2024 year-end tax planning: Individual tax update

The following is a verbatim output of transcribing from a video recording. Although the information in this transcription is largely accurate, in some cases it may be incomplete or inaccurate due to inaudible passages or grammatical, spelling and transcription errors.

Duncan Campbell: Hello and welcome all 754 of you who have logged in today to, hear us talk about our individual tax and estate planning update as part of our 2024 year in planning series of tax trends. I am Duncan Campbell. I'm a principal here at Baker Tilly. I lead our individual services practice, which includes AR ultra high net worth practice in the private wealth.

I'm joined today by Kasey Pittman, as well as a another fellow director from our Washington tax counsel, Michael Lum. Today we're going to cover a variety of topics. We'll go through a tax policy update. We'll talk about gift and estate planning as it pertains for the end of the year.

We'll go over on the individual side of things what planning we recommend doing. We'll talk about certain things, that you can do now that can affect next year. And lastly, we've got the Tax Cuts and Jobs Act that's in place currently. What does it mean if that sunsets. So, one thing we wanted to start off, we just had an election in this country, our executive offices exchanging over, with that, you know, there's uncertainty, as some may feel. And what's coming up in our future tax policy. I think, we wanted to start off today with that and have Kasey Pittman come on and talk about what she sees in regards to the tax policy and what updates we may see in the coming year. Of course, as I mentioned before, our tax cuts and job tax is set to expire and there's a lot of speculation of what the future of that is.

So with no further ado, I'd like to turn it over to Kasey, to give us an update on the tax policy.

Kasey Pittman: Thank you so much for having me. So last time we spoke a couple months ago was pre-election, and there was a wide array of, potential outcomes in terms of both how the election would go and what the future of tax policy looked like.

I think the common thinking then was that it was likely we were going to have a divided government. That's not what happened in the election. Republicans did sweep, retaining control of the House, though their margin shrunk a little bit. We'll talk about that in a second. Flipping control of the Senate and then getting control of the executive branch as well.

So it may feel like, okay, now we know what's coming, but we really don't. The potential outcomes that we're looking at are significantly smaller in magnitude than the number of potential outcomes. If we had wound up with a divided government. But there's still a lot of unknowns. And I'm going to walk you through why and then talk a little bit about what I think, we're looking at here for, action on this, Tax Cuts and Jobs Act and other provisions.

So let me be in the House. It's going to be controlled by Republicans. They have 220 votes. Just so you know, with a full House, 218 is a majority. So that's a teeny margin. And in the and have 217, because President Trump nominated three people from the House to fill, various positions within his administration.

So, the margin once those elections are complete, is very likely there. Those three seats are likely to maintain Republican control. It'll be 220 to 215. But for the start of the Congress, honestly, for the first 3 or 4 months, it's likely to be 217 to 215. So that is it. Like that is a one vote margin, guys.

And that's really important because when, there are small margins, each individual policymaker has a lot of influence. And we'll talk about how that's leading to some uncertainty here. So that and then over in the Senate, the Republicans have 53 of the 100 seats. That's a more comfortable margin percentage wise. However, it's short of the 60 vote margin that you need to really control the chamber and get, legislation through in the ordinary course.

So why are we even talking about all of this sort of Duncan alluded to, you know, we've got the Tax Cuts and Jobs Act at the beginning of 2017. Really, it was the biggest tax bill we've had in three decades. And it reduced the corporate tax rate. It reduced individual tax rates. It provided a slow through deduction for a number of businesses.

It doubled the estate tax exemption. It changed how we tax international income right. And most of those provisions are expiring. And that's because when they wrote it they had the same exact problem. They didn't have 60 votes in the Senate. When you don't have 60 votes in the Senate, there is a special legislative process you can use to overcome the filibuster, because that's really where the 60 votes come in the Senate.

Anybody can hold it up unless you have 60 votes to end debate and you don't for the Republicans. So they used reconciliation in 2017 for TCJA, and they intend to they've been very clear that if they were to sweep, they intend to use the reconciliation process in 2025 to pass a tax bill. Now, there are some inherent limitations with the reconciliation process, but it lets you overcome that filibuster.

That's not an issue. The way it works is they're going to write a budget resolution. And in that budget resolution, there will be instructions for the committees reconciliation instructions to craft a reconciliation bill. And they're going to say, hey, we would like you to craft a tax bill that can increase the deficit over the budget window. Budget window is usually ten years by a certain amount of dollars.

For TCJA, that was 1.5 trillion. What is it going to be this year? We don't know. And that's kind of what we're getting into, why we're having some issues here. Republicans are really united in wanting to extend the Tax Cuts and Jobs Act, but we have a little bit of a math problem, because to extend the Tax Cuts and Jobs Act is $4.6 trillion.

That's a ton. It would be about 13%, it would add 13%. That alone would add 13% to our current national debt. And our national debt is like cumulative. All of our debt from the existence of time. Right. So that's very significant. Add on to that. I talked about those small margins. There's a really strong caucus in the House called the Salt Caucus.

