiary Den designations look at your asset titling and in some cases

[27:54] um you may be able to move assets outside of probate and outside of your trust in a way that would minimize their Expos their estate tax exposure now this is an area where you're going to want to have an accountant involved and not just any accountant an accountant who really knows estate taxation because just because something doesn't pass through probate or isn't transferred through your trust that doesn't mean necessarily it is escapes being included

[28:30] in the value of your estate um but there are things like joint tency with right of survivorship um uh uh death on transfer um designations and accounts that may allow assets to be transferred for example between a husband and wife in a way that perhaps they're taken out of the husband's gross estate or taxable estate when he dies and thereby leaving more of his estate tax exemption to Port

[29:06] over to his wife or to his spouse okay so this is a very high level of Estate Planning and it's it's it's one that would will require not just legal but also accounting advice if if the the lawyer you're dealing with doesn't really know the intricate AES of estate tax accounting and and many do not they know how to create the entities and and advise on the entities um but they work in a team with with an accountant um to

[29:42] make sure that clients get the best possible advice and and get the best possible plan I know that's how I work in my business I I I work as a team so um I don't advise on law I don't advise on um on on accounting matters I advise on administrative matters because that's what I do as a independent trustee or as an independent administrator okay and all of those various aspects are important so um if you are considering for example creating an irrevocable

[30:17] trust who are you going to appoint to ad uh to administrate that trust okay because it probably can't be you because if you're administrating the trust even though it's it's it's a separate entity if you are administrating it the IRS may consider that to be too close and so they may impute the value of the trust asset to your estate okay so all of these things need to be looked at again from a a legal accounting and administrative basis all three of those aspects okay so those are the five

[30:55] primary uh ways that you can look at um minimizing estate taxes there are a couple of others that are um beyond the scope of what I'm going to talk about today One is using family family limited Partnerships where you have multiple generations of a family in a limited partnership that owns property could own a business could own Investments real estate um in such a way that maybe the older members um retain control of the assets while the younger members um who are who are The Heirs they you know they

[31:31] get the benefit of of um of inheriting um the the assets and and because it's a a limited partnership valuation discounts can be used in such a way that will minimize estate taxes so that's again that's something sophisticated to look at in that case um you know you would also want to probably have an appraiser involved um because it's because the kind of valuation discounts that you can take um

[32:06] almost for sure the IRS is going to want to see actual appraisals on that from qualified appraisers meaning appraisers who are who are licensed and so you're you're going to want to have that input as well and then finally there's something called a a generation skipping transfer tax exemption and to be honest with you I don't know a whole lot about it I've heard of it I haven't really looked into it but I I did I did think I I I did want to just mention it so that if you're talking with your advisers you can say well what what about a GST a generation skipping transfer is that something that would work obviously that

[32:42] would won't work if you don't have grandchildren um but if you do have grandchildren so you may be able to skip a generation and and make your grandchildren directly your heirs at least for some of your assets and there could be some state tax minim minimization that comes from doing that so in summary and and and this is where I started plan ahead okay I think the worst strategy you can take is to ignore

[33:18] what what may be a significant change happening after next year now by the same token we don't know what the change is going to be and so you may be reluctant to spend a whole lot of money or create um you know irrevocable trust and all that kind of thing only to find out that maybe a maybe you didn't need to or B um you know you you now you don't have control of those assets anymore and you sure would like to have control over them these are the pluses and minuses and and you know weigh the

[33:54] risks weigh the costs and and you know you'll have to make a decision but at least you'll be making an informed decision and so that's why um if you if you have an estate if you have not begun your estate plan begin it now okay you may you may think oh I've got lots of time before the end of next year um that time can go very very quickly especially if you have a larger estate and it's and and if you're kind of on the cusp so if you've got for example if you're single

[34:29] and you have an estate that maybe is worth 78 million you're right on the cusp if you have not begun your estate plan do start you know today um and and and likewise if you're you know a married couple and you're around 13 145 million start today if you have an estate plan already in effect so now is a good time to do a review okay um um by by the middle of next month um all the

