Welcome to the Retirement Tax Services Podcast! Steven is continuing his series on estate tax planning. Therefore, listen, but don’t try to memorize it all. Being able to recite tax codes verbatim won’t deliver value.
Clients don’t expect you to know everything. However, they need you to be willing to help with anything. Aim for the ability to discuss estate taxes intelligently. Anything beyond there is gravy.
Start with the federal estate tax basics. For instance, the national rate is 40% for estates with a value over the federal exemption. That’s well above the highest marginal tax rate on ordinary income. Additionally, it’s well above the capital gains rate, too.
The 2021 federal tax exemption is $11.7 million per taxpayer. That’s portable. In other words, one married spouse can transfer the unused portion over to the other.
This means a potential $23 million exemption to married couples. That’s good news. However, federal rules aren’t the only important ones to review.
For 2021, 11 states and Washington, D.C. have an estate tax. Meanwhile, five states also have an inheritance tax.
Maryland extracts both estate and inheritance taxes from residents. Currently, they are the only state in the union to do this.
Estate tax is based on the value of the deceased taxpayer’s property at their time of death. On the other hand, inheritance tax is calculated from the value received by individuals from the estate.
The estate-taxing roll call for 2021 is Washington, Oregon, Minnesota, Illinois, Vermont, New York, Maine, Massachusetts, Rhode Island, Connecticut, Hawaii, Maryland and the District of Columbia.
The inheritance-taxing states are Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey, and Maryland.
Even if none of your clients live in any of these places, it’s worth your time to look over the taxes there. People move all the time. Similarly, someone may have a relative there who passes away.
Some areas will be outside your wheelhouse. Great advisors help with the process. At the same time, they know when to call for backup. Never get too proud to consult another financial professional (e.g. a specialized CPA).
Steven has lots more in this edition of the Retirement Tax Services Podcast. If you enjoy it, please feel free to subscribe to us on Apple Podcasts or wherever you’re listening from.
Do you have suggestions? Would you like to share a retirement tax planning experience on the podcast? Drop us a line at advisors@rts.tax.
Thank you for listening
Hello everyone and welcome to the next episode of the Retirement Tax Services Podcast Financial Professionals Edition. I’m your host Steven Jarvis, CPA, and in this show I teach financial advisors how to deliver massive value to their clients through retirement tax planning. On today’s episode we are going to continue our conversation on estate tax planning. If you haven’t had a chance to listen to the last episode where we introduce this topic, I highly recommend it, I had a great conversation with Micah Shilansky, an advisor in Alaska, about a recent experience he had with a client addressing 1.6 million dollars in estate taxes. One of my big takeaways from this conversation was that as an adviser you don’t have to know everything about a topic to be in a position to deliver massive value to your clients. In my Micah’s case, it was the combination of knowing — what he referred to as yellow and red flags to be on the lookout for and having a great process in place around client meetings, to make sure he was asking great questions and probably more importantly, giving his clients opportunities to ask the questions that were important to them. So like I said, if you haven’t had a chance to listen to that episode go back and take a listen — a lot of great stuff in there.
Today we’re going to focus on learning more of those yellow and red flags that Micah and I discuss related to estate tax planning. Believe it or not, your client’s expectation is not that you know everything; it’s that you will help with anything. We’re going to dive into some of the details around estate tax planning but the goal isn’t for you to commit the facts to memory, being able to recite tax code does not equal providing value to your clients. The goal is to expand what you are familiar with, so like Micah you know when to ask more questions and when you might need to do additional research for a client’s specific situation.