It's bipartisan and it's got a number of Republicans, I think like 1520 from higher tax traditionally blue states, New York, New Jersey, Connecticut and California. And they're very unhappy with the salt cap that really hinders their constituents in terms of writing off, you know, these taxes that they have to pay on their homes, on their income, on their personal property, in their higher tax state, and there's enough of them that they've come out and said, hey, you're not going to pass a tax bill without us.

You're not going to pass a tax bill without our votes. And we're not signing off unless there's tax reform for Salt. Well, if we ever were to fully repeal Salt and that's probably not what's going to happen. But just so you get the picture here, it would be $1.2 trillion, 4.6, 1.2 now we're at $6 trillion.

And then President Trump made a number of promises. Not promises, proposals on the campaign trail about other tax items, credit for our home care givers, credit for, installing a tax on tips, no tax on overtime, no tax on Social Security. I will say we can't touch Social Security with reconciliation. That's one of the limitations of that bill.

So anyway, a number of items oh, bringing the corporate rate down further for domestic producers from 21% to 15%. So anyway, this is a ton and all of these things cost money. So now we're like kind of in the there's not a lot of details on some of these. We're kind of in the $10 trillion range.

And we still have a bunch of deficit hawks inside the Republican Party who are not willing to write a blank check. And to be clear, we're on an unsustainable course. It's a fairly well widely accepted we're on an unsustainable debt force. We paid over $1 trillion just for the interest in our debt last year. That's more than we spent on defense spending.

So it is a problem. It is something that we need to be conscious of. There's a growing consensus inside Congress that we really do need to make sure we're generally fiscally responsible. So unlikely we're going to have this sort of $10 trillion sign off, right? So what are they going to get? 2 trillion. 3 trillion. That's what we're hearing a lot of potentially getting.

Well, how are they going to make that work. Right. Because our priorities if you add them all together 10 trillion over ten years. Here's a couple of things we can do. As I mentioned, TCJA was deficit funding, 1.1. $5 trillion. It is a misconception that it was $1.5 trillion in tax, that it was $5.5 trillion in tax cuts and $4 trillion in revenue raisers.

So, right, we could do that again. There could be some revenue raisers. We don't know what they are, but some of the more likely ones that we're seeing are rolling back of the IRA credits. That's something that's really popular with Republicans. So again, in the party, there's some dissension a lot of Republicans in the House don't want a wide rollback of those because they're really positively affecting their district.

So maybe a more modest rollback of those is what we're looking at, as potential revenue raisers ending the ERC early. And then, you know, we'll see tariffs. Although there's a scoring issue with tariffs I won't get into the details. But there are a number of revenue raisers, but not to cover or even to come close to covering up the ones that have been talked about to cover that amount so we could see some revenue raisers.

We could see not every provision in the TCJA get extended, although like, again, I think there's a real unification in the party that we're seeing in terms of wanting to extend all of it. Or we could see them extend it. We're hearing a lot about this a shorter time period. There's a ten year budget window, but that doesn't mean they have to extend it for ten years.

They could do it for 3 or 4 or 5 and sort of kick the can down the road. And we could be back in this position, you know, right after the next presidential election. So we're going to see what comes out of this. But first they have to get to that budget number. And that is a compromise among Republicans.

They're going to have to agree on a number once they get that number. And it goes to, you know, they sign off on these reconciliation instructions and they put the bill together. Right. And we're turning all these dials. What do we need to do? How long can we do this for. Do we need revenue raisers. What can we do to make this fit within the parameters we've been given in terms of deficit financing?

So that's really where we are. We don't know exactly what's going to happen. But there are some things we were worried about before that we don't need to worry about. We don't think that the estate tax is going to come down to $1 million. It's very likely to be extended at its double rate. I don't know that it's the highest priority, but that's again, the general consensus we were worried about potentially 199A going away.

That's probably not going to happen. Worried about a wealth tax. That's definitely not going to happen. So there are a number of things that we were considering that we can take off the table. That being said, there's still a lot of work we need to do to prepare for the potential options so that we're ready to act so that we're nimble.

And I think Duncan's going to talk a little bit more about that later. In the short term. I will say we're in the lame duck session now. We have two weeks left, I believe two weeks from tomorrow. Senate leaves in two weeks or two weeks from today Senate leaves and two weeks from tomorrow, the House leaves.

Our government funding runs out in 15 days. So that's priority number one. They still have to pass the National Defense Authorization Act. There's a farm bill they have to pass. There's a disaster bill that looks like it's gaining some traction and may attach to one of these. We're very unlikely to see any tax action in the next couple of weeks before the new year.

And honestly, because why would Republicans really want to sign on to that? They know they're going to run the table next year, and they're going to have an opportunity to govern the way that they want to. So there are and we get a lot of questions about that bipartisan bill, which I know we've talked about on these, webinars before that sailed through the House in January by like over I think I got over 80% of the votes.