[35:05] you know tax return filings that were you know put on extension they have to be filed okay and so accountants will have your you know a little bit of extra time um there's there you'll still have time to do some end of the year um transactions if you need to okay that that would make your position better if you decide that's what you're going to do and if you are going to set up any kind of entities trusts or family limited Partnerships or whatever you'll have time to do that moving into next year so that you're not pressed by you know waiting until you know late summer

[35:42] fall of next year and now you're really time crushed because everybody's trying to get these things done and and you know there's just not enough hours in the day or you know your advisors are really pressed because they're under pressure from a lot of clients and they end up making a mistake all right so like I said now is the if you haven't already done it the the next best time to start your estate planning is right now and so I encourage you to do that to that extent um you know if you if you need a referral to a lawyer or an accountant um

[36:20] please feel free um to reach out to me I work with a lot of Professionals in this area and I'm I'm happy to give you a recommendation um so that you know you're you're not just sort of you know pulling someone you know off the internet or talk to friends and family members and see if they've used someone that um that they recommend uh and and you know but by the way it's perfectly appropriate to interview more than one lawyer more than one accountant um before deciding who you want to advise you um you do want

[36:55] someone who's who's a fit um and who can who understands your perspective and so um by the way if a professional is going to charge you for an initial interview uh so exclude that person okay just exclude that person right off the bat um no lawyer or accountant or for that matter administrator should charge you for an initial consultation to decide whether you know you want to engage that person uh and and and so you know talk to them uh you know have a list of

[37:31] questions to discuss to get their their perspective get a sense of how they work um whether you know personalities match etc etc um but but like I said the worst thing you can do is just ignore this and and and decide oh well you know it'll all work itself out in the wash kind of thing um not not likely to and and and of course the larger your estate the more you have that stake and the bigger the potential loss so um so you know it is it is something to to get on

[38:07] right now if you have questions comments negative positive uh please feel free to put them in our social media always look look look to uh you know always enjoy seeing those and and look to respond to them um and and if it's anything of a personal nature like a referral my email address will be there as well or you can direct message me I'm happy to communicate with you that way and then one last thing before uh I I I sign off or two more things before I sign off um if you're not a subscriber to the show please do consider subscribing um it's

[38:44] real easy to do on YouTube just just go to our YouTube channel uh youtube.com theeway to wow and um and you'll see you can subscribe and that way you'll get a notification every every time we go live um and you'll you'll never miss a show um and then let's see tomorrow at 10:00 am it these are all Pacific time um I have a special edition so tomorrow is citizenship day formerly known as Constitution Day and so we're

[39:20] gonna have a special show uh featuring um um a a history of of the US Constitution and a reading of the of of parts of the Constitution so I hope you'll join me for that and then on Wednesday at 10: amm Pacific time is our monthly feature economic Echoes where we talk about how changes in the economy affect us as individuals so for those of you who've seen one of those episodes before have heard me talk about them we don't live the national economy we live

[39:55] within it but the way changes in the National economy affect us depend on the specific decisions that we make or we and our families make and so we we dig down into the data to see you know why do we feel why does our economic life seem to be perhaps different than what we're reading in the news or what the national statistics seem to be indicating and then of course seven days from today I'll be back with the next Edition of the way to wow show and my guest is

[40:32] for return engagement is Hillary uh Cooper of uncluttered and we're gonna take our next step on this journey of what do you do with the stuff that de deant leave behind so um uh I I hope you will tune in um and and uh and watch uh and listen to Hillary's in my next discussion as we uh go more in depth on on this this topic right it's just the amount of stuff just gets overwhelming so how are we going to handle that and

[41:10] that wraps it up for today so thank you so much for watching I really appreciate it and look forward to seeing you again later this week signing off as I always do Marie darling You Are My Bell