Ep 17 - Transfer and Death Taxes

Welcome to the Good Steward Law and Wealth Podcast, where host Ledly Jennings explores law and finance to help listeners become better stewards of their wealth. Each episode covers the latest trends and strategies in estate planning, elder law, investment, and wealth management. Tune in for the knowledge and tools for financial success and security.

Welcome back to the Good Steward Law and Wealth Podcast. I am your host, Ledly Jennings, uh, the attorney at Jennings Law, who will say sponsors this podcast because, you know, that's what I do. But what we're going to talk about today is the transfer tax. And this actually considers really about 3 different taxes. But a lot of people come to my office and say, I don't want to pay the government anything when I'm gone. I don't want to pay a death tax. And, you know, we have to dig into that. But it's a very important topic that may put a lot of people to sleep, but I kind of want to just hit on it quick. To where you know enough about the taxes that may occur as you transfer assets. So that's why we call it the transfer tax because it can be while you're living, but also when you pass away. And like I said, there's 3 different kinds, but really I'd say there's about 5 different kinds of taxes. You know, you have your income tax and you have your capital gains tax. Those are 2 taxes that are based on assets and income and that kind of thing. But really the transfer tax concerns gift tax, estate tax, and then here's a new one for you, the generation-skipping transfer tax. And that's a very fun one, but we'll start with gift tax. So you may or may not have known this. If you make a gift to somebody, it is taxable. In fact, that rate is about 40%. So if you make a gift to someone, you have to report it on your tax return. Now you probably thought, well, I've never done that. Most people have not because there is exemptions that you're allowed or exclusions So every person, the way the number sits this year, and this number is inflation adjusted each year, but in 2024, the number is $18,000. So I can gift someone else $18,000, up to $18,000, and not owe a gift tax. So that's probably why you've never heard of or thought about a gift tax because you're not gifting more than that. In fact, it's even better than that because you can do that to anyone. So I can gift $18,000 to my son, to my cousin, to my friend, to the church, you know, well, church is different, but any, any, anyone. I can give $18,000 to 100 different people. So it's a tax on the giver per person that they gift to. And something different is husband and wives. There's no gift tax between husband and wives. That's, that's not a thing. You know, you are married, you're expected to share everything. So you and your spouse can give $18,000 each to the same person. So really, that's $36,000 $26,000 that you can give to a person. So another way to think about it is, well, what if you want to give more? And why would you give— why would you want to make gifts to people, first off? Well, the first reason that I see that my clients want to make gifts to people is, number one, just out of the goodness of their heart. You know, they want to help their kids with a down payment on their house, their first house, so they want to gift it to them. Now, say husband and wife want to gift enough money to their son to have a down payment on his house. They can gift $36,000 each of them to their son, no gift tax. Now, what if, you know, that down payment is more than that? So he needs more. Well, they could actually say their son is married. They could gift them $72,000 to their son's family for that down payment. And how does that work? Well, you, you know, husband and wife can each gift $18,000 to the son, but they can also each gift $18,000 to the daughter-in-law, and they're married, so that could all go toward that one house down payment. So that's a way that you can gift $72,000, uh, to the same family without a gift tax consequence. And that's one reason you gift, and a lot of people do it just out of the goodness of their heart. But strategically, tax reasons you may do it is one, to reduce, um, your estate tax bill. So maybe you want to make gifts during your life so you don't owe estate tax when you pass away. So you want to gift it now to get it out of your name. Another reason is to get other things out of your name is for asset protection. Maybe that's Medicaid or nursing home protection. You know, to get qualified for Medicaid, as we've talked about in previous episodes, you have to essentially be broke if Medicaid's going to pay the bill for your long-term care. So maybe you want to gift assets today to get them out of your name. So So that's a strategic reason that you may gift things is to get it out of your name. But one question is, well, what if I gift more than the exemption, more than the $18,000? Do I owe that 40% tax? Not necessarily because that's a yearly tax. So it's per person per year. So you can gift $18,000 to your son every year, once a year, every year. But also if you gift more than that, it comes off your lifetime exemption. So if it's under that, doesn't come off your lifetime exemption. Over that, you can then file a gift tax return. I believe it's, uh, Form 709 that you file with the IRS, and it comes off your lifetime exemption. And what is your lifetime exemption? Well, this year, 2024, it's $13.6 million. So each person has a $13.6 million exemption. So if you gift over that $18,000 a year, then it starts whittling away that lifetime number, and you keep track of it with your Form 709 with the IRS. Now, for a lot of people, that's not an issue. You may never have $13.6 million in your name at all, you know, throughout your life. Maybe you do, maybe you don't, but for wealthy people, it is a big deal and where this planning really comes into play. But so that gift tax actually works with the estate tax, and I'll explain what the estate tax is now. So this is a big concern for clients. You don't want to pay a 40% estate tax when you pass away. And that's what most people come in to me wanting to do their estate plan. They say, I don't want to pay the government an excessive tax when I, just because I passed away, I want it to go to my kids. Well, the estate tax is a high rate, so we try to avoid that when we can, but you're also given an exemption for your estate tax. And it's that same number as your lifetime gift tax. And they act together. They, they act as one number. Number. So you have this year, if you died this year, you'd have a $13.6 million estate tax exemption. So as long as your estate's under that number, no estate tax owed. Now, if you get over that number, you owe estate tax. But the, the concept behind both of these taxes is the government's going to get their money one way or the other. They're going to get it upon death one way or the other. So that's why they say, well, if you make gifts during your life, okay, we're going to tax it on your estate when you die. If you don't make gifts during your