Hi there, we have a great show for you today. If you live in any of the following states, Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, or Washington, or having estate as an American that exceeds $11 million. This is the episode for you. We will break down estate tax, how it works on the federal.
How it works in those individual states or at least give you an idea. And then more importantly, we'll give you concrete tips on how you can reduce your estate tax liability, pay less in death tax. And let me tell you it's important because death tax in America is among the highest tax rate of any type of tax. Asset protection is about many things, one of which is paying less than tax. We have a busy day let's get started. Okay.
Welcome BoomXers. Let's throw out the old playbook. It's time to tear down the traditional way of looking at your life and money and leverage the laws of money to our advantage. That's right. There are laws of money and those who learn and leverage the laws of money win and sometimes win big. Stay tuned as asset protection attorney Darol Tuttle, educator, and leader of the BoomX nation shows us how.
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As you know, each and every week as a member of the BoomX academy, as a family leader, I conduct live office hours for the BoomX nation for members. Family leaders who are trying to grow and protect family wealth. Today we talked about in family office hours estate tax, how to reduce it, how it works, what are deductions, what are credits and how trusts work to avoid and reduce estate tax.
Let's jump into office hours as it occurred, as I answer questions and break it down.
When I first started practicing. The Washington or the federal estate tax credit was only $625,000, which meant that in a credit basically the way to think of it is the first $625,000 of your estate is not taxed.
It's tax-free anything over 625 when you pass away a death tax applies. And throughout the years it's been as high as 49%. I mean that's a huge tax. Now that credit amount has gone up. So 1993, it was 625 and then it was 675 and then it was a million and that was 2 million and it was 3.5 and it was five and that was repealed for one year.
And then it was now it's like almost $11 million. And it's also portable, which means for a married couple it's $22 million federal estate tax credit. Now what Washington did was Washington, you'd file your if there was a Washingtonian who had passed and filed a federal estate tax return.
Washington basically said, we're going to piggyback on that and take a little hair, take a little piece of it to. Basically, I'm over simplifying it, but I, my memory tells me it was around 2003 Washington was so fed up with the feds, inability to pick a credit amount and stick with it. Washington decoupled from the fed state tax.
And so now it's a $2 million credit in Washington. That's adjusted annually upward. So it's 2 million and some change. That's the credit meaning. If you're a Washingtonian and pass away within a state below 2 million, there's no duty to even file estate tax return. If you're over 2 million, then you do have a duty to file a Washington state death that tax return.
And the amount of tax you pay is higher depending on how much above 2 million your estate is. And it goes as high as 20%. There are 12. I have to look it up. States with death tax and estate tax Washington has the highest rate. Oregon has a lower rate, but they only have a $1 million credit. You know, you could actually end up paying more estate at more estates, pay death tax in Oregon than in Washington, even though the rate is only 10%, so they pay less, but they get more.
And that's your net having your estate, right? Like after everything's paid. No, it's there, there are deductions for you have your gross state and then you're entitled to statutory deductions and expenses is one of them. But like charitable contributions is a deduction. There's an unlimited marital deduction, meaning that you can leave everything in any amount that you left to your spouse as an outright gift, it is a 100% deduction.
Now there's a tax trap with that, a big one, but at the first death, there's no tax owed for a transfer to a spouse. What are some other deductions? There's not a lot actually, but then after all the deductions are taken out, then you have your taxable estate.
And then if it's above the credit amount, so that's how that works. And the thing is too, people don't realize Like Washington fed the federal system is no different than the Washington system in many other states systems, because they were all borrowing from the federal estate tax code and the federal law.
Of course, they're trying to include as many assets and types of property interests as they can in the estate, right? The higher the gross state or the taxable estate, the more money goes into the treasury coffers. And so even the property that you've gifted or transferred could be included in your estate.
For example, if you make a gift. And have retained a limited or general power of attorney, even though you gave that or appointment, rather, even though you gave that asset away because you retain the ability to change the ultimate beneficiary of the asset, that's enough for it to be included in your estate and chancellors that you made within three years of death can be included in your estate.
