Hidden Treasure

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Now let's get started with finishing well, finishing well is a general discussion and education issues facing retirees guide.com are no advisors upon trial CFP insurance this show does not offer investment products or investment advice welcome to finishing well with my good friend and certified financial planner Hans Schild. Today's show hidden treasure and you might know what you know about Jesus in Matthew 13. You might remember told the story about this man.

He found a hidden treasure on the field.

Anyone allowing me he went and sold everything he had with joy anywhere in that field. Of course he did. To put that in practical terms, and comes to hidden treasure. You know, for me personally, just as Robbie story if you known me in 1990 I was a car salesman I work for the crown organization is somebody and I had a Bible that was given to me. Actually when I graduated from sixth grade that I never could throw away because figure there some kind of voodoo involved, or there was some hex if you know you actually throw the trash that I had it in my possession, and if you walked up to be and you said Robbie. I've got 50 bucks you will you mind if I buy that Bible right there. I sold it to you before your head term because from the standpoint of the basis the value of what I would've thought that Bible was worth me at that point in time was way less than 50 but today here in 2021 that very Bible I still own. You could not. There would be no way you get a buy that Bible no more importantly, would you be able to have any concept of what the value of the word of God is to me and my life and it's like totally a hidden treasure and so interestingly today Hans.

You've got what we are calling a step up in basis.

That was a term that actually an hour ago I had no idea what it meant, but once I did I understood wow the Bible from my standpoint had this huge step up in basis but in order to do that we gotta cover basis and start up with what the basis I mean when you go to your CPA or your accountant or the person that prepares your taxes and you sold something called a capital asset like a farm or piece of land or some stock you know if you own some stock for several years and now you sold it and you go to your account, say why I gotta pay tax on the gain. The first thing the accountant is going to want to know or help you calculate is what's your basis in that stocker in that land. How much did you pay to acquire that land is you and I can have to pay taxes again on the money you put into a capital asset so that the taxes are due on the amount is appreciated. Disable what you talking about this on a senior driven retirement driven radio show that's for average people typically and most people letter will very well to do the coming to me.

As clients they still describe themselves as average people. Even poor people, when, and maybe they are in their own mind, but there as far as finances go. This is a big deal that I want you to learn about okay and so what were going to talk about today is the step up in basis.

That happens after you die gate so if you hold an asset until you pass away, and then you pass it on to your children or your spouse or your nephews and nieces. If you give it to the church. This really doesn't matter because the church is not have to pay taxes on the gain, but a step up in basis means that, but let me just give an example.

Let's say you have an office building that you bought 20 years ago for $100,000 in today that same office building is worth $400,000 and it may be a substantial piece your assets. Maybe ran a business in there and how you own it. Your basis is $100,000 and the worth is 400,000 and you're thinking about selling and if you sold it while you're alive, you would have a gain of $300,000 in asset and you would have to pay capital gains taxes on that whole $300,000 pretty quickly after the sale, and so the difference is as if you held that asset until your death, your children inherited this office building there basis. Tax basis would be have stepped up at your death to $400,000. So if they sold that after you passed away for $400,000 per 420 say they would only have to pay taxes on a capital gain of $20,000 if it was worth 400,000 on the date of your death. That's what basis is the same thing with stock if you bought 100 shares of stock at $10 a share and you put thousand dollars into it many years ago and you now sell it for hundred dollars a share in his $10,000 and you had a capital gain of $9000 and you have pay taxes on. If you hold it until your death and then make a bequest to your children. Your children are going to inherit that with the basis of $10,000, and so on and so forth so that they not because of the step up in basis on your death, your children were they to sell that stock for the $10,000 and there is the hidden treasure right is it at your death, the hidden treasure is the step up in basis that your beneficiaries get tax-free. Yeah so so the motto and this is if we can afford to it. We don't need the money for something else and more doing estate planning for folks are the matter how small this is could be an inherent $30,000 gain that if you simply hold that asset until your death and then give it to your children or your spouse or whoever inherited that that gain in the taxes due on that of every wiped way through the step up in basis so it applies to a lot of things and before I move on to your personal residence because that's handled a little bit differently under a different exception just want talk in the political rhetoric and when you're reading about just in the news and hear your reading and listening the other all talking about raising taxes on rich. That's that's a lot of thing alright arrested, but were not going to raise taxes on anybody that makes less than $400,000 a year okay and I'm just sitting there listening to this enough.

