Estate Planning and Taxes | Episode 10

Confluence Financial Partners — Estate Planning and Taxes | Episode #10

Greg: Only 15% of Americans earning more than $150,000 have an up-to-date will. Imagine that.

(Google Consumer Surveys, June 2016)

This is Greg Weimer, partner of Confluence Financial Partners. So, we are privileged to have two guests with us today. Frank Fisher is a Tax Managing Partner at Deloitte, and Tracy Zihmer, who has her law firm in South Hills — Zihmer Law Firm. And they do elder care and estate planning.

So, our goal today is to make this extremely informative. And when people are saying like, ‘Uh-oh, taxes, are we going to it’s’ — so, we’re trying to make it interesting also, right? Because if people hear like, ‘Oh my gosh, we got like estate planning and taxes. Can this be interesting at all?’ And I will tell you; it will be interesting if you’re looking for ways to make sure, during your life, you are effective with taxes so you can maximize your life. And then legacy is important to a lot of people, making sure that you actually have the legacy for your family that you want.

So, taxes have a huge impact on your life. They have a huge impact on your legacy. And as we record this, there’s an election coming up, and elections have a huge impact on taxes. So, these two brilliant individuals are going to give us some information to help us understand the facts, because a lot of people, in any election, a lot of people are really focused on the emotion behind the candidates. And I know there’s a lot of emotion, and that’s what makes America great, not even judging that. By the way, guys, we’re going to try to get through this and not be political.

Right. So, we’re going to try to go with just the facts. Just the facts, ma’am, right. Who said that? Just the facts, just the facts, ma’am, was that a movie or something? I don’t know.

So, I’m saying we’re just going to focus on the facts to help people make an educated decision and, along the way, find some things that can benefit them in their lives and in their legacies.

But before we do that, I’d like both of you to just give a quick overview, like, what do you do on a daily basis? Who do you work with? And a little bit of your background, Tracy has a practice in the South Hills. And I think I knew you as an attorney before I knew you as a neighbor. So, she’s actually also a neighbor. So, Tracy, why don’t you tell us a little bit about your practice and who you tend to work with.

Tracy: Absolutely. And thanks, Greg, so much for having me. So, I have an estate and trust practice in the South Hills, and a lot of people say, what does that mean? And that’s preparing wills for people, trust financial powers of attorney, healthcare directives, helping people get qualified for long-term care if they need it, and helping loved ones through that process when a family member passes away. So, I help clients of all different backgrounds, and that’s, I think, one of the biggest things I like about what I do; I help people that are just getting started and have young children. And they want to really make sure that if something were to happen to them, catastrophically, that their kids go to the right person.

And then a big bulk of my business is helping families, pre-retirees, and 
retirees that are really looking to protect the wealth that they’ve accumulated and pass it on to that next generation in a tax-efficient manner. And also protect it, if need be.

Greg: Yeah. And it’s important. So, we actually work with 2,100 families at Confluence across the nation. And it’s really important to make sure that they have their will set up. Like I saw a statistic, 71% of Americans do not have an up-to-date will, and wealthy Americans are no better prepared.

(SOURCE: Google Consumer Surveys, June 2016)

So, right. And so, do you see that? Are you usually changing wills or seeing people who come in, they don’t have a will?

Tracy: I would say a lot of times people might come in, they had a will that they did 25 years ago when their kids were young, they were concerned about guardians at that point. Well, everything’s different 25 years later.

Greg: It was different a year ago. Right? I mean, it’s literally changed in the last year. So, getting that done, getting that updated, you know, we see the other side of it. So, your work is very much appreciated, and you know, that’s why we enjoy working with you. We see the other side of it. We see families come in here that did not do a proper job. And we get to them when, God forbid, something happens to a loved one. They come in; their stuff tends not to be organized. And I can tell you; sometimes the heirs do not look at the estate as a blessing. It’s like a curse. It’s all

— this stressful thing. What would mom want me to do? What would dad want me to do? How would they want it to be distributed? What do they expect of me?

And the way to get around that is through trust and wills. So, then your children end up having a better chance of liking each other and not fighting, which I’m sure you see, correct?

Tracy: All the time.

Greg: All the time. And I think the numbers are like 70% of families squander the wealth in the second generation. 90% of them squander the wealth in the third generation, I think, is that’s. I think that’s how it goes.

So, what’s the advantage, I think a will, people get, but if you could, just give like a quick benefit of a will, what’s the benefit of a will, what’s the benefit of a trust?

Tracy: The will is a document where you provide your wishes on paper, on where you want your assets to go if something happens to you, and then you name someone to be in charge. And sometimes that’s the more important part because if you have children, a lot of times your assets are split equally between your children, but who’s going to be in charge of that? Who’s going to be the person that’s responsible for getting all of these assets marshaled into an account, paying all the taxes, doing all the legal filings, and making sure that everything’s distributed properly?

