Is Moving money To A Family Inheritance Tax Subject To Gift Tax? |Weekly Wednesday Wisdom Webinars

Weekly Wednesday Wisdom Webinars April 7, 2021

Certified Elder Law Attorney and Financial Advisor Chris Berry of Castle Wealth Group answers questions on retirement and estate planning every Wednesday at 1pm.

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Castle Wealth Group and Christopher Berry help families with estate planning, elder law, retirement planning, and tax planning from their offices in Brighton, Ann Arbor, Livonia, Bloomfield Hills, and Novi.


On this week’s webinar, attorney and advisor Chris Berry of answers the below questions.

  • I am 71, on Social Security, with small savings. Will Medicaid pay for my long-term care?
  • Fixed Index Annuity and Index Universal Life are two vehicles that protect against downside risk. What about Whole Life? What about converting to Term Insurance?
  • Did a Revocable Living Trust in 2015, does a Castle Trust make sense now if I am concerned about Long-Term Care for my spouse?
  • Is the Estate and Inheritance Tax the same?
  •  Last week you mentioned a Family Inheritance Tax as an Estate Tax avoidance tool, is that the same as a Revocable Living Trust or Family Legacy Trust?
  •  According to something from Northwestern Mutual, all withdrawals rate taxable for insurance up to the basis of the policy? Is the cash value of life insurance taxable or no?
  • Is moving money to a Family Inheritance Tax subject to gift tax?
  • Do you have the actual values over the last 10-20 years of how an Indexed Universal Life or Fixed Index Annuity performed, your chart last week seemed generous since the S&P was 5.9% for the last 20 years.
  • What is the time limit of filing a will after death? Where should it be filed? Should that be filed before death? Is there a way for a sibling to hide the will? If yes, what is the procedure to uncover a will?


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Episode Transcript

You can always watch it live on Youtube but yeah, you missed the live experience of watching live it’s like a sporting event. It’s more fun that way and let me keep that going all right. Alright, and so if you do have questions feel free to go ahead and put those questions in the question and answer section. I already have one question submitted in our Q&A section and then I have a bunch of questions already submitted ahead of time. So, I appreciate that and what I’m going to do is go ahead and share my screen and I always like to start with a positive focus something positive that happened over the last week for me my positive focus is that I started coaching my kid’s soccer games or my soccer teams my son Ryan – he’s 11, my daughter Madison is eight and my daughter just had her first soccer practice yesterday which she said she had a good time and then my son I’m coaching tonight so I’m pretty excited with that and also coaching with my dad who is my coach so it’s kind of fun it’s generations of soccer coaching and playing so that’s my positive case. 

And then the weather is probably everyone’s positive focus as well the weather’s super nice here in Michigan with that let me share my screen. Alright so, we do these every week this is general information if you want to see how it applies to your situation as always make sure to schedule some time on my calendar to figure out how this all applies to you but that said let’s get into the questions. Let me move this over here, all right and we’ll get started so the first question – I’m 71 on social security with small savings will Medicaid pay for my long-term care well again Medicaid is a governmental program? And I just got off the phone with a son his dad it’s been dealing with dementia, gotten to the point where he just went into the hospital and now he’s going to need long-term care in our nursing home and we set up a Castle Trust. 

Five years ago and he has about 17 days left before he makes it past the five-year look-back period for Medicaid but he will be able to receive nursing home care at eight to twelve thousand dollars a month, all covered by Medicaid, because we set things up properly he has a farm and some assets but with Medicaid to qualify for Medicaid you can only have two thousand dollars worth of countable. Why is this being weird two thousand dollars worth of countable assets are everything other than a home small cash value of life insurance personal belongings so your stuff a prepaid funeral and an automobile. I don’t know why I’m drawing all these my kids would not be impressed with my drawing skills but your house, personal items, car prepaid funeral, everything, and then two thousand dollars worth of assets everything else would be a countable asset. So if you really don’t have much in terms of savings and you have less than two thousand dollars at the end of the day or if you’re able to spend down to that two thousand dollar limit without any pre-planning then you could have Medicaid step up and pay that cost of care. 

