Doug Houser:
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With the long-lasting effects of the election and pandemic you have to wonder how much this will make a mark on your future or the legacy you wish to leave behind. Today, Inez Bowie, principal at Rea & Associates, is here to talk about estate planning and how the recent events may impact your plan.
Welcome to unsuitable, Inez.
Inez Bowie:
Thank you for having me.
Doug:
As we were talking beforehand, one of our able-bodied producers said, you make the morbid fun. So, I like that, you're going to have to use that as a tagline from now on. Maybe that'll help business. What do you think? No?
Doug:
I don't know about helping business, but you know, unfortunately, it's like taxes, death and taxes go hand in hand. There's no way to get away from it.
Doug:
Yes. Well, you are certainly one of our deepest and best experts when it comes to estate planning and some of those topics, and it's something I think, we as individuals, certainly don't pay enough attention to. You know, it's something that's easy to put off and just not deal with, so you know, worry about tomorrow. So, you know, now that we're in this pandemic, can you talk a little bit about some of the additional considerations that have come up as a result of the COVID-19 that we're in?
Doug:
Yes, absolutely. So, as you mentioned, none of us like to address or think about a situation where we're passing or incapacitated, but with COVID-19, it's kind of front and center every day of our lives. So, you know, you might end up with the coronavirus and have very slight symptoms like a sinus infection or a cold and everything's fine and life goes on. But unfortunately, there are some of those that end up in a hospital on a ventilator, unable to care for themselves or make their own decisions. And as that goes on, you need to have a plan in place so that your affairs, be it medical or financial, are taken care of in that situation. And so if anything, this has made it more relevant to each of us, how we need to be prepared for every situation.
Doug:
Yeah, absolutely. I think that's certainly sage advice. It was interesting, I was talking to one of my clients this morning and she's just a wonderful individual, runs a phenomenal business, she's roughly my age, you know, early mid-fifties, and she got hit pretty hard with COVID personally, although she is recovering, she said one of the issues she's had is what she calls COVID fog, you know, brain fog. And she was a very focused individual, really ran hard 12 hours a day, you know, working really hard. And she's just had a tough time getting back to being able to focus and make the right decisions.
So, to your point, I mean, you know, even when it comes to things like that, it certainly helps to plan and document and get those things in order so that, you know, your life and your business can continue to operate the way you wish, right?
Doug:
Absolutely, and there are certain documents that most everybody should have in place to kind of provide for those situations. Most of us have a Last Will and Testament that says, you know if I die this is what I want to happen with my assets, this is who I want to take care of my children, something like that. But we don't really think about what if I'm just incapacitated, then how is that going to work? And so there are ways that you can plan for that by having things in place, such as a durable financial power of attorney, and that document would give somebody the opportunity to step in and pay your bills or make gifts at the end of the year and do those kinds of things that you would normally do, but you're unable to do. So, it's definitely important that you think about having a financial power of attorney at hand.
Another form that we don't think about often is your healthcare power of attorney. I don't know about your situation, but in my situation, I'm a CPA, and so when my parents say, "Here, we want you to be our financial power of attorney", I don't have a problem with that. But my sister's the RN, the one that takes care of, you know, the things that happen or go on from a medical sense, and so it's important that you have your healthcare power of attorney in place as well that can help make those decisions, get the information from your medical providers, provide that to your health insurance companies and those kinds of things.
A HIPAA waiver is another thing that is very important, and that's the waiver that allows your people, your healthcare power of attorney, to access that medical information. If you've tried to get anything from a medical provider, it's impossible without that HIPAA waiver. So you want to make sure you have that taken care of now.
Doug:
Yeah, absolutely.