So, you need to be able to pick that person. And if you don’t have a will, then Pennsylvania law writes one for you. And a very common misconception is that all of your assets go to your spouse. And if they’re not jointly titled, if they’re not in there solely in your name, that doesn’t happen in Pennsylvania if you have children. So, it’s very important to put that on paper what you want. And the other big one is tangible property. So, if you have, you know, jewelry or heirlooms, that’s what, that’s what the beneficiaries fight over. It’s easy to split the cash. It’s not easy to split grandma’s engagement ring.

Greg: Right. Yeah. I also think a very important choice is the attorney you use. And the good news is there’s a lot of great ones out there. If I could give you a compliment, I think what makes you unique is not only do you know the law, but you’re empathetic and caring at the same time, and you can actually listen to the family and see what their wishes are.

So, you put it on paper; then we make sure you know that it actually happens when everything’s titled correctly, et cetera.

So, Frank — Deloitte, 20 years, tell us who you typically work with and what your area of expertise is.

Frank: Sure. So first, I want to say thank you for having me today. I did some due diligence. I listened to the previous podcast, and very energetic, very exciting. I don’t know if we can do that with taxes.

Greg: Well, if you make them go down, they could. Right?

Frank: But yeah. As you said, I have with Deloitte for 20 years, always in tax. You know, here in Pittsburgh, you have to be versatile and do it all. You know, we serve big public companies. We serve small companies, multinational companies; we serve individuals, high-net-worth individuals, maybe some retired individuals, you know, here in Pittsburgh, we got to do it all. And that’s what I like. I like being, you know, diverse as opposed to very focused and narrow.

Greg: Yeah. So, here’s how, here’s how diverse Frank is. You ever watch him watch a sporting event, and he’s overly energetic? One of the teams is his clients. I had that experience recently. I’m like, okay, this guy’s just a little too fired up about this game. So, it means one of the teams happens to be his clients, oddly enough. So, you’ll focus on the tax side of it and on the income tax side of it, and Tracy will focus on the estate tax side of it.

So, let’s go to the estate tax first, and let’s go to the election. Now we’re going to do this middle of the road. But I think it’s important that people understand the facts. And then, by the way, higher taxes on the wealthy. And I, you know, some people may view that as good — they should pay more. Some people may view it as bad — it will slow growth. However you believe, that’s your thought. We just want to make sure that you understand the ramifications. And actually, the different proposals of what it could mean. So, one of the big ones is on estate taxes and the exclusion.

So, Tracy, could you do us a favor and take the listeners through where we currently are, and then the Biden proposal and what Trump would do on estate taxes on the exclusion?

Tracy: Absolutely. And just to take a step back, because one question that I always get with estate taxes is there’s confusion on what that actually is.

Greg: Thank you.

Tracy: Usually, states also have a state estate tax. So, there are two taxes. We’re usually talking about the federal and the state, and the state is very specific to where you live. So, for example, Pennsylvania taxes you through an inheritance tax on the first dollar that you have in your estate. In a lot of states, you have to have so much money, like maybe $2 million, before you would pay any state inheritance tax. So then federal—

Greg: By the way, here’s —so I was with someone last night. So, here’s the game. And I’m not saying that they should do this. I’m not recommending it. We do not give tax advice. But so you said, well, then that would be more income for Pennsylvania, but people are mobile.

So, I was talking to someone last night; they will go to Florida, right? You guys see this, they live in Florida for six months and one day — and that qualifies them to absolutely remove themselves from the Pennsylvania estate tax. Is that true?

Tracy: Yes.

Greg: It’s unbelievable. So, actually by having that tax from dollar one, it could cost Pennsylvania money and, you know who’s able to do that? Wealthy people. So, wealthy people are able to move and have a second home where they can spend six months. So, you know, once again, the wealthy benefit from that, not necessarily the residents of Pennsylvania.

Tracy: Right. And the Pennsylvania inheritance tax rates are not very high. So, if it passes to a child, it’s only four and a half percent now; I say only because some people, they don’t want to pay four and a half percent either, but it’s relatively low compared to the federal state tax, which could be 40%. So very, very different.

Greg: Right. But someone has $10 million. That’s a lot of money that the state could use. Right?

Tracy: Yeah.

Greg: It’s a lot of money, so. Okay. So, go ahead. So, then the exclusion, the national taxes, and the exclusion rates.

Tracy: So federal estate tax is then at the federal level, obviously, and with federal estate tax, there is an exemption that you get. So that’s the amount that if you have money under that, you don’t pay any tax. Once you get over that exemption, then that’s when you start paying.

Greg: So right now, people under $22 million — don’t worry about it. Right?

Tracy: Right.

Greg: Done. And that’s most people, I mean, it’s like 20, that’s a lot of money. That’s most people. So, I’m from Johnstown, that’s everybody. So yeah. It’s most people, $22 million. That’s most people.

So, take me, take us through, like under Trump, what changes, anything?

Tracy: No.

Greg: Until 2025, right?

Tracy: Yeah.

Greg: So, under Trump, which he won’t be a president then,I guess, even if he gets reelected. So, under 20, that’s the law until 2025, under Trump, right now, 22 million.

What is Biden’s proposal?

Tracy: 3.5 million.

Greg: 3.5 million. So, 7 million per couple or 3.5. Is it 3.5 million—

Tracy: Per person.

