All About Estate Taxes

All right, I promised you we were going to talk a little bit about estate taxes. And when you think about estate planning, there's multiple reasons for estate planning, one of which is just to make sure your money and your stuff goes where you want it to go when you die. You may be trying to avoid probate, which can be an expensive and time consuming process, and it can also be a public process. But for a lot of people, it's minimizing taxes is the reason they're doing estate planning. And a lot of people worry about the death tax, but it actually doesn't even apply to them. Most white coat investors are not going to have $50 million when they die. Most white coat investors are going to have $5 million, something like that, maybe $10 million, maybe. And the nice thing about the estate tax is that at least federally speaking, and it differs by the, I don't know, 10 or 15 states that have an estate or inheritance tax. But for most of us, the federal one's the only one that applies. And it has a big exemption. Right now, the exemption is $13.61 million, double that if you're married. That's how much of your wealth you can pass to the next generation without paying any estate taxes at all. So that works out to be over $27 million you can pass on without paying estate taxes. The problem is, once you get above that amount very rapidly, within a million dollars of additional wealth, you get to a 40% tax rate. So in this case, if you died with $50 million, you pass on $27 million. That leaves you $23 million. $23 million times 0.4 works out to be what, like, I don't know, $9 million or something? $9 million in taxes. That's what it's going to cost Fred when he dies, if he doesn't do anything about it. And so the main thing people do is they give their money away. You either give your money away to the next generation, and you can give, in 20, 24, you can give $18,000 a year to any person you like, you and your spouse both. So if you got married, kids, and they got three grandkids, you and your spouse can each give each of them $18,000 a year. So that adds up in a hurry. And that can help decrease that amount of your estate above the estate tax exemption. You can do that directly. You can do that by putting the money into trusts, et cetera. Also, money you give away to charity doesn't count toward that estate that will be taxed. So Those are kind of the main techniques. Now, he mentioned a slat, a spousal lifetime access trust. And this is the mainstay of our estate plan. Not only does it provide substantial asset protection, but basically what it does is it allows you to get growth in your net worth out of your estate once the money's into the slat, whether you gift it in there, whether you sell assets into it in exchange for a promissory note, further growth on those assets is not in your state. So estate taxes aren't due on that. And over the course of a number of years, we're hoping to completely eliminate any estate taxes that we may owe. And so far, I think the plan's going to work. It's not quite there yet. If we died today, we would be paying some estate taxes. But I think over time, it is going to work. We're basically spending down our estate, using it for taxes, using it for charitable giving, while the value in the slat increases. And so that's what he's looking into. Probably would have been better if he'd done that 20 years ago. Maybe he didn't realize he was going to have an estate tax problem then. Be aware, by the way, that starting in 2026, that federal estate tax exemption amount is going to be cut in half. It is indexed to inflation. But if Congress doesn't make any changes in the laws between now and the start of 2026, it's going to be about $14 million total between the two spouses, rather than $14 million each.

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.