And if you made a transfer into a trust, but retained any other kind of indirect control, it can be included in your estate. And so you have to realize that the feds are trying to include as many things as they can to include these indirect, obscure property interests that you might have, and they don't they'll claw back entire value of the gift or the transfer into your estate for tax purposes.
Now that works against them when attorneys get involved, because there's a difference between the rules for Medicaid and tax. And so sometimes we can make a five-year transfer, a trust into a transfer into a five-year trust for Medicaid purposes, right? Like the nest egg course on the Boom X academy.
That's exactly what that's about. Like create an irrevocable trust. Transfer the assets into the trust have it a complete transfer file, a gift tax return. Let everybody know that you did it. So there's no questions about fraud or any of this. Wait at the five-year lookback period. And that those assets are not included within in your estate for Medicaid purposes while you're alive.
However, then the question, and in fact, Bob asked this question last office hours. And I just answered it without going into the technicality of it. And so Bob's question was will I still get a step up in basis. And what he meant was section 10 14 of the tax code, the most generous provision in the entire tax code is actually in the estate tax portion of the tax code, not the income tax.
Now capital gains tax is actually an income tax. Like you reported on your 10 40 and the rate that you pay depends on how long you held that asset. Is it a long-term capital gain or a short-term capital gain, but it's an income tax.
It's categorized as income tax and the capital gains tax, you buy an asset in 1950 for a hundred thousand dollars. And by 2020, it's worth a million dollars and you sell it, then you're paying long-term capital gains tax on the difference between the tax basis and the amount that you sold it for. So $900,000 was the gain. You're paying the tax on that. And you file that on your 10 40 and you pay the tax, right?
In a different part of the tax code, the estate tax. There's this thing called step up in basis. And the way that works is okay, look, we have an asset that we bought in 1950 for a hundred thousand, and now it's worth a million. If we sell it while we're alive, we pay tax capital gains tax long-term.
If we give it to our oldest son and our last will and Testament, and he inherits it. The question is, what is his tax basis? Is it a hundred thousand? Did he inherit the tax basis of his dad or does he get a new start over? Tax basis, which is the fair market value of the asset at the time of death.
Right? The tax code 10 14 says you adjust the tax basis to the asset at the time of death. And so, wow. You just avoided massive capital gains tax just by holding onto it instead of giving it away during lifetime. Now, is there a way to Bob you got to unmute. I can see you moving your mouth.
But I said, all you have to do is die. All you have to do is die. It's like the only thing that has to happen and in a community property state, and only community property states. One question is okay, we've got hood canal property and bought it for a hundred, it's now worth a million first spouse dies.
It's marital community. Each spouse has a 50% ownership in the asset. Right? So the question is, does 50% of the tax basis step up to the fair market value of the asset at the time of death, because one of the asset owners is still living and you wouldn't think 10, 14 would apply to the 50% owned by the living spouse.
Right? It's an undivided, equal share community properties, undivided equal share. And so the rule is in a community property state. It's a hundred percent step up and basis. Which is just not the case for people who live in separate property states. That was my first wife passed away in 2004.
And most people look their spouse dies and they don't even know this rule. And then they sell the asset and they just pay the capital gains tax. But they need, what they needed to do is report in the adjusted basis. Back to the fair market value at whenever it was because if you bought property in 1950 and your spouse died 10 years ago, still an adjustment.
You gotta keep track of that. But the question is the question Bob asked was, okay how does step up in basis work if I make a transfer into an irrevocable trusts. So that's a complete transfer. This is where the IRS is greed by some in the butt, because remember the IRS is trying, the tax code is trying to include as much as it can, like for purposes of determining the value of your gross estate for tax purposes, but not value during lifetime.
But now that you're dead, we open the estate tax code and the state tax code says, if you make a gift to a trust and you've retained a limited power of appointment then it's included in your estate. And lawyers have driven a Mack truck through that technicality, because what that means is we can include a limited power of appointment in our nest egg trust.