Greg: 7 million per couple.

Tracy: Yes.

Greg: So, it goes from 22 million to 7 million. And anything you over have over 7 million is taxed at what?

Tracy: Roughly around 40%

Greg: Around 40 plus state. Okay. Well, state goes back to dollar one. So yeah. So that’s the difference?

Tracy: And a term that’s thrown around a lot is what’s called a “unified credit.” So that means you get that dollar amount, either during your lifetime or at death. So, you can gift money away. So, let’s say you gift away $3 million during your lifetime. That’s okay. But you don’t get another 3.5 at your death. So that money gets counted against you.

Greg: Comes off your exclusion.

Tracy: Yes.

Greg: Yeah. Okay. So, like, so in 2025, it goes back to 11 million, it sunsets, right? What if someone did an irrevocable trust and gave the money away, and took money away from their 22 million?

Tracy: Now?

Greg: Yes.

Tracy: As of right now, they’re saying there’s no clawback.

Greg: No, clawback. Yeah. That’s what I thought. So, just an example, that’s a huge window of opportunity to do some planning, but now, but if Biden would be elected, he has said that he’ll make it retroactive back to January 1st. So, some planning would have to happen relatively quick. And the $7 million. What does that count?

Tracy: You mean asset wise? All of it.

Greg: Including insurance, unless it’s titled in a—

Tracy: In an irrevocable trust. Yes.

Greg: In an ILIT (irrevocable life insurance trust).

Tracy: That’s the difference with Pennsylvania because Pennsylvania, life insurance is not counted for Pennsylvania.

Greg: Okay. But it is for federal.

Greg: So that’s big. So, Pennsylvania, it’s not counted. It is for federal unless it’s in an ILIT

Tracy: Correct.

Greg: You have the ILIT; own it. It’s amazing. We just have, like, we have people come through, and they have, they have a substantial net worth, when you add everything in, houses, everything, and their insurance is owned by them personally instead of the ILIT! And by investing, putting it in the ILIT, it’s out of your estate and—

You know, I just, I saw a million-dollar cash value, $2 million death benefit, this person’s over, so they’re over the 40% tax. There’s nobody; there’s not any insurance in that. Like, you’re going to get basically back your cash value. And, but it just was owned improperly.

Tracy: Right. The thing to keep in mind too that I always hear questions on is about gift limits for the year. People think that you can only gift $15,000 a year.

Greg: Right.

Tracy: And you can’t gift anything more. You can gift $15,000 without it going against your unified credit.

So, you can gift, you know, $15,000 to a child, and you don’t have to file anything. There’s no reporting. If you want to gift more, if you want to give a hundred thousand dollars, then you file a gift tax return. And it just reduces that exemption amount that you get.

Greg: And we see gifting a lot with 529s. So, a family may say like, ‘Hey, we’re going to fund, or in some cases over-fund 529s. So, then we can, you know, educate, help educate generations through, you know, continuing to give the money down. And in that case, you can frontload it for five years. So, you can accelerate the gifting for children’s education.

Frank, why don’t you take us through some of the differences between the current tax policy proposed by Trump going forward and proposed by vice president Biden and give us an idea of some of the changes. So, let’s start with income tax. What would it be?

Frank: I’ll tell you this time of year is our favorite time of year when there’s a presidential election—

Greg: You’re a weird human being!

Frank: Because especially in tax, because this is where we get all the phone calls. And we’re, we’re the most popular guy at the dinner table now because you know, they got the debates coming up. And what happens in every debate? They talk about tax policy. And I, my favorite is I always sit there and listen for the loophole. That’s the buzz word everybody uses. They close the loophole. What loophole? Congress says you get to deduct it; I don’t know where the loophole is!

When it’s quite fun for us because clients always want to model it out, they want to understand, ‘Hey, if this proposal goes through, what does it mean for me right now? What’s it look like?’ So, for the next three months, yeah, it’s gonna be fun for us, but you know, obviously, we’ll see what happens with election day and answer your question, Greg, on the individual side, right? The top individual rate right now is 37%. So, under Vice President Biden’s proposal, he would bring it back up to 39.6%, which it used to be. Right. I always wonder where the 39.6 — why not 39, why not 40? Where did point six come from? So, if you can find that out for me?

Greg: That’s to pay for the accountants.

Frank: So, that would be the proposal. Now, President Trump wouldn’t make any changes, but he has said that he would have a special tax exemption for the middle class. He has some sort of proposal. We don’t know what it is.

Greg: Yeah. I mean, the new proposal hasn’t come out, so it’s like, to be determined. So, I did a little math think that you may bring that up. So, I did a little investigating, because people say, should you increase the taxes on the wealthy? So, the highest income earners today, the top 5% of income earners, pay 59% of the tax—the top 10% pay 70. The top 50% pays 96.9.

So, the top 50% of income earners pay all the tax, like 96 or 97%. I’m not saying they should, or they shouldn’t. So, then I thought, okay, so is that fair or not? So, I went and looked, and I said, okay, the top 10% pays 70% of the tax. So, I thought, okay, but what percent of the wealth does the top 10% — and they’re a little different. And because one’s based on wealth, one’s based on income, but and that’s a lot different, right. But the top 10% of people that have the wealth, they have 69% of the wealth.

