00:45 Lisa: Welcome to another edition of Aging Insight. I'm Lisa Shoalmire and I'm here with my partner, John Ross. And we're here to bring information to our community in the Texarkana area for folks about aging and the issues that affect families that are caring for someone that is aging. The most common things we hear from folks is that they have three main fears as they age. One is, they don't wanna be a burden on their family. Two is, they don't wanna go broke in the process. And John, what's number three that we usually hear all the time? 


01:23 John: Well, and of course, people wanna stay out of institutionalized care if at all possible.


01:29 Lisa: That's right. So as part of this process, one of the issues that comes up over and over again are taxes and what is the government gonna get or what can I do? Or, what are the tax implications of my choices? 


01:46 John: Right. And of course, when it comes to taxes in this scenario, you've got several different types. You have estate tax which applies when you die. You have gift tax that applies related to gifts. And then, you've got other types of taxes like income tax and capital gains tax, all of which can be affected by the way you plan your estate. And I think probably to start out with is to dispel some myths about the estate and gift tax.


02:20 Lisa: Sure. The estate and gift tax, a lot of folks, they talk about, "Well, when I pass away, when I die and I pass my assets on to my heirs, am I gonna have to pay any taxes on that?" The bottomline is the law in that area has certainly changed a lot over the years but as we sit here today, the estate tax just does not impact very many people. In fact, that estate tax, I can maybe think of two or three people that I've come across in the last year that this would even impact. And that is because the way the tax is set up, every single individual walking around in the United States of America today can give way and pass on up to $5 million in assets at their death and pay not a dime in estate tax or death tax.


03:24 John: That's right. And so, the estate tax, because the estate tax is so high, most people having the value of everything that they have is less than that $5 million, which means that when they die, those assets pass without having to pay any estate tax. Now, the other side of that question is, well, do the heirs have to pay a tax on the receipt of that inheritance? And the answer to that question is 'no'. There's never a tax on the receipt of a gift or the receipt of an inheritance. Estate and gift tax is actually paid by the giver or the estate of the deceased person. There's no tax on the recipient.


04:05 John: Now, one comment on all of that. Some people have their assets tied up in things like IRAs, assets where they have grown tax-free during their lifetime. If you are the beneficiary of an IRA, there will be tax consequences to that. However, you should check with the financial adviser because there may be ways to roll that IRA into your own IRA so that you don't have to pay any taxes or you can stretch that tax burden out over a period of time. But other than tax qualified accounts like that, as long as the total value of your estate is less that $5.25 million dollars, there will be no tax at your death.


04:52 Lisa: Well, and if you have an estate over $5 million, well then I'm sure there are plenty of attorneys, accountants and tax advisors that would be happy to assist you [chuckle] with that estate.


05:02 John: Absolutely.


05:04 Lisa: And John, did you know that the estate tax came into play due to families like the Rockefellers, and the Carnegies, and the Mellons and these very ultra-rich families at the turn of the century, and that's where it all started.


05:19 John: Right. So yeah, there was no estate tax up until about 1960. Then they put the estate tax in. Now, people are pretty savvy out there. And what happened was that when they started taxing people at death, well, these very, very wealthy people got the idea, "Well, you know what, I'll just give it all away before I die. And then, there won't be anything for anybody to tax." So for several years, after the estate tax went in, these very wealthy people would give their assets to their kids or their grandkids so that there wouldn't be any tax at their death. And they got away with that up until about 1923 or so, when the government came in and passed a gift tax.


06:06 Lisa: Right. And the gift tax has remained with us as well, just like the estate tax, but what has happened is, we now have what they call a unified tax credit. And that means that if you give away assets during your lifetime, or if when you die, you have possession of those assets and you pass them to your descendants and heirs through a will, either way, you only get a $5 million exemption. So folks, if you're close that that $5 million exemption, you might want to consider doing some planning. But, the government came in and said, "Hey, we've caught onto your scheme. We're not gonna let you give it away during your lifetime and end up paying a zero tax at death, so we're gonna put a gift tax in, and we're going to blend that with the estate tax, and we're gonna make it a unified tax."


07:02 Lisa: So, the government would check for you to see what you gave away during your lifetime, and then what you had at death, and you were passing and giving away. So, we're still at that slightly over $5 million mark, so it just doesn't apply to a lot folks. But, one question I get very commonly dealing with clients is, "Well, how much can I give away on an annual basis, because my accountant or my banker told me that I can only give away $14,000, or $10,000 and not pay a gift tax if I gave that amount every year." And we're gonna take a little break right now, and we're gonna come back and talk about whether that's true, and what really that gift tax, that annual exclusion is all about.


09:52 John: Welcome back to Aging Insight. I'm John Ross. This is Lisa Shoalmire, and today we're talking about taxes, and in particular, right before we broke, we were talking about the gift tax. And here's something that I get people asking me all the time, "Well, John, I've heard that I can give away 10,000 a year, or 14,000 a year, or something like that. And in many times, these families are thinking about making larger gifts. "What happens if I give away more than that?" Well, a couple of things. So, first of all, under gift tax rules, a person can give away up to 14,000 per person per year, without ever having to file a gift tax return.