Doug:
And quite frankly, one thing that some people don't think about very often is a trust. And so I'm just going to bring that up. Not everybody has to have a trust and not everybody needs it to be a part of their overall estate plan, but they are very effective when it comes to dealing with incapacitation. Because in that situation, you have a trustee that's already named and you have a separate legal entity that's already been established. And so in the event that you can't make those decisions, your trustee steps in without any hiccups and everything that you would like to happen can be spelled out in your trust document so that they knows exactly what your wishes are, who you want to have a certain property, who you want to be taking care of your children, guardian of your children, all of those kinds of things are already kind of spelled out in the trust documents. So, it's not for everybody, but in certain situations, it's definitely important.
Doug:
It certainly provides great clarity to the situation and can help in so many ways, that's invaluable. I wholeheartedly agree with you on that. We'd love to see that more so utilized, but let's pivot a little bit, Inez, and in speaking about trusts and that, what about the estate and gift tax? You know, this episode's going to air after the runoff elections in Georgia, so we don't know the entire makeup of Congress, but with the new Biden administration, any feel for what may change with regard to estate and gift tax? Any proposals that you've seen out there?
Doug:
With a new administration, there are proposals that we've seen throughout Biden's previous involvement, governmental involvement, that provide an insight into what he is hoping to do with the estate and gift tax situation. And so we don't know if Congress will be behind and on board with all of those, but there are certainly some things that we can potentially be prepared for that could happen. For example, the tax cuts and jobs act is set to sunset in 2026. And so what that means is today we have $11.58 million of an estate tax exemption. If nothing happens between now and 2026 in Congress, then that resorts back to that pre TCJA, and we go back to a $5 million tax exemption indexed for inflation.
So, you know, whatever plan you have in place, if you're going to be somewhere in that 11 million, 5 million tax range, you want to make sure that your plan provides accordingly under either one of those situations, or that you're effectively using your gift tax exemptions and those kinds of things. So, in addition to that, one of Biden's proposals in the past has been to actually even reduce that amount back to the $3.5 million that we had several years ago, 2009 even. So, you know, that's a big difference between 11.58 million and 3.5 million, so people that aren't concerned about estate taxes today may very well find themselves in early January, realizing that now we have to make sure our estate plan is dealing with the estate tax issues that may or may not arise.
Doug:
Yeah, and that's huge. Obviously, you know, people think, "Well, it's 3 million or 5 million or 11 million, what's the big difference?" But for business owners, you know, when you talk about the value of your business is typically the largest asset that you have, and when you think about your heirs and what may happen with regard to that, you can get to those levels really quickly. Certainly.
Doug:
Absolutely, and you also have to think about assets such as your 401(k) Plan, your IRA's, those things that you don't really think about until you're ready to retire and need those, but those all become part of your assets and help make up that 3.5 million exemption amount. So, it's easier to get there than you would think.
Doug:
Yeah. So, in dealing with estate and gift tax returns and issues like that, have you seen the complexity, like everything else, just increase significantly in recent years? Or, what kind of trends have taken place, you know, over the last five years or so?
Doug:
That's a very good question. I can't believe I've been at this for 20 plus years, but it seemed like when I first got into taxes at my old firm before coming to Rea & Associates, tax law change maybe once every five to 10 years. You'd get a big overhaul, you'd learn the new roles, things would stay in place, and that has totally gone by the wayside. We are now dealing with tax law changes monthly, daily, yearly. It just seems like I've said it like this before, it seems like sometimes you're playing a game, but you don't know what all the rules are. So you just, you know, you kind of have to think what's the rules going to be when I decide to retire, what are the rules going to be when I pass away? You know, you just have to be able to kind of take each law change and make it work in your overall estate plan. Flexibility is the key.
Doug:
Yeah, I think that's a great way to put it, that flexibility. Because, you know, I know when I started my career in public accounting, I did some tax work at that time, but I quickly realized there was no way I can keep up with all of this unless I was a specialist in that area, which I'm not. So, I try to know enough to be dangerous and get folks in the hands of our experts like you when it comes to these issues. But you're right, I think it is interesting how Congress has used the tax code more than ever recently, sort of putting forth their policy that they're trying to encourage or discourage, I guess, either way, which does create a lot of uncertainty and it makes planning more and more difficult. And I guess, you know, the lesson at the end of the day is you've got to really re-examine that on a frequent basis, right? It's not something you just let go and put on a shelf.