So, the question becomes, should — so, so that’s, that’s actually somewhat, if you line those numbers up, which, you know, people that make more have the ability to pay more, but then what does that mean? Like at what point do you have things like, you know, loopholes, right? Or whatever they are — they set up trusts, or they move to Florida.
 
Because your effective tax rate, you’re not just going to say, like wealthy people aren’t going to say like, ‘Okay, here’s 3%. That’s a good idea. Let’s go.’ No, they do things, right? They’re a little more careful. Maybe they cut their expenses. Maybe they cut their consumption, whatever those things are.

What about on the corporate side? What’s the difference?

Frank: So, on the corporate side of the court, the current rate is 21%. All right. And so that came down from 35%, several years ago. So, under Vice President Biden, it would go up to 28%. So, it won’t go all the way back to 35%, but basically, he’s gonna, you know, half of it’s going to go back, back up so, that’s his current proposal, which, you know, could be, you know, big dollars to the corporations.

Greg: Costs. So, yeah. So again, what does that mean? Right. So, when it went down to 21, that makes it more competitive with the rest of the world. It has been a tailwind for the stock market because less taxes, more profit, profit is how you price the share of a stock or potential profit is how you price those shares of stock, and then that is the value of your 401k. 401k goes up or down.

Now, could they cut some costs, potentially, to keep their profit up? Because at the end of the day, there has been a lot of money spent by the government. It was unanimous in the Senate. So, it’s not like some people could say it was Republicans; it was the Democrats — unanimous. This was a pandemic that was extreme, that needed caffeine straight to the vein, trillions of dollars into the economy, get things moving again.

That’s what happened. Got things moving again. When do you take the money back out of the economy would be the question, right? So, the corporate taxes would go up and then—

Oh, let’s go back to estate taxes. Cause not only is it increasing the exclusion — or decreasing exclusion, potentially of 7 trillion or seven million — million, billion, trillion — 7 million —

Tracy: Remember that seven million is for a married couple.

Greg: For a married couple, but it also, there’s a proposal to stop — I think it’s important that people understand this — to stop the step-up in basis. Do you wanna explain that?

Tracy: Sure. So just take a step back and explain the basis in general.

Greg: This is why she’s good. Like, we like this, that’s it — like what’s basis? It’s like, more than one base — bases. No, I’m just kidding.

Tracy: Let’s say you have Apple stock, and you buy Apple stock for 50 bucks.

Frank: Or 500.

Tracy: So, what is Apple stock worth now? I don’t even know.

Greg: Call it a hundred.

Tracy: So, let’s say it’s a hundred dollars. Your basis is $50. So then when you go and sell that Apple stock and you sell it for a hundred dollars, you pay capital gains on the difference between your basis and what you sell it for. So, in our case, $50. And for any capital gains tax, I know it depends on the income tax rate, but—

Frank: Basically, 20% now, plus the net investment tax on top of it, 3.8%.

Greg: Plus, state.

Tracy: So how the current law is, if you pass away, your estate and your family, inheriting your assets, get what they call a “step-up” in tax basis. So instead of you inheriting the person who passed away basis at $50 for that Apple stock, your basis now becomes a hundred dollars. So then, if you immediately turn around and sell that stock after the loved one dies, you do not pay capital gains. You pay zero. President Trump plans, if he was elected, he plans to keep that step-up in basis. If Vice President Biden was elected, then he wants to repeal the step-up in basis.

Greg: How long has that been around? I mean, is that like, I don’t ever remember there not being a step- up in basis, is that right?

Frank: I’ve always seen it.

Greg: Yeah. And I knew that; I was just curious.

Frank: It’s double taxation, right? You’re taxing the estate once. And so why the beneficiary.

Tracy: Right. So, if that’s eliminated, though, then you would inherit that basis. And then when you go to sell the assets, and a lot of times you have to sell these assets in order to pay either the federal estate tax or the inheritance tax in the state that you live in, then you’re going to then pay capital gains. You’re going to pay your federal state tax, Pennsylvania inheritance tax, and capital gains on that as well. So, it could be a very big tax consequence on that.

Greg: Yeah. That’s the part that hasn’t received much attention, probably because I don’t think most people are aware of the basis, and you know, but that could be more meaningful for dollars than the exclusion going down. I mean, that actually could generate more revenue. Now, whether it’s right or wrong is for people to judge. But that actually could be a huge revenue, a lot of revenue to the government.

Tracy: People don’t realize too, is that it’s a lot of times it’s more beneficial to inherit right now, either under the current laws, it’s better, more beneficial to inherit property versus to gift it to your loved one. I mean, I get calls probably once a week. Should I put my child’s name on my house?

Greg: Yeah.

Tracy: Well, if you bought your house in 1940 for $20,000 and it’s in, you know, some up-and-coming neighborhood and it’s now worth three or four hundred thousand, that answer may be no, right? Because right now, you get that step-up in basis after you pass or your family does after the loved one passes.

