Long Term Care Q & A

ten WIVA. Before we get rolling though on this week's conversation, another great feature of the show is the Closs Quiz Question of the week, your chance to win a fantastic prize this week, no exception, our friends from Class Financial provide a twenty five dollars gift card to Cheesecake Factory and we'll let you know how you can win that before the end of the program. A little tip they'll listen closer to the show because most of the time

the question and answer come up during the show. And before we get rolling on this week's topic and conversation, let's actually take a look back at last week's program at the Class Quiz question, the week question and answer from last week's show as well.

or money's worth is not received in return. The general rule is that any gift is a taxable gift. Now I'll just pause right there. A lot of times that final sentence, the general rule is that any gift is a taxable gift freaks people out because they.

many people as you want with no federal gift tax consequences. Now, if you split gifts with your spouse, that total is thirty eight thousand dollars per person. So think of this in terms of children, right, Hey, I'm going to give money to my children, and I don't want to pay more taxes and I don't want them to pay any taxes on this cash that I have sitting in my

savings account. How do I give it to them? Well, you could just use the gift tax exclusion amount of nineteen thousand dollars per person, or if you're you know, if you're married, you could do nineteen times nineteen thirty eight thousand to each child. I mean, it's a lot of money, as you can imagine. And here's the key. If you stay under that gift tax limited amount for each gift to each of those children, you know, you could give away a lot of money without any tax repercussions.

And the ones those gifts are made, that money is removed from your taxable estate. And here's the other kind of cool thing. In twenty twenty five, the max you can give without any federal estate tax is thirteen million, nine hundred and ninety thousand dollars to as many individual

or I'm sorry to you know, beneficiaries. Let's say this is during or after life or times two for a married couple, So twenty seven million, nine hundred and eighty dollars, and again you would pay no federal estate tax or gift tax. Now here's the key that nineteen thousand dollars I was talking about earlier, that those gifts do not apply towards reducing what is called your lifetime exemption amount. So lifetime exemption is that call it. I'm just going

to round up, call it fourteen million dollars. So during or after life you can give up to fourteen million dollars with no gift tax or federal estate tax. However, those nineteen thousand dollars gifts all throughout your life don't count. It would only be the amounts that go over that. So imagine that I want to instead of giving nineteen thousand dollars to say one of my children, I want

to give them one hundred thousand dollars. Well, the way that would work is I would take one hundred thousand dollars minus nineteen thousand that doesn't count towards the towards the lifetime exemption amount. I would then take that number, so call it, what is that eighty one thousand dollars, and I would reduce that from my fourteen million dollars that I can give during my life, actually during or

after my life. So you see my point. That final sentence that I read, which is the general rules that any gift is a taxable gift, you kind of pause and you go, really because it sounds to me like there's a lot of ways for me to give money away without having to worry much about it. Let me add one other factor here. That nineteen thousand dollars for every individual from you to any individual you want to

per year without reducing your lifetime exemption amount. That is a really critical number to remember because if you stay under that number, you don't have to fill out what's called a Form seven oh nine. Think of that Form seven oh nine. It's called a gift tax return as the certificate. Right, So let's say I can give away

fourteen million dollars during or after life. Well, if I go over that nineteen thousand, I have to start filling out that certificate aka Form seven oh nine that keeps track of how much I'm reducing my lifetime exemption amount. Now final thought here on this kind of little section is that at the end of twenty twenty five, the federal estate and gift tax exemption amount is scheduled to sunset.

Assuming Congress and the President take no action, this gift tax exemption could decrease to approximately seven million dollars per person. So it's about fourteen million dollars it could decrease to seven Now, I'll be frank with you, we have no idea whether or not this will change. There's people guessing that it will change under on the Trump administration, but we we really still do not know. So just be aware.

Lifetime amount you can give away is fourteen million. Now it could be down to seven million as early as twenty twenty six.

the stock, but also the basis of the stock. Aka, you didn't pay tax, they're going to have to pay tax. So if you give them that stock and then they go and sell it, they're gonna pay the capital gains tax on it. But assuming you're giving cash of some sort, so money you've already paid tax on. So not retirement accounts, right, because you can't gift money out of a retirement account that's pre tax. But let's say this is money in a checking savings stock account that you've already paid tax on.

