Estate Taxes: What You Can Control| Season 2, Episode 9

Greg Weimer 00:04
Hello, and welcome to the Imagine that podcast. I’m your host, Greg Weimer, founder, partner and wealth manager at Confluence
Financial Partners. Each month, we’ll explore new ways to help you maximize your life and your legacy and meet some extraordinary people along the way. So if you’re looking to get more out of your life today and legacy tomorrow, let’s get started. Hi. This is Greg, and I’m here with two of my colleagues and guests today, Gregory Weimer, who is on the Weimer wadding team. He’s president of the firm,
and he’s a CFP and CPA.

Greg Weimer 00:37
And Randy Holcombe, who’s the director of our wealth planning department. And he’s also very involved in our Weimer wadding team also. So here’s the deal. Here’s what we’re going to hear a lot about. In the next roughly two years, and I promise you, this is going to be a buzz. So let’s just give some nuggets today. In the next two years, you’re going to hear a lot about estate taxes.

Greg Weimer 01:02
Because the estate tax exclusion, exclusion, all that means how much money you can give to your heirs without paying the government. Some of it, that’s all that means. But right now, it’s a lot of money. You can give, like, you know, $26 million to your heirs. That’s going to change automatically on January 1, 2026, to 7 million. But there’s more. We don’t really know what it’s going to be, a, in 2026, necessarily, and b, we don’t know what it’s certainly going to be when you pass away.

Greg Weimer 01:37
So you’re going to hear a lot about this stuff in the next two years. And for people that have over ten, $14 million, huge planning, things we need to get accomplished. Like, it’s huge. We need to get on this. But even for other people, I think you guys will agree there’s things that we should be thinking about. So if someone’s listening, we’re just going to do nuggets and we’re going to say, here’s some things to think about, not only because it’s important in the next two years, but also it’s just generally important planning because we were talking before we started recording one person that’s easy to tax. Is a dead wealthy person.

Greg Weimer 02:17
Right. So we’ll see what the government does to increase the taxes. Let’s get some nuggets to protect and think about over the next couple of years. Randall, do you want to start out with a nugget or two?

Randall Holcombe 02:31
So the first nugget that I think is important is just that people start thinking about this again. In recent years, the exclusion’s become so high, like you said, 26 million today, that most people, or a lot of people sort of feel like it doesn’t apply to them. They’ve stopped thinking about it. But I think it’s important to remember that it was two and a half million as recently as 2008. And before that, not too long before that, it was about 600,000.

Greg Weimer 03:00
1997.

Randall Holcombe 03:01
Right. That wasn’t that long ago. Right. So. And if you don’t think the government could lower it again, I don’t know. I would reconsider because I think that’s a great point.

Greg Weimer 03:12
We have been lulled to sleep. In fact, in the last roughly 20 years, in 2000, 117 times as many people had to pay estate taxes than 2001. So, like, way fewer people because it went from 600,000 per person to now 13 million. So I think it’s allowed us all to sleep and, like, America, wake up. We got to really make sure there’s some planning. I think that’s a great point, Randy, that, hey, don’t assume
that you’re not one of the people that’s going to be taxed. To be fair, though, back in 1997, the estate tax was 55%.

Greg Weimer 03:49
If you’re wondering what it is today, everything over, whatever they, whatever the exclusion is, when you pass away, it’s 40% federal. So federal. You pay 40%. Top racket. It’s a lot of money. You’re giving up where your children are. Gregory, what nugget do you have?

Gregory Weimer 04:04
Well, I think Randy started to mention this, but, you know, beyond just making sure that we haven’t been lulled to sleep by the exclusion being high. Use this as a time just to revisit your documents and make sure you’re comfortable with what the trusts say, with what the will say, who are guardians, who are trustees. You may need an update. Your trust may have been great ten years ago. Maybe your life
didn’t change, but maybe the trustee you put in there should. And so just use this as a time, whether the exclusion is going to impact you or not, to revisit the.

Greg Weimer 04:33
Documents and even where your mind is going. Just to be clear, in the state of Pennsylvania, if it goes to your children and it’s above the exclusion, in addition to federal, you pay 4.5% if it goes to your children. If it goes to your siblings, you pay another 12% if it goes to other people other than you pay 15, you’re up to 55% of your money going to go ahead, Randy.