Potentially Medicaid for a nursing home doesn’t have any type of income tax so the amount of your social security or that doesn’t matter really with Medicaid it’s all about the asset test where you can only have two thousand dollars worth of credible assets so you don’t have much in savings. Medicaid might be an option otherwise you’d have to either really plan ahead or we could do Medicaid crisis planning if you did have extra assets to plan for. 

Number two, fixed index annuity and IUL are two vehicles that protect against downside risk, and the reason you know this is they have this, I that means it’s tied to the index so if we have money in the market understand the market kind of goes like this if we have money and something that’s tied to the index. Typically, it means it has downside protection where the growth will go like this if the market goes up you get the upside of the market goes down you stay where you’re at the market goes up, you get the upside. Again if the market goes whoops I don’t know why that’s curved the market goes down or stays the same you say where you’re at so that’s where a lot of people especially given the fact we’ve been on a 12-year bull run. A lot of people are concerned with the pandemic and the economy they might want to move some of the money off of kind of the roller coaster of the ups and downs in the market to something that offers some downside protection. Plus gives you an opportunity for growth and that’s where we get into fixed index annuities and IUL index universal life. 

Two different tools and again we like to first focus on strategy or goals, then strategy, then tools, but a lot of people ask about specific tools because they’re don’t have as much experience with these they’re more experienced with all the tools. We typically use in accumulation investing in the market and stocks and bonds and equities and that type of thing but as you get in your retirement or if you’re concerned about where the market’s going, you might still want growth but downside protection that’s where things like FIAs fixed index annuities IUL’s come into play so the question is what about whole life so whole life is another form of permanent insurance and there are different types of insurance. There’s also what’s called term insurance and we had a question about term insurance as well the cheapest death benefit typically you’re ever going to buy is term insurance so I see some people say well my kids are adults I paid off my mortgage I don’t need insurance anymore typically what they’re talking about is term insurance like my kids are young god forbid I pass away I have term insurance I have a lot of death benefit to cover that. 

But then I was sitting with a client the other day and he’s like I don’t have any need for insurance, and when you’re older near retirement you might not have a need for insurance but there might be a good reason why you might want to look at insurance. One is with IUL we’re using section 7702 where now there is a piece of it that’s geared towards the insurance component, we call that the mortality expense which also could be a long-term care benefit but really we’re just utilizing the insurance piece to sneak in our cash accumulation – our investments, so it grows tax-free so that IUL a lot of times is set up for tax-free retirement income. Whole life is I would not say is a tool that we would use the same way as a fixed index annuity or IUL, whole life is more of a permanent insurance where if we’re looking at more of a legacy play than maybe a tax-free retirement income. 

If we’re looking at like leaving more to the next generation tax-free then we might look at IUL or whole life both of them are permanent death benefits. If we’re looking at this more as I might want tax-free income in retirement and a death benefit then we’d lean more towards IUL, but again it’s all about I keep going back to this but first it’s what is your goal then let’s figure out the strategy and then pick the tool so whole life we would only use that in really a straight permanent death benefit more of a legacy play. Where instead of leaving our kids a hundred thousand dollars we could leave them 200 000 tax free, we can also do that with IUL has some different options. And then I had a question about converting from term insurance, so if you’ve been paying for term insurance and now you figure out that maybe you don’t want to keep paying for that. What are your options depending on the term insurance policy it might be able to convert to you might be able to convert the term to permanent life depending on how you set up that term insurance. 

But typically once you stop paying for the term that insurance is gone and that’s kind of one of the downsides of term insurance is it is cheaper but once you stop paying for it or you’re outside that term the insurance just disappears you don’t have anything to show for it so you can’t really convert term insurance to an IUL or FIA you can convert term insurance. Depending on how it’s set up to your whole life but only if your term insurance policy has like a writer that allows you to do that the only other option is look at. Okay, if I’m paying 500 a year or a thousand dollars a year to term insurance I stopped paying that and now I invest that somewhere else, maybe in the whole life or IUL or something else okay so this is, it’s kind of an advanced topic looking at different ways of using insurance but it is interesting because it can provide more bang for your buck depending on what your goals are. 