I don't get angry or sad about any of this stuff because this is talk it takes a lot to change the tax code. Just you know when it was done back four years ago that took a lot and it took a lot of people coming together and compromising and think so first of all, I'm bringing up some political rhetoric only because you folks are listening to it and you know I'm just gonna break it down a little bit social.

First, you may have heard the step up in basis because they're talking about. They have a desire to eliminate the step up in basis and if they do that step up in basis at death. If they do that it's going to affect a whole lot of people that have way less than $400,000 a year income.

It's like your mother, grandmother who may be very old and she may be sitting on something that substantially appreciated. I got some clients that have a you know they inherited a beach house and his people are almost 70 years old and the ladies father passed away like three years ago and the mother passed away like six months ago the end it sounds like you have things set up pretty well, but that there telling me that this beach house in Rhode Island is worth about $800,000 and probably tells me in.

By the way, there half of that $800,000 that they're going to get is probably 80% of these people's net worth they don't have but another hundred thousand dollars. Besides their income and all that to retire. So this is a big deal to them and she's in a disagreement brother or sister or whether they are to sell it right away. The sister thinks that Arent and I don't think so mean just becoming a landlord all of a sudden at 69 years old is not and then there have to put money into it which they don't have and so the sisters using the reason to do it as a rental to avoid paying taxes. She's worked under the conclusion that the big text and do and there's not because the department basis right upon the mother's death, then they now have taken this beach house up with a free step up in basis and so while they can sell it and take the income without any tax interest, take the money you were to just put in their bank account. First, a member and invest some of it to secure their retirement.

But you know what what what I want people to get out of this is this is a big deal even if you've got your mother or father or you yourself have an asset and the appreciated part of it is only $30,000 or something is if your mother or father you were to sell it while you're alive, or you're thinking of selling it if you would hold it to your death, you can avoid some taxes on the appreciation as a ghost of the next generation so this is at the very least a consideration were sitting down with people who were up there in years and were doing estate planning is we want to look at all what's the basis and all the capital assets and then what would the tax be due now if we sold now. What would be in a couple years and then what would it be if you held that until he died. Not to mention that you know is the list into these politicians. Rhetoric not paid close attention. Our not heard any of his regular people. Morgan eliminate the step up in basis. While it's time to get send out a little letter to that representative and say you know hey this isn't my idea of no tax rate. Now the raising of taxes so biggest people. This can affect our farms that are still owned by grandma or grandpa them past year and grandma and grandpa's basis and that thing is really low as they inherited or bought it many years ago or small business people. People that own a little mom-and-pop business or something and it may not even be super valuable business and the kids could be in their run and that mom still owns and then when she passes away the under the current law and I don't see this really change in a tonic or what they're saying that the current law is going be a step up in basis that actually could be why she still owns it. Because if she gave it her sold to the kids. They think there'd be a big tax to build do and so there are very average people that are affected by the step up in basis is probably just good I did understand some again today show is the hidden treasure. I'm hoping you can see what were talking about here and talk about it all and we come back in the meantime, you can always get Hans's book the complete cargo guide to planning for and living in retirement is got a cardinal guide.com. Find out more about that or email us with any information with me right back. Hans and I would love to take our show on the road to your church and Sunday school Christian or civic group. Here's a chance for you to advance the kingdom through financial resources and leveraging Hans expertise and qualified charitable contributions veterans aid and attendance IRA Social Security care and long-term care.