And it was a compromise between the Republican leader of, the House Ways and Means Committee and the Democratic leader of the Senate Finance Committee. And, it just died in the Senate. It sort of languished. But there is bipartisan support for the majority of provisions in there, at least definitely the business provisions that affect and many of those affect flow through those.

Right. And floaters were reported on our 1040. So we'll see if we believe that those are likely to be included in any eventual bill as well. So a couple other things I just wanted to talk about. I mentioned that Inflation Reduction Act as a potential revenue raiser, and how we expect it to be a more modest rollback rather than a universal cutting of it.

But we do think those EV credits are likely to go, the potential to sell credits may also be at risk, and a few other things. But as we get more detailed, we'll keep you updated. And the other one I wanted to talk about for a minute is tariffs. Because tariffs don't have to go through Congress. Over the last hundred years or so, Congress has ceded a lot of its authority to impose tariffs to the executive branch, thinking that that was a more appropriate action.

You know, in terms of negotiating trade positions. So, honestly, we've seen a lot of action from President Trump, both in his campaign speeches when he was campaigning and now on his social media platform. In terms of proposed tariffs. And we're getting a ton of questions. Can he unilaterally implement them without Congress? More likely, yes. Right. We'll have to see.

We'll have to see under what authority he attempts to do it. Will there be a court challenge? Yes. People are already preparing their court challenges and industries are already lobbying Congress to say, hey, could you pass a legislation that would limit the president's ability to implement tariffs? None of that obviously can't challenge something hasn't been done. And there doesn't seem to be any, action so far in Congress to limit the president's authority.

But we have seen in the campaign, proposal of 10 to 20% across the board, 60% on China, 100 to 200 or more, percent on cars coming from Mexico. Now, in recent days, we have seen, you know, postal action. We've seen 20% on Canada and 20% on Mexico. A lot of that he's tying to, the import of drugs, particularly fentanyl, open borders, immigration, things like that.

And then there's another one for an additional 10% on China that's being, again, tied to fentanyl. And then 100% on BRICs countries. I don't know if anybody follows BRICs, but Brazil, India, China, Russia and, South Africa. And then a couple others have joined as well because they're trying to develop their own currency that would kind of, they're hoping would replace the U.S. dollar in, in some trade functions.

So again, 100% on that. That's a lot. That's a ton. And that's going to hit our businesses, that's going to hit our floaters, it's going to hit our consumers. It's going to hit all of our assets. And the valuations, if that comes to fruition, right. Are those really broad aggressive tariffs. That being said, we don't know if he really intends to implement these on day one.

Or this could be posturing in terms of trying to get a better deal when he goes to the negotiating table, when he's in state, when they're again negotiating trade relations. So to be determined. But it is something it's been a big enough theme in his campaign and his post-election, thoughts that we do need to take it seriously.

It does seem as though there is likely to be a significant change in our trade policy as it relates to tariffs. So we don't know, but we're keeping an eye on it. We're keeping everybody up to date. And to the extent that affects you or would affect your business. We really encourage you to reach out to your advisor and talk about, you know, again, planning so you can be nimble if they are, implemented.

And I would say that's sort of a wrap up. Again, please stay. And we try to put up something every, every month and we try to put these on every quarter and just keep you informed and really love engaging. So please give us your feedback. Give us your questions. We're always eager to hear from you.

Which one of the expiring tax cuts would most impact your situation if it wasn't renewed? Top individual rate and increase AMT exemption and personal phaseout threshold. The 199A QBI deduction, the double the state tax exemption or I won't be impacted by TCJA expiration. So if you could go ahead and answer that I am very interested to see this.

Which one of the expiring tax cuts would most impact your situation if it wasn't renewed? Top individual rate and increase AMT exemption and personal phaseout threshold. The 199A QBI deduction, the double the state tax exemption or I won't be impacted by TCJA expiration. So if you could go ahead and answer that I am very interested to see this.

Michael Lum: Thanks, Kasey. My name is Michael. And, I'm a director in our national tax group. My area of expertise is gift and estate tax. And before joining the firm, I was a practicing estate planning attorney in Las Vegas, which is where I'm from originally, and then also in Dallas, where I currently live. And I'm going to give our estate planning update today.

By way of background, the Tax Cuts and Jobs Act or the TCJA, case you alluded to, was signed into law December 2017. It doubled the estate tax exemption, the gift, an estate tax exemption for 5 million to 10 million. And that amount has been increasing every year with inflation. So this year in 2024, that amount is $13.61 million per person.

And it's set to increase to almost $14 million per person next year. $13.99 million, to be exact. And again, kind of piggybacking on what Kasey said, the TCJA is scheduled to sunset, with respect to the gifting estate tax exemption. So in 2026, the way that the law is currently written, you know, we're expecting that exemption will get cut in half.

Here at the bottom of this slide is a chart that illustrates the trend in the estate tax rate and the trend in the estate tax exemptions dating back to 1997. You can see the rate is illustrated by the one, the exemption by the bars. You can see that the rate has declined from 55% in 97 to 40% today, whereas the exemption is increased from $600,000 in 97 to again, almost $14 million next year.