Number three – Did a revocable living trust in 2015 does a Castle Trust make sense now if I’m concerned about long-term care for myself or a spouse so I have a lot of clients when they come in they have a revocable living trust, because it’s very basic revocable living trust can avoid. Probate control the distribution upon death any estate planning con attorney can do it the way that we set them up a lot of times we build in additional benefits where we build an opportunity for a lifetime of asset protection for the beneficiaries you don’t see that in any revoke all revocable living trusts but the question is, does a Castle Trust make sense and again it ends up I hate to keep banging this drum. 

But it’s what is your goal then let’s pick the strategy and then choose the right tool so what the Castle Trust does is protect against long-term care costs and lawsuits right as well as avoid probate and control the distribution upon death. Now why doesn’t everyone have a Castle Trust or an asset protection trust what are the downsides and why maybe why didn’t we do it originally if we met in 2015. First of all the investment it’s more of an investment because it’s a more complicated trust so we have to weigh the value of that and then also understand that the trust only protects assets that are in the trust so if we have this Castle Trust understand it’s protecting only assets that are in the trust. 

So that would be things like real estate I met with the client today they’re moving forward with a Castle Trust they had two pieces of real estate and then they had some non-qualified money or I just got off a call with someone who reached out to us they have a home he’s 73 has about 800 000 of post-tax money and he’s concerned about long-term care. Castle Trust makes a lot of sense we move all the assets into the trust and then that starts this five-year race. Where now we can make it five years before everything inside of the trust is protected from that nursing home or Medicaid spend down right but what can’t go in the trust and we’ve talked about this is your IRA money like that pre-tax money you haven’t paid any income tax so what we have to do is we have to a lot of times this makes sense because most people think taxes are going up we have to pay the tax which we’ve been recommending just from tax planning standpoint where tax laws are and the change in the presidency and the pandemic and the deficit but we have to pay the tax to move the money and then we can invest it in the trust. 

So why you might not want the Castle Trust is a you’re not willing to pay for the protection it offers or b you’re not willing to pay tax, and I’m not saying do it all at once but pay tax over time on the IRA  money now for a lot of people this makes a lot of sense just because taxes are going up I’d rather pay a 22 tax now than a 25 tax in the future so yeah if your goal is protection from long-term care then typically a Castle Trust is going to make more sense than a basic revocable trust number four is the estate inheritance tax the same the answer is yes these are synonymous they mean the same thing so you might hear it called the death tax the inheritance tax or the estate tax and I this is a number of years ago. Maybe six years ago I actually had another lawyer get a little upset at me because I reference the estate tax or inheritance tax as a death tax. Somehow that might have political connotations I’m not sure what those are, but typically, we hear the estate tax inheritance tax or death tax it all basically means the same thing it’s another tax when you pass away and right now the estate tax exemption is at 11 million dollars. Adjusted for inflation then when the tax cuts and jobs act expires which is scheduled for 2025 and could be sooner then it’s going to drop down to 5 million and then Biden’s tax proposal and this is also part of Bernie Sanders proposal is to lower it even further to three and a half million dollars so what this means is adding up the value of any IRAs any roth IRAs which are income tax free but not estate tax free any real estate any life insurance that’s not handled properly maybe inside of the irrevocable life insurance trust all of this add all up add up all the value of everything that’s going to be your estate tax value at or your state value at death. 

And right now if it’s greater than 11 million dollars you have an estate tax issue when the tax cuts and jobs act drops to 5 million anything greater than 5 million will be taxed up to 45 percent, and then if the Biden Sanders plan goes through then that’s gonna drop even further to three and a half million, so now if you have greater than three and a half million dollars of assets anything over this amount could be taxed. 

Maybe up to 45 percent so this is where we need to think about other planning strategies which dovetails nicely into my next question, I organized that well is that we might want to carve out this overage in assets maybe it goes to irrevocable life insurance trust where we can remove life insurance from your estate or depending on the type of assets we can set up what’s called a family inheritance trust which is different than a legacy trust. A fit or family inheritance trust is an irrevocable trust that removes the money from your estate. You cannot be the beneficiary of it anymore, you can manage it but you cannot be the beneficiary anymore instead the beneficiary would be the kids but instead of giving an outright to the kids, now it could be held in trust that you could still manage, while you’re alive and well and then upon death. 

