Best Way To Leave $ To Your Heirs

all right my friends I want to take a few minutes to talk about step up and basis that's what we're going to talk about it's an incredibly important understanding for you to know when it comes to your estate planning in the tax ramifications thereof and before you say you don't have much of a state I'm telling you right now do not go away from this video because it's critically critically important you don't have to be rich you don't have to be Mr Burns from The Simpsons just have some assets and I'm going to show you exactly how this works so welcome to Heritage wealth planning YouTube Channel please you come to learn most tax efficient strategies out there during your life or as part of your estate to transfer to your air so let me get out my uh trusty markers here and I had a we're working with a lady today Miss Sharon and uh we're talking about the various strategies and I could tell it's kind of um maybe talking a little bit above her in terms of the the ramifications of various planning strategies uh to lead to her heirs and so it occurred to me I better do another video on this to bring it step back a little bit so people can understand because it's incredibly important I've done videos on this before but you know I've got over 500 videos so if you haven't seen the other videos I've done I won't blame it so let's talk about so there's three types of accounts that you have you have a taxable tax deferred and a tax-free all right so you got those three types of accounts 401k 403b 457 tsp IRA that's your tax deferred and even annuity that's your tax deferred I know my handwriting is pretty bad there but you can see that I think yeah all right then you got your tax free and the only tax free you have is Roth municipal bonds and then life insurance I'm not I don't care too much about municipal bonds I'll show you why in just a second then you got your tax bill could be anything CD could be uh brokerage account stocks bonds I mean it literally could be anything anything that is here what happens is on a taxable account you'll get a 1099 at the end of the year in some ways municipal bonds could the same thing could factor into that but I'm just saying in terms of the tax-free municipal bonds are tax-free so we're going to put it in this bucket it's just not that important for what we're going to talk about I mean when a taxable account you get a 10.99 it could be a qualified dividend could be a regular dividend could be real estate investment trust or or retail Reit or Reit uh could be interest from a CD interest income qualified dividend income dividend income long-term capital gain short-term capital gain and taxable interest you get taxable interest ltcg long-term capital gain STC stcg short-term capital gain dividends qualified dividends and then real estate Investments I guess that's it any other income I can't think of anything else so this is you get a 10.99 each and every year now will you get a 10.99 out of Municipal Bond so it's again I don't want to focus on municipal bonds but just don't yell and say oh I don't care all right so 1099 will get on this taxable account there's no 1099 here because you don't pay any taxes until you take a distribution and then you'll get a 1099 but only once you take a distribution here you get a 1099 if it pays any kind of dividends long-term capital gain or taxable interest here there's no 1099 either on tax free no 10.99 so that's how you kind of separate those three assets tax deferred you will pay tax at some point but you got a tax deduction on the front end typically not with an annuity all right annuity don't get any tax deductions on the money going in uh not with a non-deductible IRA either to talk to a guy today who makes too much money to put into a Roth so we're talking about non-deductible IRAs it still falls in the tax deferred account but when he takes a distribution from that non-deductible Ira the portion the 5500 that he put in he'll get tax-free but still it's not the quite the same thing because it still Falls and tax deferred bucket all right so let's so far so good taxable tax deferred tax free all right so let's keep going here because it's important so now from an heirs perspective what would you rather get would you rather get we'll just say tax I should probably deferred attacks free or tax a bull and this is the financial planning software I use right Capital it breaks it down in terms of these three buckets too it gives you a tax allocation percentage of tax referred taxable and tax-free is freaking awesome probably some of my favorite parts of the financial planning software that right Capital provides is that one chart right there I love it so your mom just died which do you rather get well obviously let's just say it's a hundred thousand bucks a piece all right for Simplicity well obviously you'd rather get tax-free all right tax free does you know paying taxes inherently tax free the second one would be this right here in fact I'd even say between the two they're essentially the same all right it depends on the investments in there I get it but from a tax perspective to you these are the exact same it's not taxed here it's not taxed there there's completely non-tax to either when you inherit the account from your mom this one is tax so whatever your interest rate is all right whatever your tax bracket is so if you're in a 10 tax bracket you're only going to net 90k that's how it works so we do not want tax deferred accounts to transfer to your error so we don't now let's show you something else all right so that's how the buckets work we want tax-free and we want taxable to transfer to your errors without question let me show you something else though all right we're growing we're moving we're moving what if you put 50 bucks into brkb that's Berkshire Hathaway the class B shares brkb I have no idea what the price is but just so you put 50 50 000 in there and it grew to 100 I'll say two hundred thousand dollars all right so 50k grows at 200 000 and then you get hit by a bus that is the account value at your date of death DOD valuation date of death valuations just as a side note if you're looking at brokerage firms you want to find out will they give you an accounting for data death valuations USA wasn't doing that for a while it actually infuriated me USA said we're not going to provide the day-to-day evaluations I said wait a second they hold the money in USA as a custodian how could you not provide date of death valuations especially on our fee based account where the client was paying a fee is insane and they kind of change they kind of wishy-washy and they kind of changed it but you had to go through this huge rigmarole is insane they finally smartened