And what that has done is it's sort of confluence of those trends, as well as lower interest rates during this period of time, has opened up a really great window for wealth transfer planning. So folks have been able to transfer more wealth during this period of time dating back to 2018 now than they have ever have historically.

And again, with the TCJA sunset, we're kind of entering into the final inning of this, potentially. And so, you know, I think it's important to consider how to best utilize it. On this slide here, just to kind of clear up a misconception, I think, that some clients have in terms of how the exemption works here.

You can see on this slide there's this layer cake. There's two parts to it. Below the black line is the pre TCJA amount of the base amount of the exclusion above the black line is the bonus portion that's the portion that was added by the TCJA. And the way this works is that in order to get into the bonus, in order to use the top part of this cake, you have to eat through the bottom of the cake first.

In other words, you have to make gifts to fill up the bottom part first before you can get into the top. And so to utilize any portion of that bonus exemption, you really need to give way more than what you expect the exemption to fall to in 2026.

And the projection is that it will fall somewhere between 6 and 8 million. I think with inflation, it's probably going to be between 7 and 8 million. So you need to give something more than 7 or $8 million to use that bonus exemption and to use the whole, bonus exemption, you got to give $13.6 million with this year or 13.9 next year.

So again, it's in terms of the bonus, it's use it or lose it. And hopefully this clarifies, you know, something I think clients safe. Well, you know, I can use the bonus part, his top part of this and preserve the base. Preserve the bond for later. And unfortunately, that's not the way it works.

So, Kasey gave us this great discussion on these elections. And, you know, I think that the speculation is that, you know, some or all of the TCJA provisions will be extended. And so you might ask, does the conversation that we've had up to this point in terms of the expiring state tax exemption and maybe the urgency to plan, does that really matter given the results of the election and I would say yes for a few reasons.

Number one, the law has not changed. Right. So, we should plan based on the way that the law is currently written. And at this point, this is what we're dealing with. We're dealing with this sunsetting the 2025. The other thing, too, is, you know, again, kind of harkening back to some of the things that Kasey said is the process of extending the TCJA, and all of its provisions is going to be more complicated than maybe some people anticipate.

Right. As she mentioned, a full extension would contribute significantly to the deficit. And you've got folks out there who just don't wanna see that happen. Right. So, the other reason I think that this conversation is important is we don't know what to say or what I think that most practitioners, many estate planners that I talk to, you expect that the gift estate tax exemptions will remain high, that part will be extended.

But we never get. Right. There are other policy objectives that, that, you know, Congressman, you want to advance ahead of the gift, the state tax exemptions, and they really don't have to do anything to let it expire. That's just the way that it's written. Right? So you don't have to take some affirmative action to do that.

So, they may decide you know, we've got some other more pressing matters. And we'll just let this one go, at least for now. So that I think that's another reason and then lastly, even if the IRS, you know, legislation next year extends the exemptions and makes them higher for some period of time. You know, it's probably going to be another short term deal, right?

Because the Republicans don't have the 60 votes that they need in the Senate for some more permanent legislation. It's probably going to be a short term deal. And so, you're going to face slightly another one of these sort of cliffs or sunsets in short order. So I do think that this conversation is still important. And so what should clients do?

Well, to borrow phrase from the Red Hot Chili Peppers, they should give it away. Give it away, give it away now. But, all joking aside, you know, I think that if you're in a boat where your estate is well above the estate tax exemptions, let's just say $50 million. Let's just throw a number out there.

Right? If you're in that boat. I think you still plan, right? I mean, there's probably non-tax reasons for you to plan as well. And planning. You probably should have done more planning up to this point anyway. So I say for those folks, keep going. You know, keep that train moving and keep planning I think for folks that maybe don't have taxable estates, say $14 million per individual or for folks that are, for married couples, $28 million, you know, if you're in that boat, then maybe you wait and see, maybe you wait and see, you know, to, the early part next year, hopefully, and see if the exemption gets extended, because, you know, if you're in that boat and you want to use a full exemption, if you want to use one spouse's full exemption, well, you got a $28 million, so you got to give half of it away. I mean, that's a significant, portion of your wealth, right?

And so you may want to wait to see how things go before you make that kind of a, yes. So for people, you know, in that they may want to hold off, but I would say, you know, even if you're in that boat and you have but you have an asset that you expect to explode in value, you may want to get your attorney sort of lined up and have them draft documents that you have ready to go, if, say, the exemption doesn't get signed for some period of time and you can capital trigger on that money.

Now, I want to go into, three economic and tax reasons why you should do this. Now, and here the first is to transfer future growth. So when you make a gift of an asset, you not only transfer that asset, but you transfer the future appreciation on that asset. Okay. So here's a really basic example, to be honest with you, the salary listed example.