And for Medicaid purposes, it's a complete transfer but at the death of the grant or for estate tax purposes, it's clawed back into his estate and we get a step-up in basis. So it's really the best of both worlds where we're eating our cake. What's that expression. You can't have your cake and eat a bowl too well we're we have our cake and we're eating and that's just because of the nuances and contradictions between the two capital gains is an income tax step up and basis.
And in the estate tax code rules about clawing back assets within the state tax code. And so that's pretty good. It's a very powerful way to plan because that means that you can have tax savings. Like you really want to step up in basis that's you don't want to give that up.
It's very good news. It's a little technical. So people, they either don't understand it or are not aware of it. And they lose these opportunities. That's, on the podcast BoomX show laws of money podcast. The theme of it is learn and leverage the laws of money to your advantage. Those who know the rules and leverage them do much better.
I, for one do not like I'm calling the next block, promo or a break. It is not a break. It is directing your attention yet pausing for a minute to remind everyone that it takes more than just knowledge in order to protect assets, you must take action. The law has requirements they must be met. Let's take just a few minutes to remind you of the important work that we do at the BoomX academy on the BoomX show as part of the BoomX nation.
If you are in or near retirement, you may have concerns that one of the many threats to wealth in America today in particular high unreimbursed medical costs, unnecessary taxation, or even family mismanagement could threaten your retirement nest egg. The good news is that the law does have solutions.
Federal law and centuries old trust law offers many safe harbors. And when implemented correctly can protect your savings against Medicaid liens, state, and federal tax agencies and even private creditors. But why do so many retires then suffer asset erosion or even complete depletion? Having failed to meet the laws requirements?
The simple but sad truth is that most are unaware of these asset protection laws. Or believe that only the super wealthy can pay less in taxes or think that they must hire an expensive attorney, some who charge tens of thousands of dollars to put it all together. Unfortunately, we live in a world now where middle class Americans simply do not have enough wealth to lose any of it.
It's more important than ever for most to have an asset protection trust and plan even if they are not super wealthy. Now for the first time families have help, families can protect their assets. If they learn a few basic concepts, have the correct legal documents and implement these asset protection plans correctly to do this begin by enrolling in the BoomX Academy.
The BoomX academy is that you guessed it, boomxacademy.com. That's boomxacademy.com. BoomX academy offers free and tuition-based courses on topics related to retirement, estate and asset protection planning. Sign up today for the family leaders membership level. And you will also join an online community of other learners.
You may attend weekly live office hours with me Darol Tuttle, host of the BoomX show and in the trenches asset protection attorney. Best of all, you'll have access to the BoomX drafting app so that you can easily draft all of the legal documents you need without hiring an expensive lawyer.
To repeat, you will walk away with a full set of properly drafted legal documents. Documents that you understand.
You can join today as a free member and you will be enrolled and the BoomX show companion course automatically. You can also test drive the $40 per month. The family leaders level at the astounding rate of just $1 for the first 30 days.
During this first month, you will be able to draft a limited power of attorney to preserve their right to transfer your nest egg to an irrevocable trust. A proven strategy. I've helped clients implement countless times. This is also an $1,800 value. You will be enrolled at no further costs into the nest egg courts, which will introduce you to the concepts of asset protection and how to implement this legal document and begin your asset protection plan to learn more.
Go to boomxacademy.com. That's boomxacademy.com.
Welcome back to the Boom X show laws of money podcast. Before the break, we were in office hours, answering questions about estate tax. There are 11 jurisdictions, including Washington state that impose a separate estate tax. Now, when we're talking about Washington state, that's just because the members of the office hours of the BoomX nation family leaders at BoomX academy are Washingtonians.
However, these principles apply in part or in whole to all 11 jurisdictions. And of course, federal law also has a a state tax that you should be aware of. It's important to know whether your state has a estate tax and then think about ways that we can reduce the estate taxation. And in terms of tax planning, like reducing that tax bite overall, one of the most important types of things you can do, strategies you can implement is simply considering what is known as a credit shelter trust.