Greg: Right. And by the way, when we talk about step-up in basis, that is true of mutual funds also. But when you use stock or property, it’s also like people like own a lot of mutual funds. It kinda accounts for that also. So, you have to, just have to think of that concept more, a little more globally.

So, then the capital gains tax, so the capital gains tax, currently is good, Frank?

Frank: So, it’s 20%, yes. With the additional 3.8% for the net investment.

Greg: If you make over like 400 and some thousand, right. Something like that. Yeah. It can go down to 15 or zero-based. Is that right? Yeah. Yeah. So, that’s what it is currently.

Frank: That’s right.

Greg: And by the way, that’s up. So, just so you know, that was, I remember when it’s 15%.

Frank: That’s right.

Greg: It wasn’t that long ago when it was 15% capital gains. Because again, it is, sort of, double taxation, right? So, you’ve already earned money. You’ve paid taxes on the earnings, and now it’s your money you’ve already paid taxes on. And then that grows, and you pay a capital gain.

What are the competing proposals out there by Trump versus Biden?

Frank: Yeah. So, Vice President Biden’s proposal would be, if your income’s over a million dollars, your capital gains will be taxed at ordinary rates. So, back up to your 37, 39.6% tax rate.

Greg: Okay. By the way, there are things you can do. So, like, strategies that we did when COVID hit in March and the market went down like really fast.

I don’t care how long you’ve been in the business. Like, I’ve been in the business since ’86. I still don’t like that. I mean, it’s like, it still makes you — it’s uneasy — because anytime it happens, it’s based around an event that we’ve never really seen before or some aspect of it feels different. Right.

So, but when the ma— but what you do is, back to the Apple stock, it goes from a hundred to 50 (now Apple didn’t), but it went from 100 to 50, you can sell it at 50, buy another investment that is extremely similar. Apple would be a bad example, easier to do it in mutual funds.

And then you capture that $50 loss, so any future gains you can offset. So, we were able, we have right now, losses for our investors, on the sidelines, so if there are any capital gains in the future, which there will be, we can offset them — and they don’t have to pay tax. So, if your advisor didn’t do that —a missed an opportunity. Now it’s a lot of work. We did it. Wow, wonder what we did. We were able to do it. We were able to do it in March, and we were able to do it last time, in December of ’18. So, there are strategies that you can do.

So, you said, capital gains go up over a million dollars. The capital gains tax goes up over a million dollars. How are dividends treated differently based on the two candidates?

Frank: So qualified dividends and capital gains are both taxed currently at 20%. So, both of them under President, Vice President Biden, if you make over a million dollars, both of them would go up to the ordinary income tax rate.

Greg: Okay. But it is for people making over a million. So again, people say, ‘Oh, that doesn’t really affect me.’ And but, you know, but it does affect some of our listeners. And it, you know, it’s just taxes tend to be a headwind to growth, right? So, taxes tend to be a headwind to growth, but that one doesn’t seem like it’s that extreme. As maybe, you know, 22 million to $7 million, that one could hit a lot of folks when you add all of your insurance and everything in. I’m interested in this; in fact, we’re going to have a future guest on and talking about, you know, they’re opening up a private school for underprivileged children. So, do either of you want to explain the Pennsylvania EITC?

Frank: So, the Pennsylvania EITC, the tax credit entices individuals to make a donation to a charitable organization and education organization. Let’s just use an example of, you know, $20,000. If you’re going to make an investment of $20,000 to this organization, it has to be a two-year commitment, first of all. Alright. And then once you do it, you will get a, I believe it’s an 80 or 90% Pennsylvania tax credit from your investment. So, you know, you know, if you’re making a $20,000 contribution, it could be an $18,000 Pennsylvania tax credit. And then your remaining $2,000 would be a charitable contribution for, you know, for your federal tax return.

Greg: So, think about that. Now you have to pay $20,000 in tax cause it’s so, because it’s like, it’s a credit, right? So, assuming you’re paying $20,000 and you’re willing to donate $20,000 two years in a row, you get a 90% credit. I think if it’s if you only do one year, what is it like 75 or something like that? It’s not the 90, but assuming you’re willing to say $20,000, I really care about this Catholic school or whatever. I really care about this place. I might as well take that money and donate it. And you have to do it through the credit, can’t do it directly to the school, and you get a 90% credit off your state. So, dollar for dollar. And then the 10% you write off your income tax. So, you could give away, you know, roughly $10,000 and it could cost you 700.

And if you really care about the school, that’s like a great thing. That’s one of those things. If you really want to maximize your life and say, I want to make an impact, that’s one way to make an impact. And the government, our state is really going to help you do it by filling the void in some educational facilities.

So, you know, let’s go back to tax, the current proposals between the two candidates because one that isn’t getting any attention — startled — is how it changes for the retirement savings.