10:35 Lisa: And John, let me give an example of that. So for instance, if you have a daughter and son-in-law that you just think are great, and you would like to make a gift to them of $28,000. If you make a 14,000 gift to your daughter, and a 14,000 gift to your son-in-law, there's no gift tax return and no gift tax due.


11:00 John: That's right. That's right. But then the question becomes, "Well, what happens if I gave more than that? So what if I gave one person, say 15,000, so $1,000 over that annual amount?" Well, it's not that there's actually a tax due. Remember, as Lisa was talking about, we also have a $5.25 million lifetime exemption from gift tax. And so what that means is, if I were to give more than 14,000, there's still no tax, it just reduces my lifetime exemption by a little bit. So, keep in mind, that as long as you have an estate of less than $5.25 million, there's not going to be any gift tax associated with your family and your family dynamic.


11:48 John: Now, that's not necessarily the end of the story though Lisa, because I'll tell you, here's a story that I had. I had some folks came in, and their mother had been sick for several years and over those years, the family each year had given $14,000 from mom's estate to each one of her kids. So they were giving away 28, 32, however much a year over each year, and then they came in and they said you know what, "Mom needs nursing home care and we gave away all of her assets but we gave away that $14,000 so we're all good right? 


12:34 Lisa: Oh yeah. That's a big mistake. A lot of times, we have families that when they've been gifting as a parent or grandparent has been aging, and they might even be thinking that down the road, they've heard that a nursing home is gonna get the assets, and so they start a gifting plan with a half-understanding or a misunderstanding about how that works. Income tax and gift tax, and the exclusions that go with gift tax and income tax have nothing whatsoever to do with qualifying for Medicaid benefits or more importantly in this case, the transfer rule. So a gift is in fact a transfer from one person to another. Under the Medicaid rules, if you are seeking to get some assistance to pay that nursing home bill for a loved one, they're gonna look back for five years to see what kind of transfers have been made by that individual who's needing that care, and the fact that those transfers were within the 'annual exclusion for gift tax' has no relevancy whatsoever. And so now this family is going to be in a pickle when it comes to applying for Medicaid and accessing Medicaid long-term care benefits.


14:06 John: Yeah, so keep in mind that these are definitely two different rules. There's a tax rule, where you can give away up to $14,000 per person per year but that has nothing to do with, say qualifying for Medicaid to pay for nursing home care. Under those rules, if you live in Texas for example, for every $142 that you give away, you're disqualified for 1 day of Medicaid. So as little as a $142 worth of a gift, can create a penalty under Medicaid rules. On the Arkansas side, there's a similar penalty, it's about 4,900 per month. So, if I were to give somebody say $5,000, I would be disqualified for one month. Would there be any taxes on that gift? No. I would not pay any taxes as a giver and the person that I gave it to would not pay any taxes on the receipt of that gift. But it would still cost me to be disqualified for Medicaid for that nursing home care. So these are two completely different rules. One's tax, one's Medicaid for nursing home care. And I really hope people don't make that mistake of thinking that one is the other.


15:22 Lisa: Well, I guess that just goes to show you that you have a lot of well-intentioned professionals and advisers out there. And they may be more tax advisors, so they know all about the gift tax and the estate tax, and income taxes, and capital gains taxes. But yet, those same advisors may not have a knowledge base about Medicaid rules, paying for long-term care, those type things, and so it's just really imperative, especially in this area, that you get good professional advice, good tax advice, good planning advice for those long-term care needs.


16:07 John: That's right. So, one thing when we talk about estate and gift tax. So first of all, most people are not impacted by the estate and gift tax rules. But that's not necessarily the end of the story because hidden in some of these rules are other tax issues. Some of which may not actually rise up to the surface for many, many years. So here's the kinda of the question, and I like to ask people this question all the time. For most people out there, for tax purposes, are you better off with there being an estate tax or would you pay more tax if they took the estate tax away. And it's actually kind of a interesting question. In fact, for most people, if you took the estate tax away, the family would actually pay more tax. Now that sounds a bit strange. But we're gonna explain that, so what we'll do is we'll take a quick break, and then we're explain why if there is not an estate tax, why would people actually end up paying more tax when they die. So, we'll explain that in just a second.




18:30 Lisa: Welcome back to Aging Insight, I'm Lisa Shoalmire and I'm here with John Ross and today we're talking about everybody's least favorite subject, I'm sure, and that is taxes. And so far in the program, we've learned that almost nobody in our area will be affected by the death tax or the estate and gift tax. We've also talked about how giving amounts of assets away, while you may not have to pay tax and the receiver of your gift may not have to pay tax those gifts may still come back and impact your qualification for long-term care assistance through the Medicaid programs. And finally John, before the break we were talking about how, even though the estate tax does not impact hardly anyone in our area, there are some hidden tax issues that definitely will have an impact on families in our area. So, tell us about that.