Generally speaking, you as the giver will pay no tax and the recipient will pay no tax. Now here's a key, one of the biggest questions. We get this is great, well, then I will just I'll give nineteen thousand to each of my children and then I'll deduct that on my taxes. No no, no, no, no, no no no. We didn't say you'd get a deduction. They are not charities. So that's where the kind of the line in the sand comes in here. The good news is you don't have to pay any tax. They don't pay any tax upon

rescups even get assuming it's cash. But it does not. It's not a gift to a charity, and therefore you cannot deduct that gift to your children. I mean, that would be great, and then if we could just give money away to our children and take it off our own income for the year, But that is not the way that it works. And so I already mentioned as long as you are aware of that nineteen thousand dollars limit and you try to avoid going over it to any one individual in a year, then you don't have

to fill out that Form seven o nine. And the beauty there is then you preserve your lifetime exemption amount. Now why would you want to do that, Well, because when you die, everything you own, including any life insurance proceeds goes towards that lifetime exemption amount. So there is kind of this incentive to try to preserve that if you don't need to use it. Now, I'll admit to you, for ultra wealthy family families, they're actually not trying to

preserve that. They're actually trying to do very large gifts to use up their lifetime exemption amount and then get large portions of their estate out to an irrevocable trust. But more to come on that later in our show. Today.

to be the donor. But let's I want to dig in here a little bit more on some of the exceptions and why we say, you know, generally there's not going to be any gift techs do on this. So the one that the first one and the one we talk about most often with our clients and CJ is just talking about here, is the any gifts that don't

exceed that nineteen thousand dollars per individual per year. Those are that's your freebie, right, That's not even going to be considered when it comes to your your lifetime credit or anything. So that nineteen thousand number is generally what people are focusing on when they're when they're giving money to those non charitable organizations, regardless of how the parents feel about the kids. Another exclusion is going to be a tuition or any medical expenses that you pay for

someone else. So I'm going to discuss more about this in a moment. In terms of the rules around that. But the you know, tuition support, medical expenses that you pay off, those are not subject. Those are those are not subject to the gift texts.

If you're giving to children, for example, they probably have a greater need for that financial support when they're in their thirty or their forties compared to when most folks pass away. So let's think about this. If people live into their seventies or maybe their eighties, their children are likely closing in on retirement when they pass away, and they've already had to do, you know, a lot of the what i'll call it financial hard work at by

that point. So are they going to be grateful for the gift, obviously yes, But will it be as impactful as it would have been when they were younger. Probably not. And you know, so, I think those are just a couple of things we think about when we're thinking about gifting, specifically to family. And regardless of who you decide to give to or when you decide to start gifting, it's

really important to create a gifting strategy. So, like I said, once you have enough resources to take care of your needs during your lifetime, giving assets to your children or to charities, which we haven't talked too much about yet, it could be helpful from the state planning perspective, and it can have a really really large impact on the quality of life of your errors your favorite causes, and for yourself, a strategy for gifting can help you minimize

your future state taxes and really really want to drive home the fact that if you're giving to family, giving to them earlier on generally is a lot more impactful than waiting until later. But earlier we were talking about the gift tax exclusion for education and medical expenses, and I mentioned that we were going to dig into that a little bit more because it's a little bit more

complicated than the nineteen thousand dollars rule. So one of the exceptions to the nineteen thousand dollars annual gifting limit is that you can give an limited amount to your children for tuition or medical expenses. So education and retraining that can be an excellent way to help your kids be more self sufficient, and you know it has the potential to make them more employable or maybe even help

them earn more in their current job. But two really important things to understand around the education and medical expense exception was that the money it must be paid directly to the educational institution or the medical provider. It cannot go to the kids first. At that point you're going to be subject to that nineteen thousand dollars rule again. And then helping to pay off student loans would not count as an exception unless you were a co signer

on the loan. That's despite the fact that it originally came from tuition obviously, but you must have been a co signer on that loan in order to not have it count as a taxable gift. And the last thing I want to talk about in this section here is another great way to benefit your errors is by giving them money that they can then contribute to their retire accounts.

can give money to your children. You can't be making contributions on their healf without their awareness. Now give a minor child. That's a little bit different. There's these things called custodial retirement accounts or custodial roth I raise. I was just helping a client set up one yesterday on Fidelity.