So let’s start at the federal level. Federal estate tax is currently 40 percent for estates with a value over the federal exemption, which of course is higher than the highest marginal tax rate on ordinary income and significantly higher than the rate on capital gains currently. For 2021, the federal exemption is 11.7 million dollars per taxpayer. And the exemption is portable, which means for married taxpayers, one spouse can transfer any unused portion of the exemption to the other spouse, essentially giving a married couple an exemption of over 23 million dollars. The exemption being so high might lead some advisors to not spend time on estate taxes but like so many other areas, the federal rules are not the only ones that are important. Estate taxes at the state level are all over the place. For 2021, eleven states and Washington DC have an estate tax, five states have an inheritance tax and Maryland has both an estate tax and an inheritance tax. As a quick refresher, an estate tax is calculated based on the value of the property of the taxpayer who has passed away, as of their date of death; while an inheritance tax is calculated based on the value received by individuals from the estate. So it just changes at what level the tax is calculated and who’s responsible for payment. Again, the goal here is not to commit all this to memory, but just so you have heard it at least once and you know which states to be on the lookout for, Washington, Oregon, Minnesota, Illinois, Vermont, New York, Maine, Massachusetts, Rhode Island, Connecticut, Hawaii, Maryland, and the district of Columbia all have an estate tax, and Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey and Maryland have an inheritance tax, so again Maryland is the only state on both lists.
Okay that gives us where the rules are different, but I want to talk real quick about some of the differences in the state rules compared to the federal rules, to highlight why this matters. Compared to the federal exemption of 11.7 million for an individual taxpayer and 23.4 million for a married couple — the state exemptions get as low as 1 million dollars, which would be in Oregon and Massachusetts. In general, states have been trending upward with their exemptions but that isn’t even a 100 percent consistent, so there are really no safe assumptions without at least checking the applicable rules in a given year. So that is a huge gap between some of the lower states at a million dollars exemption and that federal exemption that we talked about. Now the other states definitely span the range between those two, but there are going to be a lot of areas where taxpayers can potentially find themselves in a very expensive situation, if they’re not paying attention to both those federal rules and the state rules.
So even if you don’t currently work with clients in any of those states that I mentioned, situations always change. What if a client moves, what if a client is considering retiring, retiring in a different state or similar to Micah’s experience — what if client’s parents live in another state but your client is involved in the estate planning and comes to you for advice. The good news is like most other tax laws there are things that can proactively be done to plan ahead and make sure clients are not overpaying the IRS.
All right great, now I’ve given you a whole list of where and why your clients might need your help with planning for estate taxes but I certainly haven’t made you an expert on how to resolve the issue, and honestly that’s intentional, some areas are going to be outside your expertise to do all the work for your client but great advisors still add value by helping with the process. Being able to say “Mr. & Mrs. Client, based on what you’re telling me it sounds like there could be some potential issues related to estate taxes that need to be addressed, great news there are attorneys and CPA’s who specialize in these areas and I will be happy to work with you to find someone who can take care of this for you.” This is such a great way for you to add value without having to become an estate planning attorney or a specialized CPA.
Well I know the details of tax rules are riveting for everyone, what really matters is what action we take as a result of learning new information. So let’s talk about action items from this episode. The first action item is to block out time on your calendar for professional development or PD, and dedicate at least some of that time to expanding your knowledge. Personally I am partial to tax plan related learning, but there are plenty of areas that are worthwhile and the great news is that the rules are always changing so this opportunity will never go away. If you aren’t sure what areas you should be focusing your time on, I will put a shameless plug in for retirementtaxservices.com so you can go and see some of the other content that we have on tax related areas. But there are so many great resources in the industry, personally I spend time on kitches.com, Ed Slotts website, Kiplinger, Bob Keebler has great stuff and there are so many great podcasts put out by really successful advisors in the industry who are doing these things in practice. The second action item is to get every client’s tax return every single year, I bring this one up on every episode because it gives you a fantastic resource for identifying playing opportunities for your clients and is really the only surefire way of knowing your client’s current tax situation to be able to have effectively help them plan whether you are helping with estate tax planning or recommending Roth conversions, you need to clearly understand the client’s current situation to responsibly help your client make these kinds of decisions. The third action items to make sure you are giving your clients the opportunity to ask the questions that are important to them, make sure this is built into the process for your meetings and touch points with the client, so you are addressing what is on their minds, this is a great way to make sure you are really adding the value that they are looking for it and not trying to decide for them what’s important. The last action item is to find the Retirement Tax Services podcast on whatever platform you use to listen to podcasts and leave us a 5 star review so we know this has been valuable for you and so our community can continue to grow. If you have any questions or suggestions for future topics, please send us an email at advisors@rts.tax, we would love to hear from you. Thanks for listening, good luck out there and remember to tip your server not the IRS.