19:36 John: Right. So, here's an interesting thing. Normally, let's say that I bought a piece of property. And let's just for purposes of this discussion, let's say I paid $10 for this piece of property. Well, it's a nice piece of property and over the years that piece of property has gotten more valuable. So, I originally paid $10 for it but now it's worth $100, and let's say I wanted to sell this piece of property. Well, if I would sell this piece of property, I would have to pay tax on the difference between what I paid for it, and in this case what I pay for it is called my basis.


20:19 John: So, I pay $10, so my basis is $10, and whatever I sell it for, in this case I sell it for $100. So take 100 subtract 10 and that's 90, and so I would have to pay capital gains tax on $90. Now, what happens for example, let's say I gave that piece of property to Lisa. Well, if I give it to Lisa, it's as if she paid the same amount that I've paid. So, to her, she still paid $10 and so if she sold it, 100 minus 10 she would pay tax on $90. But let's change the facts; what happens if I died and at my death I were to leave that piece of property to Lisa. Well, here's where that an estate tax issue comes in.


21:11 John: Since there is an estate tax, and since that property is part of my estate, even though it's below the $5 million amount because it's part of my estate when it goes to Lisa it's as if she paid fair market value on the date of my death. So, it's just like Lisa paid $100 for it. Well, let's think about it, if she sells it for a $100 and then you subtract her basis what she paid for it which was a $100, well then there's no tax on that sale. And so, the benefit here is when you die and you pass assets as part of your estate, a death transfer is much more beneficial tax wise than giving that property away while you're alive.


22:00 Lisa: And so we actually come across this quite often because a lot of families have... In fear that assets will be eaten up by long-term care cost, often have gifted the farm, the deer lease property, the old home place out that's not too far from the interstate these days; A lot of families will gift that property away during that owners' lifetime, and what happens is because... John, what you were talking about where the receiver of that property now takes the same basis in the property as the original owner, if I receive that property from my grandfather, he gives it to me and I have his basis and he bought, if he bought the property back in 1947, well his basis in that property compared to today's values is likely to be very low.


23:04 Lisa: Well, if I hold on to that property for another 30 years, then there's likely to be a much larger difference between the basis in the property and the fair market value at the time that I pass it along, either through a death or sell the property. And I'm gonna pay a big tax when that happens so that... A capital gains tax. So, if you plan instead to hold onto that property through your lifetime and pass it as a death transfer, you actually get a tax advantage and it's a step up in basis, and you'll pay less tax, ultimately, in the most common situations.


23:47 John: Yeah and so, our topic here being about tax, I would say probably the number one reason the people are asking us questions about whether or not there's gonna be a gift tax or what about the estate tax. Most often these folks are thinking because they're gonna be giving away assets. So, while you've heard us say that there's not gonna be any taxes for most people if you give away assets, unless you've got a very, very large estate in excess of $5.25 million, you could give away assets. But let me say this and let me be very clear about it, don't give your stuff away. It's too important to you and to your security. Now, that doesn't mean you don't still need to protect it but giving it away is not protecting it. As we've talked about, it can impact your ability to pay for long-term care, it can have some negative tax consequences because you lose your step-up in basis and that means somebody else is gonna pay more in taxes when they sell that property later on. But most importantly, if you give assets away, they're not yours any longer. And that means they can be spent by somebody else or that person could get sued or divorced, or file bankruptcy, or any number of other things that could impact your safety, your well-being, your security. So, if you're asking yourself, "Well, I think I need to give away all of my stuff. So I wonder what the tax consequences are." Well, I can tell you that there's no taxes.


25:28 Lisa: Yeah, and that really shouldn't be your first consideration. Although, people in dealing with the IRS and taxes is a very scary issue but giving your things away, taxes are not your first concern. Frankly, I'm concerned about how those resources are gonna be available to you later. I'm concerned about how those gifts may impact your ability to finance your long-term care needs. Taxes are way down on my list of concerns.


25:58 John: Absolutely. But, even though they're way down on the list, these are still some things that you do need to keep in mind as you're going through the estate planning process, because things like the IRA, yes, those things can be rolled over to other beneficiaries, but you have to make sure that you plan correctly for that. While you may not be affected by the estate tax now, that doesn't mean that you couldn't be... Hey, you might win the lottery, who knows? Who knows? So, take all of these things in mind and plan ahead. Now, of course, if you have any questions or you ever wanna try to reach us, we do have a Facebook page and that's at www.facebook.com/aginginsight. And of course, you can get on there, you could leave questions or comments and we'd be more than happy then to answer those on the show. So feel free to look us up on there. Also, if you want, you can follow me on Twitter. And my hashtag there on Twitter is TXKelderlaw. So, if you could follow me on Twitter, you can find us on Facebook, and we'll be more than happy to keep up with what your questions and your concerns are, so that we can answer those here on Aging Insight.


27:19 Lisa: Well, and John, of course, you can also visit with us live on our radio program, we do every Saturday here in the local area, on 1071 on noon on Saturdays. So, that is a live call-in program, so we enjoy getting calls from you all on your concerns.


27:38 John: That's right. So, we wanna thank everybody for watching another episode of Aging Insight, and we look forward to seeing you next time right here.


27:48 Lisa: Bye-bye.