But generally speaking, what Eric is saying here is like you can give it with the expectation of a going into a retirement account, which is again it can be a huge blessing to your children when they have cash to live off of, so that those earnings that they

receive from their employer can go into a retirement account. Well, that being said, yes, so your question about trust and what I alluded to earlier, so a state planning just it's not just about preparing for the future, it's also about taking strategic steps during your lifetime to benefit your loved ones. Using specialized trust can help you pass on wealth efficiently, reduce taxes, and preserve the value of your estate.

So here's a breakdown of three key points as it relates to trust and kind of gifting and moving money to the next generation while being tax efficient. Item number one would be an irrevocable trust. This can shift growth to the next generation. So here would be a concept. Let's say that I own I've been blessed throughout life,

I built maybe a small business. That small business has grown, I don't know, I own a good portion of it, and suddenly I'm left in a position where I go, goodness, gracious, my stock when I die is gonna put me over some of these limitations on lifetime exemption amounts. And now again these are large amounts, right, but often people say, what the heck do I do? Because I've got these lifetime exemption amounts, I can only gift so much to my kids without using up my lifetime exemption. So how

does this work? C how could I and not to mention I've still got the business. This this thing is still growing. It could be fifty eighty one hundred million dollars by the time I die, and then my family just has to get blown up with taxes. Well, no one thing you can do if you're operating agreement allows for it, which you do have to start getting pretty specific here on working with lawyers and accountants. But is you can actually gift some of that stock into an

irrevocable trust. Once it goes into the vocabal trust, two things happen. You are using up some of your lifetime exemption amount that you know, fourteen million dollars we talked about to put money into that trust. But let's say I put ten million dollars hypothetically of that highly appreciated you know stock into that irrevocable trust. Well, all the future appreciation on that is now outside of the estate. It can still benefit my children, so it can still

say the beneficiaries of this stock are my children. But the beauty is I have used some of my lifetime exemption. I've gotten that money into a trust, and then all the future appreciation of that stock is outside of the estate and it can't impact my lifetime exemption amount. Another concept might be, so stick with that idea of the highly appreciated stock. Well, what if I my corporate governance doesn't allow for that, or I just don't want to put that much money into an irrevocable trust, or I

should say that much stock. What are other options? Well, another option would be doing what's called an irrevocable life insurance trust known as an islet. Because we know our industry loves our acronyms, so islets. It's this idea of saying, Hey, I'm going to keep all that stock inside of my estate, but I don't want to my kids get blown up

on taxes when I die. What do I do? Well, you could buy a life insurance policy inside of an irrevocable life insurance trust if you do it all appropriately, and by the way, you really need to work with a lawyer, accountant advisor on this is not something to try to do on your own and my humble opinion, but if you do it all appropriately, that large life insurance policy when you die can come swooping into the estate without counting towards your federal estate tax exemption amount.

So it comes swoop in And why does it come swooping in to pay all the taxes, right, so it pays the taxes without increasing your taxes. So ear Vocal Life Insurance trust can be a great way to pay final expenses, pay pay any taxes that would be due upon the estate without kind of forcing the beneficiaries to have to sell a bunch of your stock or to have to, you know, sell a bunch of land. Think of a farmer with a lot of land. So these

can this can be another great estate planning tool. And then finally there's these concepts of grantor retained annuity trust known as grats. And I will just warn everybody, as much as I love talking about this, just a word to the wise, none of these strategies we're talking about should be something you jump on Google and say, I'm

gonna I'm gonna do this tomorrow. Please don't. These are advanced financial planning strategies that often require you know, expert legal advice, good accounting advice, good financial advice, advisor feedback. So with that being said, though, the concept of a grant or retained annuity trust is that they're ideal for gifting assets that are likely to appreciate significantly in value.