So, one of the things that isn’t getting much attention, that I’m surprised that affects a lot of different people because so many people are contributing to retirement plans — that’s how they’re saving for their retirement. You know, it’s been a huge change, where you used to work for a corporation for 30 years, you’d have a defined benefit plan, meaning that they would define the benefit when you retire. And they’re really not near as popular as they used to be. Now it’s defined contribution plans. That’s how people are able to retire. They have their 401k. That’s why I keep mentioning the impact on 401ks. They have their 401ks; they have a defined contribution that they contribute X amount, and it’s their money, and they’re in control. And one of the proposals that I’m surprised isn’t getting more attention, maybe cause of the lack of clarity is, is the difference in proposals on retirement accounts.

Frank, would you just like to address what that is and what’s being proposed?

Frank: Sure. So, this is under Vice President Biden’s proposal. So, under President Trump, there are no changes under Vice President Biden, and I know no one could see me when I use air quotes on equalize. So, the proposal is, they will equalize the tax benefits associated with these defined contribution plans. I personally don’t know exactly what that means, and where does it go? I think it’s a, ‘Hey, maybe in the next couple of debates this might come out.’

Greg: That’d be interesting. Yeah. Cause I mean, I guess equalized means it’s going to be less beneficial for people of means to contribute, more beneficial for, you know, for people with less means to benefit and equalize. So, you know, more like a flat tax benefit versus graduated. Like it is on income, on the benefit. I think it’s more like a flat, you know, you’re able to do 22%, and I’ve heard it explained, but for me, it wasn’t clear, so I’m sure that’ll come out. So, everybody, listen for that. Listen for what the proposal’s going to be.

Frank: Cool.

Greg: Good. Tracy, I just want to, I want to go back to the 7 million because I just don’t want there to be any confusion when we say $7 million. That’s per couple, not per individual, and it’s only when you file something for portability. Do you wanna explain that?

Tracy: Right. So, a few years ago, well even back up even further, the traditional estate planning, years ago, was that you would have an A trust and a B trust because you could not add spouses’ credits together for federal estate tax. Well, they eliminated that with portability, which means two spouses, they can add their credits together. So, 3.5 and 3.5 under Biden or 11 and 11 under Trump. And then you get that as your federal state tax. Well, in order to preserve your spouse’s unused exemption, when they pass away, you have to file a federal estate tax return, and you elect what’s called portability. So, you follow return. It’s just for reporting purposes, that show the assets that they had in their estate. And then, most of the assets will get a marital deduction. So that then you get your entire spouse’s — they call it the DSUE. So, the decedent’s unused exemption. So, then that’s how you have to preserve that. So, the key is, if your spouse passes away, there’s a tax filing at that point.

Greg: Complicated. Right. But here’s the thing. If I were a listener, here’s what I would, all you need to think about is, “Okay, well, that one applies to me. I better call someone.” “That one applies to me, I better”— and as we’re listening to this, make a checklist. And by the way, we are happy to play point guard for anybody listening to this, to make sure — we will worry about all this for you. We will put the right professionals in the room or refer you to the right professionals. So, then we can, you know, we can just make it a little more pleasant for you and your family.

Frank, another tax that hits anybody that has a paycheck, right, is the social security tax. And there are some meaningful changes. They’re a little complicated. Could you talk about the potential changes under President Trump or potential President Biden?

Frank: Sure. So, President Trump, in August, he actually had a directive related to social security tax. And so, he’s made it very clear that he’s looking for a reduction in social security tax on the employees. Vice President Biden, his proposal is focused on the donut hole. The current law right now is a maximum of $137,700. So, if your salary is maxed out at 137,700 is the max that you pay your social security tax, and then that’s it. Now Medicare goes on forever as much as you make, but social security is capped out. So, under Vice President Biden’s proposal, his proposal would be to turn it back on when your income hits $400,000.

Greg: So, turn it back on. I got that. So that’s the donut hole. So, turn it back on for the employee and the employer?

Frank: That’s correct.

Greg: It’s not clear!

Frank: No, it’s not clear, but right now, you know, you pay half, right? Then the employer pays half; the employee pays half.

Greg: Wow. No more high-paid employees. Wow. Yeah. So, that’s meaningful. So that’s 6.2% additional tax on everything over $400,000, in addition to everything over 137?

Frank: 137,700.

Greg: Wow. Okay. That’s interesting. And then one of the other changes in the pass-through. So, you want to talk about the changes that may be happening.

Frank: Sure. So, when we had tax reform several years ago, the corporate rate went down, as we talked about 35% down to 21%. A lot of pass-through businesses were up in arms—

Greg: And they would be, such as?

Frank: So, a partnership, an S-corporation, anything where the entity doesn’t pay the tax, its income passes through to the owner, and the owner pays tax. So, they’re taxed at their individual rate, which is obviously much higher than 21%. So, as part of tax reform, there was a special provision put in the code, section 199A, that’s for domestic businesses to get a special 20% deduction on their income. So, that’s what we have today. So, there are some businesses that don’t apply to that; Greg, you, and I, we don’t get that. But if the company is a manufacturer, makes stuff—

Greg: An architect.

Frank: An architect, exactly.

Greg: So, tax is interesting to me. So, an investment firm, no; architect, yes — it’s crazy.

Frank: Better lobbyists.