But just for purposes of illustration, here you got somebody who has a $14 million state. They give it all the way in 25. Not not real estate, but they give it all the way in 25. Assuming a 7% growth rate, 3% inflation rate, you can see that the difference between making a gift, which is illustrated by this orange line versus not making the gift, but illustrated by the blue line over this 20 year period.

At the end of that, this person can transfer an additional $14 million worth of wealth to family members relative to the do nothing scenario. Okay, so that's one reason this is to transfer that future growth that can be that can be powerful. The other reason the second reason is discounted. So if you have an asset that's not marketable or that you don't necessarily have control over, that asset as, you know, as we sit here today, that asset, is eligible, likely for a discount.

So in my example here, I got 40% of a business interests were $10 million. Well, that if I wanted to make a gift of that asset, I could get a discount. And in this depiction here, I'm illustrating a 20% discount. But in my experience, that discount and more like 30 or 40%, I'm not a valuation person, but that, you know, just in my experience, has been higher.

But just say, conservatively speaking, it's a 20% discount. Well, I can transfer a $10 million asset. I can transfer $10 million worth of value for $8 million of gift exemption. Right. So I'm already setting my firm up, you know, in a better position because I'm transferring 20% more, value that I have to use for my exemption, essentially built in sort of appreciation.

Discounting the reason why this is important is, you know, discounting has been one of those items, sort of, that, you know, legislators don't consider, you know, discounts could go in the future. Of course, you know, we don't know what'll happen. But, you know, if you're able to do it, and achieves other non-tax reasons for you, it could be beneficial again now to lock in those discounts, in case, you know, the discounts go away in the future.

And then the third reason that I have here is to benefit multiple generations. And here there's a lot going on in this slide here. But, just kind of bear with me in this example. Just assume that the parent has, has his $10 million, right? They don't have any gift received exemption. So everything that they have is taxable in the red column if they were to pass their wealth through each generation.

Right. So that's kind of what you expect. You pass well through successive generations. So outright to their kids, their kids transfer out to their kids, etc.. Well, by the time you get down to the great grandchildren, guess assuming no growth or anything like that, you're going to, this person would transfer $2.16 million, or roughly 22% of the original wealth, to their great grandchildren.

It's also subject to a 40% rate, but it also has an exemption, of the $13.61 million tax. So in this example, assuming that this parent has that exemption, they could skip a generation, right? So they could pass a wealth in the yellow column here. They could pass it off instead of going to the children first.

Is that a grandchild and then from the grandchildren to the great grandchildren. So in that scenario, we've avoided one layer of tax and we were able to transfer a 36% of the original wealth versus the 20% that we get in the red state, right. And take one step further in the teal column, let's say we get two generations, then we can transfer $6 million or 60% of the original wealth.

And this can be done in a way, this can be done through trusts where the kids can still benefit. But we're skipping this generation, these generations in terms of tax. So that's another reason, why, you know, gifting now could be that efficient. Now, we've talked about reducing estate taxes, right. We've talked about reducing taxes.

And of course that's important. But that isn't the only goal when you're making wealth transfers. It shouldn't be the only goal. Other goals would include passing wealth to family members, but maybe not too much, maybe not too soon. Right. Shielding assets from creditors, protecting against spendthrift behavior. So if you have beneficiaries who you think you're going to frivolously spend this money on, anything, you know, inconsequential things, well, you know that could be a problem.

That may be a goal of yours pretty, maintain cash flow. And then for clients or businesses that may have a goal of keeping the business in the family. And so the question is, will you know, that being the case with those goals, how should I. And often the answer is in trust. Trusts, can satisfy all of those goals that we talked about.

You could you can save taxes over multiple generations. Again, you can allocate GST exemptions to transfers and then how that skip generations, for, you know, situations where you got the spendthrift beneficiary or yeah, you want to control the timing and, you know, distributions out to the beneficiary. Maybe because of age or whatever the case may be, you can have an independent trustee approach, a trustee or family member, service trustee and control those distributions.

Right. And then finally, I think that this is, equally as important as saving taxes. And that's asset protection when you make it, when you make a gift, you make a transfer to a trust for the benefit of someone else. Those assets are protected from your creditors. Okay. So, you know, they may not have creditors now, but they may have creditors in the future.

And not only creditors, but creditors, people just coming after the money. Maybe they don't have a bona fide claim or, you know, whatever it is, but they just try to come after the money, offers protection to that. And then also it can protect against divorce and stuff. So you can isolate those assets in the trust and protect against claims from divorcing spouses.

So I think, you know, as a protection is kind of sometimes put on the sidecar, right. When we talk about wealth transfer planning, we really focus on tax savings. But asset protection I think is equally as important. And so here we go to our next polling question. The question is do you plan on making substantial gifts before the state tax exemption sunset at the end of 2025? Yes or no? But you can answer that.

So there are a myriad of different trusts. You know, and I've got some of them shown on this slide. There's many more, in estate planning, if you like our opinion. So every one of these has an acronym. But, the point is, is that, you know, there's are many different vehicles for which you can, use to satisfy your goals.