So a lot like the irrevocal trust. So this could be again privately health shares of a company, you know, hedge funds, private equity stocks, real estate interests, and closely held business and you transfer assets to the grat and retain the rights to receive an annuity aka income for a set period. When the trust term ends, any remaining assets pass to your beneficiaries free of federal gift tax.

This allows you to lock in today's asset value while giving your loved ones the benefit of future growth, while also getting some income along the way. So think of that original irrevocable trust concept I talked about at the beginning, that once it's out, it's out, you can't get it back.

Whereas this granted retained annuity trust, you still can't get the money back, but you can get an income stream off of it, which can be nice because lest you put the money in you use part of your lifetime exemption. That money goes to your children a state tax free later on. But along the way you're able to get an income stream to you know, offset any any income

needs you have in retirement. So very advanced estate planning techniques, this is actually just the tip of the Iceberg of various estate planning advanced estate planning techniques, but these are a few that we see commonly, commonly used.

three seven. Coming up with later this segment will do our class quiz quesch Leak, So you want to hold on to that number for that as well. Talking this week about charitable giving and Eric, what about incorporating charitable giving into our estate planning.

we'll say advantageous options as well. So whether you're looking to give back to your community or just support a cause that you really love, there were some really impactful ways to do that. We're going to look at four of them here briefly. The first one is the simplest. Okay, so it's just an outright charitable gift. This is, you know, sending a check to the Salvation Army or whichever organization

is important to you. You're giving cash directly to the charity, and provided that you are able to itemize your taxes, you can often get an income tax deduction for this, and you know, in the long run it can also reduce your estate taxes, and you know, really simple win win for the charity and for the individual. But the second one here is is actually when we're seeing a lot more since since the Tax Cuts and Jobs Act raised these standard deductions so high and made it less

likely that folks will itemize their taxes. And that's a donor advised fund or a daft CJ says, we love the acronyms, but think of this as like your personal charitable giving account. So when you contribute dollars to this fund that you set up at you know, a brokerage house or wherever it is, you get an immediate tax benefit.

the money out of the out of the account. Now, it's important to remember, even though you don't have to give all the dollars to the charitable organizations immediately, your contribution is irrevocable.

And the really really important part about this is it allows you to what we call bunch your gifts in one year, so that you can get enough to deduct to use the itemized deductions and actually be able to deduct the contributions, and then you know, in future years you can give the dollars away having gotten that large tax benefit right up front. The last two that I want to talk about here are actually forms of irrevocable trusts, which CJ was just just talking about in our last

section here. The first one is a charitable lead trust. So this arrangement allows a charity to benefit first from the dollars and basically any income generated by the assets in the trust goes to a charity for a set period of time. After that, the remaining assets are passed to your beneficiaries, all while potentially lowering your estate tax burden. So it's a great way to support an organization that's important to you, but also leave a legacy for your heirs.

And then the last one here is a charitable remainder trust. So this is the reverse of the charitable lead trust. Okay, so in this case, your beneficiaries are receiving income from the trust for a set period of time time and then any assets left over go to the charity at the end of the term. So you'll receive a charitable deduction upfront, you'll reduce your state taxes, and this approach allows you to support a cause while ensuring that your loved ones are still cared for for that set period

of time. Now, I know all of these strategies seem like I don't know. People may to hear them and say, gosh, that just seems so far away from me. I'm not going to think about that right now. But thinking about these strategies earlier, it gives you more control and flexibility

in managing your legacy. So whether you know you're trying to protect your state, maximize your growth, ensure liquidity, all of these are going to be more impactful if you actually think about them strategically and plan for them ahead of time, and make sure you speak to a professional to see how you can implement these two best benefit you a lot of.

the telephone number. Now it's time for the Class Quiz Question the Week.

federal gift tax consequences? Is it fifteen thousand dollars or nineteen thousand dollars? Telephone number six oh eight four four two five six three seven. First call correct answer, we'll win that twenty five dollars gift card too the cheesecake factory. Don't forget as well, that's Class Financials Office right here in Madison again the number six O eight four four two five six three seven CJ Eric. Always great chatting with both of you.