Greg: That’s exactly what it is. It’s crazy.

Frank: So right now, that 20% deduction is taken on your tax return. But Vice President Biden, he’s proposing that he would start to limit that deduction once your income hits $400,000.

Greg: Okay. That seems like that’s an important number coming up, 400,000. Right. So that seems like we hear that number an awful lot.

If you were a listener and you were like, okay, and you’re like, okay, from tax, from wills, estates, trusts or elder law, right. If you could tell our listeners, each of you, here’s three things you should think about that you think would benefit the majority of the listeners.

Tracy: The big one is to find your dusty binder with your estate planning documents in them and read them.

See who’s in there, see what it says, and see if it’s still current. And if you don’t have an estate plan, then—

Greg: By the way, we will find beneficiaries of ex-spouses. Like, we see it, that’s usually — now some are very, some divorces are very amicable. My experience has been that’s not how most people want it but go ahead.

Tracy: Or a deceased sibling or, and then it just makes a mess for your family. So, I think that’s the first thing is, find, you know, where you have your documents, take a look at them, read them and just make sure that you’re comfortable with what they say.

Greg: And wait for our clients. You know, we do have a secure electronic vault where you can put them all electronic, so you can have access to them, in addition to in a safe somewhere.

Tracy: And then I’m cheating. Cause my number two is going to be building off of number one. I’d say number two; the big one is looking at the powers of attorney. I think those get glossed over a lot. A lot of people focus on their will. They focus on trust. They think that’s important, but with the aging population and we saw it a lot with everything going on with COVID. I had all these clients that were in nursing homes, and then the nursing homes were on lockdown. So, people were not going in and out. And you know, mom in the nursing home would always go out with her daughter to the bank, that was kind of their day out trip, Sundays. They went to, you know, Mondays, they went to the bank, got some money out. Well then, they weren’t able to do that. And mom didn’t have a power of attorney. So now, everything was stuck. There was nothing that they could do to help mom pay bills because nobody else was on that account. And they didn’t have a power of attorney in place. So, kind of building off of one is, I think, making sure you have updated ones, and if you’re in Pennsylvania, they changed the laws in 2015. So, you really want your documents to be later than 2015.

Greg: Number three would be?

Tracy: Now, I’m thinking of two! Look at that. I have two in my head. One, I think, is that beneficiaries, like you were saying, look at all those beneficiaries and make sure they align with your estate plan.

Because that’s one thing, I see when I’m doing the estate administration side. So, when a loved one passes away, and I help that family through the process, they either never updated beneficiaries to align with their estate plan. So, they might’ve had an old trust beneficiary of a retirement account, or something is in that trust that no longer exists where it really should have gone, maybe outright to a child. So, making sure that those beneficiaries are updated is really important. And then I think having conversations with your children, I think that’s really, or your family members, if you don’t have children and on who’s going to take care of your situation: one, if you pass away or two if you become incapacitated. There’s a lot of people that are very, very private with their assets and their information. And I think that’s great if you work with someone like Greg because he usually knows about stocks, you’re comfortable telling him all about the assets. Maybe your family doesn’t know about what you own or where your assets are titled, but having somebody know where those assets are, is so important. Because I can’t tell you how many estates we have where we don’t know even where the bank account is. If there are life insurance policies—

Greg: Oh, the kids, they get them based on what’s coming in the mail.

Tracy: Yes.

Greg: “Oh, we have an account there. Oh, there’s an account there. Or there must have been an insurance policy. Oh my gosh, we owe this.” It’s like every day they get the mail, and that’s how they figure out what’s going on.

Tracy: Yes. I had an estate once where it was a year and a half later, and they owned individual stocks, and that stock had not paid a dividend. So, there wasn’t any tax reporting. There was no dividend. And then it finally did, and it came out of the woodwork.

Greg: Where’s that? Yeah. So, we can’t encourage folks enough to do family meetings. We at our house, the Weimer house, we do it on December 26th. We have a family meeting, and that’s because we think family meetings are important. It also encourages them to be home for Christmas. So, if they want to be in the will, you gotta be there. So, what we do is we literally, we, I think we’ve done three, and they’re getting better. And, you know, I hope we’re going to do them for the next 20 or 30 years. And by the time 20 and 30 years come, they’re going to have a better idea of how to invest — the values, the expectations because I, I clearly don’t want any assets to be squandered, but more importantly than that, I want everybody to get along and have a relationship.

And, and the way you do that is: you communicate, I said earlier, 90% and 70%, you know, the second generation, third generation things are squandered. And it’s because of a lack of communication. They’re like, “Oh, I don’t want to talk to them. I don’t want them to know. I don’t want them to get lazy.”

Well, I mean, I’m only fifty— just turned 56. So, I’m going to be around for 25 30 more years. So, if my kids are waiting to get my assets, they’re going to be broke for like a really long time. So, but, when they do, I want to make sure that they’re handling them the right way, so they can pass them on to the next generation. I know there’s a belief out there that, “I don’t want my kids to get lazy.” You’ve done a great job raising your children; at the age of 40, your children are going to be what their children are going to be. And it’s not going to make them lazy if you do it in the right way.