life, then we'll tax it on your estate. So that's why it's the same number. So if you make a gift over your exemption, then it comes off your lifetime exemption, which comes off your estate tax exemption. So, um, that's kind of conceptually how you think about estate tax. And I really wouldn't worry about estate tax for most people because not only do you have that $13.6 million exemption, but if you're married, the exemption is portable. So you and your wife have both have the $13.6 million, which is $27.3 million, I believe is what that adds up to. So as long as y'all's combined net worth is under $27 million, you're not going to owe an estate tax. And what portable means is if one spouse passes away, the other spouse can elect portability and get the deceased spouse exemption. So, you know, wife passes away, husband gets his exemption and her exemption to use. Um, so not many people have to worry about estate tax right now, but that's where the real value with an estate planner comes in because in our lifetime, it's been lower than $1 million,000,000, and a lot of people have a net worth over, you know, that amount, over $600,000 at times to $1 million,000,000. A lot of people have a net worth over that amount. So how you plan for that is there's a few different ways. If you're very wealthy, then clients want to use that gift tax exemption while it's so high and gift their entire $13 million while they have it. Out of their name into a, either just outright to their kids or better yet into a special irrevocable trust, um, that gets it out of their name, whether it's a trust in their kids' names or, um, you will hear a lot of people talk about SLATs, which are spousal lifetime access trusts, uh, just various kind of trusts that protect against estate tax. But you only have to worry about it very high net worth. Now, with a lot of my clients who are on that edge that we don't really know if they don't need it now, but they may need it when they pass away, we do do planning within their revocable trust to avoid the estate tax. And how that works is we set up, say, a joint revocable trust. When one spouse passes away, we look at the value of the estate and divide it. So say we take— they're worth, you know, $20 million. Then we take that $13.6 million and put it in its separate non-marital trust where the client uses the exemption their spouse's exemption, they can access that whole $13 million. It's theirs. But we don't want to pay estate tax on the other $6 million that's sitting out or $7 million that's sitting out there. So we put that other $7 million in an exempt trust that meets certain qualifications that doesn't mean it doesn't owe the estate tax. So there's a different power of appointment that you can put in a trust to make it in, in your estate or out of your estate. So when you're thinking about planning for your spouse or the next generation. And I won't go into much detail on this, but we talk about powers of appointment is how you consider leaving assets in your estate or out of your estate. If you limit the power of appointment, meaning you limit what they can do with it, then it's technically not theirs and it's not in their estate. They call it a limited power of appointment. And that's how I encourage a lot of my clients to leave things to their kids is you limit the power of appointment to certain things. Like you say, you can leave it to your descendants, or even your spouse, but no one else, then that is not included in your estate. So not only are you protecting your kids from the estate tax, but you're giving them asset protection as well. So it's a great way to pass something on because maybe in the future, the exemption is very low, or your kids are just really well off and they're going to have an estate tax problem. So you don't want what you leave them to be taxed at 40% or cause them to have an estate tax problem. So you leave it to them in a trust. That meets certain qualifications. And we won't go into the differences of general powers of appointment or limited power of appointment, but just know if you meet with an estate planning attorney, it's something that can easily be planned for. Um, so that is the gift tax and the estate tax, the two main things everyone is worried about. So takeaway from gift tax is make gifts if you want to, up to $18,000 per person with no consequence, whatever it may be. So if you're in that situation where you're thinking about helping your kids with the down payment commitment on a house, come see me. We can devise a plan to where the rates are set up and certain things are gifts to where you don't owe that gift tax. Now I will hit on one other kind of tax that we talked about is the Generation Skipping Transfer Tax. So this is not as common, but it was put into place is basically to ensure that the taxes are paid. Um, so years ago before the law was in place, people would leave things to grandkids or great-grandkids to avoid avoid the estate tax. So basically what the government and IRS did is put in a law that says you can't skip your kids just to avoid tax. So you will pay a generation-skipping tax if you skip a kid above a certain exemption. Now that same exemption applies, it's the same number as the estate and gift tax. So you have a $13.6 million exemption that you can give to a skip person, and by that we mean grandkids. So say you skip your kids, give straight to your grandkids, you can give them up to $13.6 million and not owe that generation-skipping transfer tax. Now the difference in this, it is the same number and it's adjusted the same each year, but it's calculated differently. So the estate and gift tax are calculated together. The generation-skipping tax, they call it GST. Is calculated separate. So you only have one of those and it is not portable. So you can't transfer it between spouses. So you have $13.6 million, no more, no less. Um, all that to say, it is a tax that ensures, like I said, one way or the other, eventually the government will get their tax upon your death. Um, it just may take a little bit. So if you're gifting over that amount to your grandkids, we need to talk. There's ways to leave it exempt and exempt shares in the future that can protect against the generation-skipping tax. But just know those numbers need to be monitored if you're gifting in amounts where you're approaching, you know, $13, $14 million. Really, I even consider now if you're approaching $7 million, because it could get cut in half at the end of 2025. So if you're approaching that number and you're making gifts, then we need to start monitoring each of these taxes. And that is what I wanted to hit on today is just the, um, the 3 kinds of transfer taxes. All that to say, not many people have to worry about it. But if you do have to worry about it, we can plan for it. And thank you for listening to the Good Steward Law and Wealth Podcast, where we consider everything a gift, and it is our job as good stewards to do the best with what we've been given.

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