Too often in estate jurisdiction under old federal law. When the first spouse died, especially in a community property state. There was this moment in time, right? When the first spouse died in which the estate was split into two parts, there were the assets that were owned legally, either a share of community property, or as her own separate property.
That moment in time when the estate, when the marital community split because of death of the first spouse, the surviving spouse has her money and the deceased spouse. He had his money, but it is now called an estate. Number one rule, the golden rule of estate planning is you cannot take it with you. So the word estate comes from probate law and it comes from tax law and it means the assets owned by a deceased asset owner.
Now, if you make the mistake of an automatic transfer of assets to your surviving spouse, a great example of that is a joint tenant with right of survivorship account. If your brokerage accounts are set up that way, then what happens is the husband dies the first spouse to die, passes away and entitled to those assets automatically vests in the surviving spouse.
That's unfortunate. And it can be in some cases, if you're estate's over the credit amount in your state or under federal law, what happens is a credit is lost. Each individual has what is known as the tax credit and office hours. We were using the example of Washington to illustrate the concept.
Washington law says that if the estate, the value of those assets owned by the deceased asset owner is greater than the credit, which is 2 million. Then the amount above that is taxed at a rate as high as 20%. However, it's a credit, a tax credit, which is a gift to you. And it means the amount below 2 million is tax-free.
If you're estates below 2 million, there is no duty to even file an estate tax return. I also mentioned, office hours that there's an unlimited marital deduction, meaning any gift to spouse is tax free. However, when the surviving spouse takes and possesses and owns the assets of the deceased spouse.
What has happened? Her estate has now valued at the totality. Husband passes away. He owned $2 million surviving spouse at $2 million of her own. If surviving spouse inherits outright, the assets of her deceased husband, then her estate's now 4 million. When she passes away, she's only entitled to one credit too.
And so Washington state, or perhaps your state, if you live in one of the states, I mentioned there's 11 taxable states with a separate estate tax. I would apply to credit and tax her estate based on that rate in Washington, it would be in the state tax owed of as much as $400,000. That's a check the estate of the surviving spouse has to write to the state of Washington, the government, the department of revenue.
Now likely you do not intend the tax agency of either the state or the federal government to be an heir to your estate. Now the mistake was made was when the first spouse died, the estate claimed the unlimited deduction, but forgot, forgot the tax credit, which is a blender.
What could have happened is transfer that estate of the first spouse to die into what's known as a credit shelter trust and hold the 2 million for the benefit of the surviving spouse. Payments can be made. Distributions can be made from her to her for maintenance, education, support, and health. If that occurs, then she has full benefit of the trust as the beneficiary during her lifetime, but does not count as her estate assets.
It's not included in her estate and her estate will be valued at 2 million. If that was the case if a credit shelter trust had been used and not hypothetical when the first spouse died, we would have reached out and we would have claimed the credit for the first spouse to die. We would have preserved the credit for the surviving spouse.
Two plus two is four husband had $2 million credit wife had $2 million credit. The trust is below 2 million. The surviving spouse's estate is below 2 million. And in that example, we would have owed the state of Washington, the department of revenue, the state agency that collects tax, perhaps in your jurisdiction, we would owe them the big goose egg, not a Neal, nothing zilch that my friend is tax planning at its best.
That is an simple example of the use of a trust to avoid estate tax taxation. People are chasing return in the stock market with risk to acquire 20%. In this case, a simple trust, we prevent the collection of a $400,000 death tax. That my friend is BoomX planning at its best exhausting, but the solid tip.
That's what makes work at the BoomX Academy. So fun and so valuable.
Thanks for listening to another episode of the BoomX show laws of money podcast, where asset protection attorney Darol Tuttle breaks down the complicated rules of estate, retirement, and even long-term care planning. You can listen to past episodes of the BoomX show by going to boomxshow.com or subscribing right from your smart phones podcast player to take a deeper.
Join as a free member in the BoomX academy, and you'll be automatically enrolled in the show's companion course where you can find enhanced content and many of the shows important episodes in role now by visiting boomxacademy.com. That's boomxacademy.com.