Doug:
Because, with the 11.58 million exemption amount that we have now, folks are more worried about preserving the step-up in basis that we currently see on date of death, which has been around for a while. But if that exemption amount goes back down to $3.5 million, that you know, if we're going to have a taxable estate at 40 or 45% tax rate, it's going to be more important to shelter it from that estate tax to the extent that you can versus worrying about whether or not you're going to have a step-up in basis at the date of death.
And that being said, that's also a proposal that Biden has supported in the past, is doing away with the step-up in basis, which could be a big deal because at death it would require a capital gains tax to be paid on the increase in the value of your assets that you've had over a period of time. So, definitely important for us to stay on top of those potential tax law changes that are out there. And yes, as always, just make sure that you, your attorney, your financial advisor, and your CPA are working very closely to keep your plan as efficient as possible, but allow for those flexibilities.
Doug:
Yeah, I think that's great advice too, in terms of getting the attorney and your other, say your financial planner and all those people together. We don't see that enough, a lot of times with clients and prospective clients, they sometimes tend to keep those things in a silo and it doesn't help the information flow and the communication when it's done in that fashion.
So boy, that basis step-up, if that were to go away, as you potentially suggest, I mean, that would be a massive, obviously massive change for almost anybody out there. It would be a big, big difference.
One of the other questions we get frequently, Inez is about gifting and how to address that, you know, when you're gifting to children or things like that. Can you touch a little bit on that topic for us?
Doug:
Sure. So, currently, the gift exemption and the lifetime unified exemption amount for estate purposes, are unified. We called those a unified exemption amount. So you can, under current law, give away up to the $11.5 million before death or after death. That's the max that you have. Now, under the current gifting rules, if you give more than $15,000 to anyone done in a year, then we do have to file a gift tax return. And what that does is we then use a part of your exemption amount, that $11 million, and we just record that on the gift tax return that's prepared.
So, even though we have these large exemption amounts, there still may be gift tax filings along the way. You want to make sure you're letting your accountants know what kind of gifting you're doing throughout the year. And currently, Biden has also supported a provision where you could only do lifetime gifting of up to 50,000. So, you know, again, we're just throwing out there some things that have been battered around, but that is a potential, is that you know, where we have those unified amounts right now, you can gift during lifetime or at death, that may not be the case in the future. It may be capped at an amount similar to $50,000 or a million and a half, or whatever that might be.
Doug:
Yeah, massive changes potentially, for sure. So, I think the lesson at the end of the day, Inez, is again, be flexible and make sure you're working with an expert like yourself when you're thinking about all of these things. The planning, you just can't do enough of it, frankly, from a client perspective. And to sit down with somebody like you and their attorney, and as we said, I mean, that's just so, so important to make sure that happens.
So thank you, you're such a great resource for our firm and for our clients out there and we really appreciate it. So, thank you for being on today as well and sharing all of this, the sage advice. So, it was great visiting with you, and we'll look forward to having you on again here soon once we get maybe an idea of what the next administration's focus might be with regard to some of these changes.
Doug:
Sounds great.
Doug:
And you can help us navigate and understand some of those. So, look forward to that.
Well, thanks again and if you want more business tips and insight, or to hear previous episodes of Unsuitable, visit our podcast page at www.reacpa.com/podcast. And while you're there, sign up for exclusive content and show notes.
Thanks for listening to this week's show. Be sure to subscribe to unsuitable on Apple podcasts, Google podcasts, or wherever you're listening to us right now, including YouTube. I'm Doug Houser, join us next week for another unsuitable interview with an industry professional.
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The views expressed on unsuitable on Rea Radio are our own and do not necessarily reflect the views of Rea & Associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere.
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