Right. And so depending on those, those are you can use one or more of these types of trusts to satisfy those goals. But I would say I think, you know, generally speaking, it's important to make it agree to a trust. So if you think about trusts tax from the highest level income tax of trusts at the most macro level, you've got grantor trust and you've got non-financial trusts.

Grantor trusts are disregarded for income tax purposes. Whereas non granular trusts are suspected tax havens okay. The benefit of having a grantor trust is I as the grantor I can sell the assets to the trust without recognizing in advance. So let's say I got a $10 million asset. I got $3 million basis in that asset. Well, I could sell that asset to the trust and not recognize any of that $7 million gain.

Okay. So that's the thing that if I could loan money to the trust and the interesting bits that come back to me from that loan are not income for income tax purposes. To me, I can exchange assets with the trust or I swap assets, in other words, so that could be beneficial. Or maybe I've got an asset inside of a trust that has a really low base, and then I've got an asset in my estate of equivalent value with the holidays.

Okay. So that's the thing that if I could loan money to the trust and the interesting bits that come back to me from that loan are not income for income tax purposes. To me, I can exchange assets with the trust or I swap assets, in other words, so that could be beneficial. Or maybe I've got an asset inside of a trust that has a really low base, and then I've got an asset in my estate of equivalent value with the holidays.

Well, I could swap those assets and I can move that high basis asset into the trust, the low base asset in my state. And so then when I die, I can step up from basis on the asset that is in my estate. Whereas that wouldn't happen if it stayed in the trust. Right. So now when my heirs with my family members, with beneficiaries get to sell the asset, well, I've eliminated that gain by virtue of my death in that asset.

Right. So who makes that cost. So that's another benefit. And then finally, the grantor pays the tax on the trust. That may seem counterintuitive, right? You may think, well, why do I want to pay tax on something that we do have access to? And the benefit is that, well, by paying tax, you are preserving the corpus of that trust, that trust can grow compounded unimpeded by income tax.

And as I said, the payment of that tax is not an additional gift. It doesn't lose more of your exemption. Right. So again, you can benefit the beneficiaries not in exemption. And the other thing too is, you know, when you think about estate planning, wealth, financial planning, the goal is, you know, you want to transfer as much wealth as you can outside of your state.

And then what's in your estate? You want to try to winnow that down over time. So that when you die, you have little or no estate tax. And by paying this income tax on these trusts, that helps you to winnow down your estate, system. So some important features of the grantor trusts. Now we talked a lot about the tax savings.

But there is one thing you want to consider when you're making gifts. And that is the step up in basis. Right? We have alluded to it on that past slide. But there you know, you make this clear. If you do have estate tax savings potentially. But if you've got a low base asset, you're going to shift that lower basis to the person that you transfer the assets.

So whenever they go and sell, you know that person has to recognize gain, right. So that's going to be a cost. And so in this illustration here this shows again it's not real estate but a person who has a $40 million asset. That's all that's in your estate. It has zero assets. Give it away in 2025. And in this scenario again assuming 7% inflation, assuming a, I'm sorry, 7% growth, 3% inflation, 23.8% cap gains tax.

This person has to live seven years before the gift option is better than the do nothing option, right? So they have to go to 2031 for that orange line looks better. And so that's another consideration. Now this model here is assuming that the beneficiary sells the asset in each of these years, which is probably not going to happen.

Right. And there are some ways to defer gain depending on the asset. And so anyway, yeah, this is a really simple example. It's not entirely accurate. But just to illustrate the point that you might want to weigh the loss of that step up in basis. And then the last thing I'll cover, before I turn it over to Duncan is, it's just a modulus.

So, you know, we talked about the gift exemption. You talked about the estate exemption. You talked about the GST exemption, kind of big items. But you know, don't forget about some of the smaller things, like for instance, exclusion. If you give $18,000 this year, to unlimited number of people. And that doesn't count against your exemption. That amount goes to 19,025.

You can pay your beneficiaries medical education expenses. An unlimited amount doesn't count against your exemption as long as you pay directly to the institution gets to US citizens spouses, you can make those a limited amount and get to charity. You can make those in an unlimited amount. And with that, I'll turn it to Duncan.

Duncan Campbell: Well thank you, Michael, and thanks for going over and explaining that for us. Appreciate your time on that. We're going to work I’m going to work here this last bit to land the plane. Michael mentioned at the tail end they're giving to Charity unlimited. That is the other part of gifting. Of course, there's to your heirs when you're dealing with estate taxes or potential estate taxes, there's really three primary places it goes.

One, if you do nothing, 40% goes to the government and 60% left to your heirs. Or if you've done something, you've left it to your heirs. The last is you can leave it to charity. And when we're talking about the individual tax so that you're in planning, one of the things this time of year we're dealing with all of our clients on is, hey, how much can I give to charity?