Just go to cargo guide.com and contact Tom to schedule a live recording of finishing well, your church, Sunday school civic contact on cardinal guide.com that's cardinal guide.com welcome back to finishing well, a certified financial planner Hans Schild today show hidden treasure were talking about step up in basis and hopefully you're just tuning in, you might want to go back get the podcast of this the weather step up in basis is but but carrying on on the conversation you know we don't want to confuse folks that this doesn't have to do with their primary residence meet I take many clients coming in is the word most many clients they own their residence about people that are 65, 68 people in their early 70s that or did Miranda financial planning. They own the residence they own part of it because they got a mortgage, but a lot of them on the whole thing is planned well and then they generally have some IRA money or the money they do have is typically in an IRA or 401(k) or something and neither one of those assets apply to what we talked about in the first part of the show, so another words you don't get any step up in or free before taxes are hidden treasure if you die with a substantial balance in your IRA. If your beneficiary wants to get anything out of there and have big tax of ordinary income tax. The same is not true for your house so if you sell your primary residence during your lifetime and that's defined by the IRS as if you that is been your primary residence to the last five years and then you sell it while you're alive. You don't know any taxes on the first $250,000 again and for couples it's 500,000. It is because they each get they have to have both lived there. Two of the last five years so couples they get a $500,000 exemption and many clients I have really weren't looking at taxes they just wanted to be rid of the house or their moving in with her kids with her relocating to a much less expensive home in a different and is people of all kinds of reasons to sell their home in retirement and their thinking the way homes of appreciated especially lately they've just been thinking all along that you know this home. I know it's can bring 350,000 only paid 100,425 or something and there just think it is a big tax bill, and I'm telling you there's nothing because you can earn $250,000 of gain on the sale your principal residence. You could do this every really essentially every two years and there's a bunch of builders. This is part of homebuilders that they actually move in and live into one of the homes that they built and then they lived there for two years and at the end of the two years they sell it and they have a $500,000 exclusion on the game. It's a little people in the homebuilding business actually work this but were not really talking to them today were talking to people you just living your house and now you're going to sell it. You don't have to get into this hold till death basis and all this kind of planning now cello both of us being at this age at me. We both realize something we didn't know when or where it is that you don't need all those rooms anymore. Do you like why am I maintaining all this space and you know so why what why do I need all that. I don't want to pay in a property tax on all that and so you know this has been hidden treasure like man I can get up to $500,000 in tax exemption if I sell my primary residence and what a time to do it.

By the way, because homes are just along for like never before. Sure and while people are considering somebody's listening, I don't want anybody go on start making financial moves based listen to the show the real thing were doing the shows I wanted to teach you today what the step up in basis at death, but that really is and how it affects just average people and then how it affects what what I would call well-to-do people, but many of them don't like me: well-to-do because they consider themselves very average normal people but they've just accumulated some stuff and if they have something other than their home and other than their IRA that has some substantial appreciation to we may want to consider. I'm not saying in all cases hold this thing till death and then your kids won't have to pay any capital gains taxes sour sand all will work. What were saying here is as a consideration in estate planning and financial planning retirement planning. We may want to hold onto some things other than the home and the IRA till death.

Now mimic completely flip gears on is if if you have a married couple files jointly in their income is their combined income is lower than $80,000 a year. Do you know what the capital gains tax rate is for those people I don't know you cannot.

It's 0%. What I definitely did know that another hidden treasure like that. So if grandma's income is $40,000 a year and she's got a capital asset that she's holding onto till death, and maybe the inherent capital gain is $50,000 or something she can sell that now and when we do the calculations at tax time.

She's going to have a $50,000 gain. You know that's what it was and then her tax rate on the outer federal tax rate is going to be zero. Now North Carolina's if she lives in North Carolina is going to come in and get her for like 5% or something, but still there's other ways. There's many ways is for this way to avoid capital gains taxes or to keep the rates low split map sales but in estate planning. This is a consideration. It's a big consideration and then it's not real clear what she should do with certain things, tax wise, and I found myself as I was preparing to do the radio show.

You know, as you know Robbie, I prepare a video which later goes on YouTube so like this one will be up next week and it is the preparation for the show and I found myself talking to myself when I was reading it this morning are watching it and I'm thinking that what I what I was telling myself essentially were telling all the listeners in which they tell clients all the time. Don't let taxes and tax consequences tax strategies drive your decision-making that this really shouldn't be the first thing we should talk about like you for talking to grandma about selling her house taxes should not be the whole reason we do that or even a big part of the reason I mean if she wants to sell the house. She's got have a reason for wanting to sell the house like you mentioned mission is a smaller house me she didn't need it anymore. Maybe she's moving into an assisted living or some senior housing can be all kinds of reasons. That's what we want to drive the decision-making when I get clients to come into me and they're just all taxes it's only want to talk about. They want to pull out of me.