It’s removed from your state and can go to your kids that’s different than our family legacy trust family legacy trust is a revocable trust that’s in your name. You can make changes to it but then upon death the way it goes to the kids is it’s held in trust for their benefit upon death, but you’re in control while you’re live you can remove assets that type of thing versus the family inheritance trusts and I apologize we use all these different acronyms. This is while you’re alive and well you’re moving money into an irrevocable trust that you can manage but now the real beneficiary would be say the kids so it’s a way to manage take some amount of money that might be subject to estate taxes remove it from your estate. 

But you can still manage it but you cannot take the money out and put it back in your name you’re really removing it from your control okay but the advantage is now that it’s protected from the estate tax question okay and so if you have more than three and a half million dollars you might want to look at a family inheritance trust or irrevocable life insurance trust to remove some of this money that is over the estate tax exemption. 

Moving on number six – according to something from northwestern mutual all withdrawal rates are from insurance or taxable based on the basis of the police policy is the cash value of life insurance. Taxable or no and so one of the big things I always caution people especially my engineering clients out there is be careful what you read from the internet. Be careful where you do your research, in fact I have a mug in my other office in our conference room that says your Google search does not trump my law degree. So there’s ton of information out there a lot of times my job as an attorney and advisor is to cut through all the bs out there and figure out what really applies to your situation.

Because otherwise, we’re going to go down these rabbit holes where okay here’s the general rule but that northwestern mutual piece doesn’t talk about all the different exceptions or how it applies to your situation. And again this is kind of getting into where are you going for advice right and so there’s a lot of vendors out there where this is where kind of do-it-yourselfers go and they pick out what they want. 

So if you look at building a house you go to home depot and you just start buying lumber and stuff and then you got to figure out how to be the architect and put everything together home depot will send you sell you whatever you want there’s a lot of vendors out there like vanguards or northwestern mutuals of the world where go to them for life insurance, or they’ll help have someone help you buy the right life insurance because that’s what northwestern mutual is. They’re a life insurance company they’re going to sell you life insurance now they might put it together as part of some other type of like kind of overall quote-unquote comprehensive plan. 

But the end of the day they’re not fiduciaries they don’t owe you a they don’t they don’t have to act in your best interest they’re just gonna sell you something and there’s even attorneys, I would say are vendors where every person that walks in their office gets the same basic revocable living trust you’re buying a revocable living trust that looks the same as everyone else’s versus what we do in the legal world is we have different options based on again what are your goals. Let’s pick the strategy and then the tools similar with investments we’re doing the same thing from an investment standpoint, so yeah vendors they’re going to provide some general information and then it’s up to you as the do-it-yourselfer. To figure out okay is that the right information does that apply to me is that in my best interest and then kind of second level of people out there in the financial world are just investment professionals where they’re going to put together a portfolio or sell you some stocks that may or may not be in your best interest. Okay and they might give you some advice but a lot of times they’re still working in what’s called a broker-dealer relationship, where they’re selling you stocks they’re selling you mutual funds versus true holistic planning. 

Where we’re taking a look at everything in it all of it is in your best interest and this is where we are and we’re not the only people here, but just understand where you’re getting your advice from all right so now that was a long-winded setup for northwestern mutual is the money you take out of the cash for your life insurance taxable or no depends on how the insurance is set up depending on how that’s permanent insurance is set up. 

Typically when we’re setting up IUL’s for clients we set it up so that the money you pull out of there whether it’s through loans or however you take the money out is not taxable that’s one of the goals. Typically of setting up an IUL is to have tax-free income so depending on how you set up the insurance policy will depend on whether the proceeds of that will be taxable or not but typically if our goal is tax-free income. then we’re going to set up the insurance policy so anything you pull out of it will be tax-free income, as well as a tax free death benefit. A couple questions came in is moving money to a fit subject to gift tax so getting back to this the estate tax is tied to the gift tax. So it’s a unified credit so if you were to gift four million dollars to a fit and you have 11 million dollar estate tax exemption well that’s going to cut into your 11 million estate tax exemption because it’s a unified credit. And this is something we talked about before is with understanding that the estate tax exemption is going away the IRS has said that if we gift a portion now and then the estate tax exemption drops this money that we’ve gifted will not factor into this lower estate tax. 