What should I give to charity? So I'd like to give a refresher on what charitable deductions are. What are the limits that apply to those. So there are there's four categories regarding charitable deduction. There's a what we call a 60% category. And that essentially is the easiest type of charitable deduction. You've given cash to a public charity. That 60% category means if you have adjusted gross income of a million bucks, you can give up to 60% of your million dollar income to charity and get a full deduction for it in cash in that form.

So if you had $1 million of AGI, $600,000 can go to charity in that one year, get a full deduction. There is another category which we call the 50%, which we rarely see. But it does happen. But there is a 50% limit organizations. And those are churches, educational organizations and hospitals where you don't get quite the bang for your buck on an ability to deduct side of things.

But it is a 50% of your AGI, and that $1 million AGI. That just means you have a $500,000 limit. The third category, which we see the most of, beyond cash is the 30% limit, which is where you can give appreciated property or capital gain property to public charities. You're allowed up to 30% of your AGI in that one category.

The reason being that is not 60% is because when you give a capital gain property, if you've acquired a Coca-Cola stock for 100 bucks, it's worth 100,000 and you give it to charity, you get a deduction for the 100,000. But you never have to recognize the gain on the difference between your basis of 100 and 100,000. So they're not going to allow you to get 60% of AGI wiped out on that on a deduction basis.

Every year you're stuck at a 30% limit. But it is still worthwhile, for you to be able to deduct that way. The last, of course, is a 20% limit. It's different for your own private foundation. If you've created one, you're now limited to 20% of your AGI on any capital gain. Property. Now, when we're talking about charity and these different categories, it's kind of a fill out the bottom bucket until you get to the top.

If that's if it's still from Michael earlier that clear example you had on the tax exemption. If you've given appreciated stock and you've met your 30% limit on your capital gain property, you've given, you have enough cash, you can fill out the rest to get to a total of 60%, but you're not going to be able to double count.

In other words, if you have $1 million of AGI in you given away stock of $250,000 of value, which is below the 30% limit, and then you're given cash, $350,000 in total, 600,000. You're going to get a full deduction in both scenarios on the amount. But if you if you did 350,000 of value and appreciated securities and $250,000 of cash, you're going to lose out on $50,000 of that appreciate securities because it fills from the bottom up, but you would still get the full 215 cash there because you still have not exceeded, the 60% of AGI limit.

So the question always becomes, okay, based on all those limits. What what is what is it I should donate? First and foremost, if you've got any appreciated assets, and they're more marketable securities, the, the best one to do. The best tax answer is always going to be appreciated. Long term securities, where you do not have to recognize the gain on the sale of it, but you get the benefit of the value.

So it's a tax free nature you may have paid 100 bucks for. It's worth a hundred thousand. You get a deduction for 100,000. It's one of the few deductions in tax where you get benefit for something you haven't fully paid for. You get benefit for the value. The next, of course. Once you've done your appreciated securities, give your cash the last in one you kind of want to avoid if you can is any short term securities that have appreciated.

So they've you've held in less than a year. You may not get a fair market value on that donation. You may actually get cost basis. So you know, if you have any in that category. We try to fill out on a long term basis in cash first instead of on the short term. So as I mentioned, there's different categories of 60.

The 50 to 30 is 20. It depends on the charity you're sending it to. So you always want to make sure that, first and foremost, on a public charity, that there are 501 three, there's a published list you can look up. You could even go on GuideStar and actually pull up a copy of their prior reports that they file with the IRS as well.

If you ever wanted to vet out, the charity, the second of us, of course, and not any priority here are just listing the ones, eligible to give to private foundations of have always and long been a source for our ultra high net worth clients where they've created their own foundations. The last though, and definitely not least, which is kind of a, I'm going to say, a newer concept.

It's been around, but a lot of people have been going there more is to a donor advised fund. A donor advised fund is an account that you can get set up with any generally any investment advisor. They would have, the capabilities for you to make contributions into this account. That account would be similar to like a private foundation.

You get a charitable deduction for making the contribution. There, but you do not have to deal with the administrative headache of handling a private foundation. You don't have to deal with any annual filing. Of the private foundation filing. You don't have to deal with self-dealing rules, etc. and once you make that contribution to the DAF, you get the tax benefit, the deduction that day, the DAF itself will have time for it to pay out contribution.

So think of you've made a commitment to your church or school. You're going to do $1 million over a period of five years. And instead of you making you have a big income, you're in 24. You may actually advance all of that money to the DAF, the million dollars, and have the DAF pay that 200,000 out of each.

Each person consecutive year for the next five years. So it's a way for you to deal with a little bit of planning of timing on that. So, I'm going a little fast on purpose. Just try to land this plane here. But we do have a polling question for each of you guys to be able to get a CPA credit.

Just asking and wanting to know when you do make charitable donations and which form do you typically donate? Is it cash and appreciated securities of Publix? Is it cash an appreciation to Das? Is it to prior foundations or you know what? You're not you're not deciding to do any of that in your all. There's nothing wrong with that.