These tax strategies that you know minimize taxes and went because everybody wants a little bit of that but when I get the sense that that's the end-all be-all.

I sit down, have a conversation with the client.

Let's think about why do you want to do this particular thing. What do you want to have happened your money.

How do you want to handle this. Who do you want to give it to you want to donate it to who is it possible for you to enjoy this while you're alive or just that needs to be the priority with their goals are and when I found myself talking to myself I'm really thinking.

I wish I do said you know what needs to be the priority is God and what God wants and what God tells us to do so. I was I was almost wanting to add words to my mouth and the videos doing it on the show. I love it. I absolutely love it and I and I also think that that that that I found out this week that that one of the definitions of week biblically in Hebrew is it it has to do with the way you talk to yourself.

So if you put Jesus in front of your mouth and you got Jesus talking your strong but most of us most of our weakness come from what we've talked ourselves out of and when it comes to money, it's really a place that were week. If we allow ourselves to talk ourselves into a strategy without first asking Jesus what it is, would be the strong thing to do in your doing that. When you're you you're asking yourself or your financial and what would you really want to do what you want to accomplish with this money with this asset coming what would selling it do for you what, why do you want to do that. What's going to come as a result of that and then how we can invest that what we can do house that can benefit you as I can benefit God as I can benefit your family and then once we get through all that part of it, then let's sit back and say what's the tax effect and then we may sit and say well now we want to do that because if we you know if we waited till after your death.

And then we gave it to your kids, then your kids again pay substantially less taxes is nothing wrong with that. It's just it becomes wrong when it becomes the main event I I have some people that I really not taken on his clients just just because I mean they they watch my stuff and I think man this guy knows how to beat the tax deal of meaning and just and I do have some pretty nifty strategies they're all illegal or all above board and they're all intended by government. But if that's all somebody wants to talk about then I can get very far with me right because again it gets back to the main event is to meet all have life and life abundant and that includes God in every aspect. But it's it it's a beautiful thing, but also II just love the whole idea of hidden treasure. You know when you find these things that that you see. Wow, this this is of great worth, especially for that family that that thought they had this hurdle that they didn't know how they were going to climb and then all of a sudden while you know they can sell like in the case of the two sisters that don't get around in an old man. If we pull this hurdle out of the way.

Then they can take this asset out from between the two of them and they can work on their relationship. Rather than argue over what can happen with the property absolutely family farms is where this stuff applies small businesses. Families were the last generation was well-off enough to own a beach house for a mountain house or some type of vacation home and those of gone berserk and saw a lot of older people is there doing estate planning they want to give this to the kids and then the many times they're talking about selling it because they know it's worth so much and you know then then I must sit down and I'm just I'm a sated you know that we we go look at the tax effect in the tax bill that's due, depending upon when we sell this because we could rent it until your death and create a bunch of cash flow that will come to you and then it'll it'll it'll then when you pass away, then your kids will inherit that place as you wanted. And they'll not have to pay any capital gains taxes it's hidden forever.

And as always this is brought to you by Cardinal guy go to Cardinal guide.com you can see the video in YouTube and began again. Just go to Cardinal guide.com's got all your stuff right there. Thanks for listing. Thank you. Finishing well is a general discussion and education of the issues facing retirees Cardinal guide.com Cardinal advisors upon trial CFP some insurance this show does not offer investment products more investment advice. We hope you enjoyed finishing well with you by Cardinal guide.com visit Cardinal guide.com for free downloads of the show previous shows on topics such as Social Security, Medicare and IRAs, long-term care and life insurance, investments and taxes as well as ponds best-selling book the complete Cardinal guide to planning for and living in retirement and the workbook once again for dozens of free resources past shows to get Hahn's book go to Cardinal guide.com if you have a question, comment or suggestion for future shows. Click on the finishing well radio show on the website and send us a word. Once again that's Cardinal guide.com Cardinal guide.com this is the Truth Network