So really important, and by the way, you can still communicate without being specific on all the numbers. But having a conversation among the children is really important. And we include the spouses because spouses can fight just like children can fight. So, we bring everybody together to talk about it. And I’ll tell you, the first one was weird. You know you got to get over that. And then over time, rightfully so, it becomes more comfortable.

Tracy: Nothing says Merry Christmas and happy holidays like talking about your will.

Greg: That’s it! Here we go, right, right. So, if my kids pushed me down the steps, we’ve had this conversation.

Frank: what, go ahead.

Frank: I’d say they’ll do it before the exemption goes down.
  
Greg: Right, right. Hurry up. So, Frank, three things, if people are listening, what should they be doing?

Frank: So, the first one is plan. There are so many times we see people just come around April 15th; here are all my tax documents—

Greg: In a shoebox.

Frank: In the shoe box. And it’s like, Oh my gosh, I owe $100,000. Like no planning. No thinking about the transactions during the year, the income, the taxes paid, just showing up on April 15th, and being just shocked and surprised.

Greg: Think about how long someone takes planning their vacation versus planning their life financially or taxes. I mean, if you spent more time on the tax side, maybe you could take a better vacation. Right? You wouldn’t have to go to the condo place. You can do whatever. Save a hundred grand.

Greg: So that’s one.

Frank: So, the second one, I’d say is, just be educated when it comes to taxes. So, we’re talking a lot about Vice President Biden, President Trump, but keep in mind, Congress has to be involved too, right? Congress is generally where tax policy starts.

Greg: Right. And by the way, you know, clearly, the house is Democratic, and it looks like it’s gonna stay that way. The Senate also looks like it could go to the Democrats. So, it looks like it. And that’s just, and I’m not political, you go on RealClearPolitics. You go under the Senate map, and you’ll see that it’s 47 Republican, 46 Democrat, and then seven toss-ups and six of the toss-ups are on the Democratic side. That’s polls. We all know polls aren’t always right. But if you listen to the polls, you’re right. I mean, you have to, you have to watch all of this as you’re anticipating tax policy.

Frank: So, so that’d be my advice. Just be educated and, and focus on what Congress is saying as well. Because a lot of times, that’s where policy starts. Right? I would say the third thing would just make sure you’re doing tax-efficient retirement savings. Right. Everybody’s working so hard, and you’re so focused on right now, right now, right now, but thinking about the future, right, then retirement, but having someone advise you, even if you can’t do it yourself of just, you know, “Hey, how do I do this in a tax-efficient manner?” Because there’s a lot of inefficient ways to save for retirement, but there’s also a lot of efficient ways as well.

Greg: I’ll tell you another virus out there that’s dangerous. The virus of defined benefit plans that I explained to defined contribution. Because what companies have said is, it’s now the responsibility of the individual to contribute, defined contribution plan in your 401k. And so, now it’s not like, okay, you work there for 30 years, you get 80% of your salary, and you stayed at the same employer the whole time. It’s not like that. Your retirement is going to be based on how much you saved.

And the virus is: not sure America is retirement ready. Right? So, America may not be retirement ready. And that’s why you have more of “soft” retirements where people at 60 or 65, they don’t really stop working; they tend to get a part-time job because they can’t really afford to be able to retire. So, the earlier you can start, the better. And couldn’t agree with you more, Frank, do it a tax-efficient way. Get the match from the company. It’s amazing how many people have a 401k, and they don’t contribute. It’s just; it’s truly remarkable.

Or, or we see it all the time. When we look at their allocation, they’re in; they’re in cash or bonds. Like, and again, that could be right (probably not), but it could be right. Because it’s the last money, you spend. So, it has the longest timeframe. So, it should be where you’d accept the most fluctuation, but for people to be in bonds when they have a 20-year time horizon or 30-year time horizon is unlikely to be the best option. It could be (hedge), but unlikely. Fair?

And by the way, we’re just trying to give information because what we’re trying to replace is facts with feelings. And some people may say higher taxes are great because we want to reduce the debt. And that’s the way to do it.

Other people may say lower taxes are better because they’re not increases growth, and that’s the way to increase or reduce the debt. Some people may; I shared the numbers on what wealthy people are paying today, you know, the percentage, some people may think they should pay more. You know, it would be disproportionate to what, you know, where, where the money is allocated. But it’s important that people just think about that and take the emotion out and come to a good, a good decision.

So Frank, Tracy, thank you so much. That was just a ton of information and truly just nuggets that people can use. And I know for our listeners, it’s like, “Whoa, that’s a lot,” but, but please reach out to professionals, get with someone you can trust.

Let us help you. Call Frank. Call Tracy, but let’s make sure that we understand the planning behind taxes during your life and then equally important for your legacy. So then, ultimately, we can make good decisions along the way.

So, thank you so much. I really really appreciated the time and enjoyed the conversation.

Tracy: Thank you, Greg.

Frank: Thanks for having us.

Greg: Thanks for listening. If you’d like to hear other subject matters that may be of interest to you, please check us out at confluencefp.com/podcasts.