Randall Holcombe 04:57
And there’s really no exclusion for that. No. In Pennsylvania, you’re just going to pay that on everything you’re leaving. Right?

Greg Weimer 05:02
Right. So what are some of the other things we can do to take advantage of the exclusion? Or do you want to talk about slats or 529s or dafs?

Randall Holcombe 05:14
I think a couple of those things. Really, all three of those things you mentioned, they all involve gifting. And it’s important to remember there is an amount that government allows you to give while you’re living that doesn’t cut into that lifetime exclusion. And so right now, I think it’s 18,000 a year, and that counts for you and your spouse. Right. So you could give a total of $36,000 to each of your children
and not worry about estate taxes that comes out of your estate. And so that’s an important thing to remember.

Randall Holcombe 05:44
And a lot of clients don’t realize that, and they waste a lot of years.

Greg Weimer 05:48
Yeah, but I think there’s a lot of advantages to that. Not only is it getting it out of your estate, if you do that every year, it matters, but it also, it really allows. To watch your children a enjoy the money, see how they receive it and how responsible they are with it. So. And it’s amazing how many people don’t take advantage of that.

Gregory Weimer 06:08
I was going to say the same exact thing, I think. Yeah. Getting money out of your estate that way, that’s great. It’s out of your estate, but just getting it to your children while you’re living and creating some of your legacy while you’re still alive can be really cool. And seeing that money build up and maybe be used for a first home or something like that, or just allowing them to really learn how
investing works and watch the money grow so that when they inherit the wealth down the road, this isn’t the first time that they’re watching an investment account grow.

Randall Holcombe 06:37
Another big one, like you said, is 529s. Yep. The government lets you front load those gifts so you can give up to five years all at once one time. We have a lot of clients, as soon as they have a grandchild born or a child, they’ll just put the max amount in and it’s kind of done forever. And usually if you start out with that big of an amount, you’re not just funding that grandchild’s education, you’re probably going to end up funding your great grandchild’s education as well. With that money, wouldn’t it be cool.

Greg Weimer 07:02
Your great grandchildren actually remember your name? Think about that. You’re creating a legacy of education that’s powerful. It’s
out of your estate. It’s creating a legacy. It’s powerful.

Gregory Weimer 07:12
The other thing that works good, well, you’re able to create that legacy because although you’re putting money into a 529 for your child or your grandchild, that beneficiary can change throughout the generations. And there’s rules there and gifting rules and how you actually do that. But as of now, there are ways to continue to change that beneficiary. So if you’re thinking, yeah, but if I put all this
money in for my grandchild and they don’t use it or they don’t go to college or there’s money left, we’re talking about it being a legacy tool, because you can change that beneficiary.

Greg Weimer 07:43
So I’m positive one of the things people are going to hear an awful lot about are slats. So a slat is between a husband and wife, and it’s essentially your, both spouses put a similar amount, call it $13 million, into these trusts. They’re irrevocable, which means they can’t really be changed. So then each spouse can live off of the slots. They cannot be identical. They should be invested a little differently. I don’t want to get into all the specifics, but the important part would be it will use up the exclusion.

Greg Weimer 08:26
So even though the $26 million may go away someday, you’re able to use it while you’re alive and get $26 million and all of the growth out of your estate. Do you want to do the step up in basis?

Gregory Weimer 08:42
Yes. I mean, the other thing with estate planning that’s big is. For a normal situation with no irrevocable trust, there’s a step up in basis currently under current law where if you have made money on your investment, when you pass away, the person who inherits it does not have to pay any gain on the money you’ve made. Their cost basis becomes the value and so it steps up to the current value that has been talked about recently. You may have heard in the news, will it change? Will it won’t. Right now that still exists.

Gregory Weimer 09:14
However, there are often times where that’s different with trusts where with an irrevocable trust you lose that benefit.

Greg Weimer 09:21
Like a slat.

Gregory Weimer 09:21
Like a slat. So you have to weigh those benefits and pros and cons with an irrevocable trust because sometimes you do gain a lot of value on that side. But your heirs do not get the step limit of NASA. So you just need to be aware.

Greg Weimer 09:35
You’Ll pay tax when you sell, but the appreciation’s out of your state also. So now, just things to think about. But you’re going to hear an awful lot about slats.