up but if you find if you ask your brokerage firm your custodian do you provide date of death valuations and they say no I'm just telling you look for someplace else the reason being because data death valuations are what you're going to use for your estate planning to appraise your estate how much was the state a state worth at your date of death everything is based on that from the state tax and on top of that an income tax perspective as well because simply when they inherit money it's based on a date of death valuation on how much the inheritor the air has to potentially pay so as your brokerage account ask them do you do date of death valuations if they say no find someplace else all right so here we start with 50 000 is worth two hundred thousand dollars now this isn't a taxable account a brokerage account you drop 50k into Warren Buffett and you say born you did a great job you quadrupled my money is worth 200 000 you die how much taxes due to you little Miss Janie when she inherits that against a brokerage count a taxable account the answer is zero tax [Music] that 150k of unrealized capital gain is free and clear to Little Miss Genie there she gets the entirety of the account completely tax free that's called the Step Up basis I cannot stress how important this is I cannot stress the reason you need to understand the three different modes of transferring assets tax-free tax deferred and taxable tax deferred is the worst tax-free is the best and tax-free includes in this case taxable brokerage accounts she pays nothing nothing on that nothing whatsoever now let's just say you make a mistake and you give Miss Genie the the account before you die don't do this and I'll probably do another one on this specifically so now you put 50 000 in is your cost basis it's worth 200 000 now you haven't died but you're thinking you're gonna die and you say oh Janie I don't want to just have to go through a probate so I'm just going to give you the shares and then two weeks later you die so Janie owns this now two weeks later you die what's her tax on that when she sells this property at two hundred thousand dollars she'll owe a hundred fifty thousand dollars of income for capital gain tax long term capital gains tax on that because what happens when you gift a property you gift it while you're alive you're gifting the cost basis with it and the cost basis here is fifty thousand dollars so again let me just be very clear I have a fifty thousand dollar Berkshire Hathaway stock it could be anything could be my house could be anything I want and I say I have two options I want Janie to get it so I'm going to give it to Janie while I'm alive and then when I when Jenny can do whatever she wants she didn't have to wait for I die she just could sell the very next day when she sells a dough she will pay long-term capital gain unless it's a short-term capital game but in this case long term on the difference between the account value and how much it's worth I don't even have to die it just says at the end of the day I give it to you Janie and Jenny sells it she's going to pay capital gain tax on 150 000 on the other hand if I wait till I die and give it to her via inheritance either through trust or either through a estate probate I.E through uh my will no tax none because when you inherit a property is tax free that hundred fifty thousand dollars of unrealized capital gains is completely wiped away I just cannot stress enough so if you think there's a reason to give a property that's fine but make sure there's a reason not just to avoid probate because if you're giving a property away in order to avoid probate you're you're giving a huge tax hit as well that's that's just a fact secondly on top of municipal bonds there's no growth in municipal bonds municipal bonds do not grow I'll do another episode on that specifically but municipal bonds are not what you want in a taxable account it's simply because there's no growth there you want especially if you're looking at leaving assets to errors you don't want tax-free bonds because they don't grow they give you interest that's it but there is no growth of principle whatsoever so you're not taking advantage of a step up in basis because a step up in basis only really works if there's a growth from the initial cost basis you put in to the account value at your date of death a municipal Bond he put a hundred thousand bucks in it's worth a hundred thousand bucks that's how it works it's worth a hundred thousand bucks there is no growth no matter if you die tomorrow if you die 20 years from now the municipal Bond will not have any appreciation so people say I'm gonna have tax freeing to transfer to my kids tax-free oh that's the worst possible estate planning not the worst but that's a bad estate planning move we want your heirs to inherit accounts that have grown in value Berkshire Hathaway stock I'm just using that for example could be McDonald's stock I don't care but we want them to inherit stuff that has grown that way they can inherit it without paying any tax on the unrealized gain municipal bonds do not serve that purpose whatsoever life insurance is a completely different thing and I'm not going to talk about that here today but you're a growth heavy stuff that you want your kids to inherit put that in your IR in your taxable account you're not Ira your municipal bonds get rid of them outright and buy traditional bonds inside your IRA to get a higher yield absolutely the difference between a municipal Bond a Government Bond the government bonds are all going to yield a full 25 to 30 percent more and it's all coming out as ordinary income anyway so that's when I want to get too much of that but don't transfer municipal bonds via your will through a taxable account because there is a step up basis especially if you have a Berkshire Hathaway inside your IRA that's growing like gangbusters you're just so you're going to give them a tax consequence so you get no tax benefit of the Minnesota Bond on a taxable account when they when you die and you give a huge tax liability in the Berkshire Hathaway stock in your IRA ah don't do that I'll do another video tomorrow uh going over this strategy here I just want to introduce you to the concept of Step Up basis and give you some things to think about when it comes to your own estate plan so if you like what you see subscribe comment questions concerns as always put them down there and then don't forget to give me a thumbs up for sure and then go to the blog at heritagewealthplanning.com and we'll see you next time thanks guys

Channel: Josh Scandlen

Views: 9,579

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Id: _i3SrWMiF4w

Length: 14min 12sec (852 seconds)

Published: Sat Jul 15 2023