So we have this unique opportunity right now where the tax cuts and jobs act is still going on to make gifts to special types of trusts, where it will not play a role in the future with regards to your estate taxes the next question are educational savings plans included in taxable estates, I’ll have to double check that my initial reaction is yes, because you’re still technically the owner even though you’ve appointed a beneficiary you’re the one managing it but I’d have to double check that I don’t know off the top of my head so like a 529. I would think it would be countable in terms of your estate but I’d have to double check that all right so that’s six do you have actual values over the last 10 to 20 years of how IUL or FIA performed your chart last week seemed generous. Since the S&P was 5.9 for the last 20 years so I kind of summarized this question. 

But again I’m not going to get too much into this, but I will share let me share a screen this is an actual policy that shows how it’s done how it would have done over the last 12 years so and again past performance doesn’t always equal how things will do in the future but by taking out those downsides. This is where index products can really shine so especially when you add your 2002 2012 2002’s 2008’s, if we can take out those downsides you’re going to see how it can really provide some value over time this shows how basically 130 thousands would have or 121 000 would have performed over the last 12 years based on the illustration of just repeating the last 12 years in terms of the market so with this product and again I hesitate to talk tools too much but if you look at the rate of return each year this is pretty good for something that has downside protection. 

Now there’s some bells and whistles involved in this, this is a fixed index annuity but you see over the last 12 years this would have generated seven over seven percent rate of return so by taking out the downsides we can perform similarly if not better sometimes than the market with indexed products. Again I’m not saying everything should go into something like that but it is just another tool depending on what your goals are and then so that was all the questions I had ahead of time. 

Angela wrote in a question and please submit your any other questions or anything else you want clarification on because I went through everything pretty darn quickly today. So what is the time limit of filing a will after death where should it be filed should that be filed before death is there a way for a sibling to hide the will and if yes what is the procedure to uncover a will so when we talk about planning upon death there’s really two main tools that we use a trust or a will. 

A will is instructions to a probate court so typically we want to avoid probate so we rely on a trust a trust does not have to be recorded a probate court or anything like that it doesn’t have to be filed at the court it’s a private document you do have to notify beneficiaries if they are named beneficiary of a trust when they pass away and they’re entitled to understand what they’re a beneficiary of but with a will technically what’s supposed to happen is that a will should be recorded at the probate court upon death because now it’s public knowledge and if a probate is to be opened it should be opened relatively soo. Typically within a couple months and but again a will gives instructions to the probate court and if you’re looking to avoid probate you’re not going to want to rely on a will you’re going to want to rely most likely on a trust is there a way for a sibling to hide the will and if yes what is the procedure to uncover the will. A will is instructions to probate court a will probate court is public for example if you wanted to check on Michael Jackson’s will or Kobe Bryant’s will you can actually find that by going to the court records now what’s in the trust that’s private the only way a sibling would find out about that trust would be if they’re a named beneficiary if they’re not a beneficiary then they’re not entitled to what’s in a trust versus anyone can figure out what’s in a will once the will is recorded at probate court but again typically a will is only recorded. 

If there’s assets going through probate and in which case it’s going to be a public court process so anyone not just a sibling but anyone can see what’s going on in the will that’s another reason why a lot of people lean towards trust-based estate plans versus wills because trusts are public. All right any other questions that you have if you do have questions please make sure to submit them real quick because I went through everything and if you don’t have questions that’s great you can go out and enjoy some of the nice weather I’m gonna enjoy some soccer coaching tonight I think it’s supposed to be 80. Thanks you’re welcome my pleasure I always enjoy doing this all right looks like that’s all the questions for this week Tony writes in, thank you you are very welcome so again we do these every week they’re really dependent on whatever questions you have I look forward to seeing everyone next week please make sure to share this so we can get more people on I always appreciate the questions so thank you so much take care everyone make it a great week 

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