Gregory Weimer 09:46
Another irrevocable trust idea that we see a lot of with our clients and have talked to a lot of attorneys about is an irrevocable life insurance trust, an islet. And so, you know, that allows you to purchase a life insurance policy, and if it’s owned by the islet, it is out of your estate. So that is not included in the total value of your estate when you pass away, which can be a huge savings. And there are
ways to really create a lot of leverage with a policy that could cover a lot of the state taxes if you’re someone who will be subject to them.

Randall Holcombe 10:20
Absolutely. Another thing to think about is how to include philanthropy, or whether to include philanthropic pursuits in your estate plan. When you leave money directly to a charitable organization, that money is exempted. You don’t own any estate tax on that. Just like 513s don’t pay income tax. They also don’t have to pay a state tax. So now, for example, if you leave, if you leave a charitable organization, a million dollars versus leaving that to your kids, the charitable organization gets the whole million.

Randall Holcombe 10:50
If you would have left it to your kids, they would have got 600 charitable, 400 goes to the government. To set the math straight. But for a lot of our clients, where maybe they’ve already had vehicles set up, where their kids and their heirs are going to get a certain amount, it’s already set aside, they’re good. And now it’s like, well, what do we do with the excess? We want to pursue our charitable goals,
etcetera. You can leave it to a charitable organization. Another thing you can do is you can, instead of leaving it directly to an organization, you can put it in a private foundation or a donor advised fund that then your family, after you’re gone and while you’re still living, can work together on to make grants and support things that you care about and they care about.

Greg Weimer 11:32
And we have a lot of resources to help you with philanthropy and really help you with the get your documentation straight, set up a donor advice fund. We could help people set up a private foundation, which candidly doesn’t make sense nearly as often. But charities also are doing a remarkable job, realizing how many families want to do this, because it is a gift to your heirs. The fact that you’re making this big impact on a charity and you’re going to change children’s lives for the next hundred years, that is a gift to your family to know that your family made this decision together. So then, therefore, you’re going to peel off a million, 2 million, 5 million, and you’re going to make a difference in some charity over the long run. That’s also very important.

Gregory Weimer 12:15
And it’s really cool if you can involve your family before you pass away, too. And you can put money into the donor advice fund as an example. And it’s not only something that your family sees the legacy, once you pass away and it gets donated out, you can involve them in the decisions today. And we’ve seen a lot of people do that, and it’s a really good family meeting tool.

Greg Weimer 12:35
And I want to make this as a plug for children, but it’s also, you got to think, we’ll help you think about which charity. So if it’s a really small charity, donor advice funds make sense, because who knows what’s going to happen to that charity over the next ten or 20 years? You know, if it’s children’s hospital, I feel very comfortable in the fact that children’s hospital is going to be here in 2030 years to
receive that charity. And I know what it’s going to or to receive that money. And I know what the. I have an idea of what the charity is going to look like. What else?

Greg Weimer 13:01
I got one. I look at the estate tax and I think a lot of people say, I moved to Florida for estate taxes. And so I’m not moving to Florida. I’m a resident of Pennsylvania, and that’ll stay the same for the foreseeable future. But be careful on that. You’ll hear people say, oh, well, if you just moved to Florida or whatever state, you can avoid, you know, state taxes, which is very different than estate taxes, but you can avoid both of them. Just know that you have to be out of the state for 183 days, know that you have to have your driver’s license down there, know your car needs to be registered, know you have to have a residence, know that you should be voting, and know that, yes, they all will be checked to make sure that’s true.

Greg Weimer 13:43
And if you move down recently, you should review your trust to make sure that they’re written appropriately so they’re not pulled back into the state of Pennsylvania, etcetera. Well, I don’t know. I think it’s enough nuggets. I just wanted to give everyone and we wanted to give everyone enough nuggets to think about. The reality is we can’t control what the estate tax exclusion is going to be. We want you to know that we have the right team to help you and your family navigate it. So we will focus on the things we can control.

Greg Weimer 14:15
And that’s all those nuggets, or some combination of those nuggets to put together the recipe to help you minimize your estate taxes.
So we look forward to doing that. We look forward to the conversation. We are privileged. We work with the vast majority of the
children, parents and children of the families we serve to help them navigate this, and we feel very fortunate to do that. Please call us if
any of those nuggets are of interest to you. Talk soon.