So, if you could answer that, please. So everybody can get their, their CPE credits. All right. So in a year in planning, side deductions typically are what everybody's trying to accelerate at this time of year. Deferring income is the next item that most are. The one thing that, has become a new, limitation that's kind of come to seeing some people is this 461 L limitation, which is called the excess business loss limitation.

It was instituted as part of the tax cuts and jobs Act, which Kasey covered earlier. Likely extended may may not be for another eight years, etc. but we we are dealing with a threshold here that hey, in any one year, if you've got business losses in excess of your business income prior to this enactment, those losses went could go negative in an infinite negative to negative infinity.

It's hard to say. It's kind of, you know, a interesting concept to think of, but you couldn't go completely negative on your tax return. The the Tax Cuts and Jobs Act puts this limit in and said, yeah, we didn't like that. We're going to we're going to stop you at -578,000 if you're married, or 289,000 if you're single.

So instead of going 10 million negative, and having a huge loss on your return, you would stop at that limitation amount. The excessive amount would be carried forward as a net operating loss for the next year. Now this limit was in place. It was we had to deal with it and calculate an 18 and 19. And then we had this thing called Covid kind of long and at that time the government said, yeah, all these businesses, small businesses have losses.

We can't limit them. So they passed this thing called the CARES act, and they suspended the computation of this limit and put it to it. This can to be the first day of 21, instead of it being enacted in 1819, 20, we had to do a lot of minute returns and updates at that point in time because of that, but it also moves back the sunsetting day of this.

So this one is not a Tax Cuts and Jobs Act item that will sunset the last day of 25 or the first day of 26. It will be the first day of 29 or the last day of 28. So we're going to deal with this for a while. And so just to, land the point home on what this is, if you have a married couple this example, they have $1 million loss from a business that's not passive.

They can actively deduct the 578,000 of that million dollar loss against their income in 24, and they have a loss over 422,000. In the next year. They have that for 22,000 as a net operating loss. So why am I telling you this in regards to a year in planning what this limitation, ultimately did is it would force you to look out in the future and say, hey, is 25 going to be a big income year for me?

Is 24 loss situation? And, and I'm going to be subject to this limit anyway. How do I get more loss today? That can be an argument, in a well for 25. In other words, if you generate more loss in 24, even though you're subject to the limit and it becomes an in a well and 25, I now have it without this limitation.

Okay, this this access business loss limitation essentially is just spread the loss that occurs in one year over two. And the first year it's subject to a limit. The second year it's not. It's unlimited in that year. So if 25 is going to be a big income here, how is it you can accelerate additional business losses this year?

Be subject to the limit. You're going to have to take it out. But now you're setting, with a, a a great tax asset in 25 and in a well that you can use to offset income. Or you say, you know what, I have things I can do and pull traders on in 25 and generate more income because I've been able to, deal with a great loss now.

So things like depreciation, you would want to take conventional conventions, their take on capital asset purchases today. Accelerated depreciation is, for success in 2025. The last one here. I don't want to talk about we'll get to the last polling question so everybody can go grab lunch and and go about their day. Trust Michael mentioned it earlier.

There's things grantor trusts versus non grantor trusts. Essentially in a non grantor trust they pay the same tax bracket as an individual. But it starts at 14,000 bucks of income for an individual. You don't get to that high tax bracket until about 700 grand. So there is a big disparity in the amount of income subject to that high tax bracket.

And trusts. The one thing that you can do and look at, and you have this 663 B election, which is called a 65 day election that says, hey, in a trust is non grantor. You can strip income out of each year as long as you have distributable net income and you've taken some of the cash.

The 65 day election lets you go in all the way until the 65th day of 2025 and take a distribution for 24 and counted as 24 to pull income out of the 24 trust return, lower threshold of income subject to the 37% tax. Put it on the beneficiaries tax return so that they get advantage of the run out of brackets there, instead of being all subject to a 37% rate at the trust level.

Of course, Michael talked about this earlier at the end there, there's planning to set aside for asset protection any of these distributions. The caution I would give, of course, it's moving it out of a protected entity. And there's been some estate planning that's been done in the background. The tax tail should not always wag the dog in this situation, but that is a potential there.

I want, you guys to weigh those, factors there. Lastly, when we're trying to we're talking about 461 L the excess business loss limitation, we do have bonus depreciation. It's working its way down to zero. But for 24, you get up to 60% of your cap. New capital asset purchases there 40%. Next year. You're in planning again.

Hey, let's look at accelerating any of those capital improvements. You've got an additional 20%, benefit for doing it this year versus next year instead of waiting, in the future. So the last polling question here. Hey, do you want any of us to reach out to you and pester you, yes or no? But at the end of the day, for the 952 of you that I've attended today, we appreciate you guys joining us on this webinar.

Kasey, thank you for giving us a tax policy update. Michael, thank you for the education on the estate planning side of things. I hope this was, beneficial to each of you. And if you've got any questions, please reach out to us on BakerTilly.com. Everybody have a good rest of your day. Thank you.