The pitfalls of leaving assets up a generation

Episode Transcript

Speaker 1 (00:01):
This is the Legal Exchange with Todd Lutsky from the
law firm of Cushing and Dolan and Susan Powers of
the Armstrong Advisory Group. Each week, Todd and Susan will
discuss many topics, including estate planning, how to avoid probate,
and protecting your money from a nursing home. If you
need assistance in any of these areas, or have a
question about another issue that may affect your future, call

(00:21):
eight six six eight four eight five six ninety nine
to make an appointment. That's eight sixty six eight four
eight five six ninety nine. Operators are standing by. Now
Here are your hosts, Todd Lutsky and Susan Powers.

Speaker 2 (00:38):
Welcome into the Legal Exchange with Todd Lutsky. I'm Susan Powers,
a financial advisor the Armstrong Advisory Group, and I'm joined,
of course by Todd Lutsky, a partner with the law
firm of Cushing and Dolan with a master's in taxation.
Welcome Todd. How are you today?

Speaker 3 (00:53):
I'm never better in you.

Speaker 2 (00:54):
I'm great, Thank you. What do you have for us
this week?

Speaker 3 (00:57):
Couple of things? Uh, Kansas. We're going to go to
Kansas where we have an appellate court case. Basically, how
does an anti lap statute work when you leave assets
to people, in this case parents and disinherit children, and
then parents die before you, which is expected, and you

(01:19):
don't provide where it goes in that event. There's so
many problems with this case. First of all, why are
we leaving assets up a generation? Number one? Never mind that,
But there's a lot we can learn in this thing.
But folks, a lot of people do things like this,
So it's really going to come down to drafting and
planning and understanding how to do it. And then we're
going to head over to Missouri where we have an

(01:40):
appellate court case dealing with specific enforcement of a contract
where a family not a family member, just not a friend,
but someone who worked the farm for some for Kathy
in this case, and basically Kathy ultimately wanted to sell
the farm to Anthony. And then after are they in
a into a contract, they got a much better offer. Now

(02:03):
what do you do? Is there undue influence here? Was
there some hanky panky going on? Who knows? So we're
gonna we're gonna find out about that. But again, I
think the bigger picture on this case is, you know,
how do you deal with getting real estate to another person?
What's the most efficient and effective way to do that
from a planning perspective? And I think that's what we're
gonna learn from that case. But most importantly, it is

(02:27):
a new month, so brand new welcome, Welcome to October
fall and super fall. In this case, we are going
to be giving you a guide that's interestingly enough, making
the most of gifting. Uh. And so it's important because
in it it talks about not only you know what
if you gift, what do you gain? You you lose

(02:48):
a step up in basis, but you get it out
of your estate. Is that good? Is that bad? You know?
What about from a medicaid perspective, if I own something jointly,
is that a gift? How does it Is it protecting half?
Is it not protecting? Our bank accounts treated differently than
investment accounts. So there's that perspective. Can I give things
away and still enjoy what I gave away through the

(03:09):
use of spousal lifetime Access trust for higher net worth
clients that's in here. So you really need to figure
out what makes sense. Just because you can gift doesn't
mean you should and if you're gonna gift, how do
we do it? And do we in if we're gonna gift,
do we gift outright or not? Folks, So much to
think about when it comes to gifting, and the tax

(03:30):
is related to it, not just gift but a state
and income tax all built into this guide. Please get
it eight six six eight four eight five six nine
nine or Legal Exchange show dot com. Get the guide
before you make the gift eight six six eight four
eight five six nine nine or Legal Exchange show dot com.

(03:51):
Heading to Kansas, shall we h going over the rainbow?
So Larry dies with a will in eight of twenty
twenty two. His parents, Frank and Clara are the sole beneficiaries,
and he intentionally omits his two kids. I guess it's
a Zemi and Frank Junior. We'll call him Junior. Turns out,

(04:14):
of course, that the parents predeceased Larry, so normal, So
in May of twenty twenty three they probated the will.
Interestingly enough, a creditor of the estate named Judy was
appointed pr. So now we've got a creditor of the estate.
And so Maddie's the niece who basically says, we got

(04:35):
to file a petition to determine airship. Who gets what here? Well,
the kids, Frank Junior and a Zemi argue that the
gift to the parents had lapsed because both parents had
predeceased Larry and there was no residuary clause in there,
so the assets should pass to them through the interstate

(04:57):
succession statue.

Speaker 2 (04:58):
But he specifically disinherited the two.

Speaker 3 (05:01):
Kids, right, But but there was no residuary clause as
to where it goes if the parents die. And the
parents died first. So the residuary clause, folks, for all
of you that need to know, is a catch all provision.
It says, in the event nobody's around here, where the
rest residue of my assets go. Fine, well, that wasn't there. Well,
the district court decided that no, the anti yes, the

(05:24):
anti lap statute should apply. And so you know, basically,
Maddie is entitled to a share. And and of course
the children of a Zemi and Frank were not disinherited really,
so as grandkids, they should take what the parents would
get and split it up, right, So they're his silo amount. Yeah, yeah,

(05:50):
so they want They said that that's how should go. Well, Frank,
and as you imagine, Frank, Junior and a Zemi appealed.
They didn't like that result at all. They said, no,
we're gonna We're gonna appeal for all the same time, Well,
the appellate court affirmed the district court, and I think
that's appropriate, stating basically that the lack of a residuary
clause does not prevent the stated disinherited language of the

(06:14):
don ore from being effective. You are still disinherited kids.
That doesn't change because there's no residuary clause. And therefore,
since the kids, the grandkids of the two kids were
not specifically disinherited by the don oor, well then those
kids should take under the intestate succession.

Speaker 2 (06:35):
Status Junior and Zemi's kids the grandkids because but not them,
not them, they're the children of Larry because remember he
left it up a generation.

Speaker 3 (06:47):
Crazy. Yeah, anyways, folks, I think that's the right result here.
But we don't want to have to go He.

Speaker 2 (06:54):
Didn't want them to get it, so it does sound right.

Speaker 3 (06:56):
Yeah, we don't want to go through this. And again
I think it's if you make a good point, Susan,
at least what I was going to say this a
will or a trust. Both of these serve to specifically
direct how your assets go.

Speaker 2 (07:11):
And sometimes more importantly where you don't want them to
go or.

Speaker 3 (07:14):
You don't want them to go. So in this case,
while they didn't do a trust, they did a will.
And I always say a will's a won't but it's
better than nothing. And in this case, it's at least
going to make sure that the assets go where you
don't want them to go, right, And you make sure
where they go where at least as the next best option.
And again remember by doing the will and not of trust,

(07:36):
you put the creditors in play. And that's always interesting
that a creditor in this case was.

Speaker 2 (07:41):
Maybe maybe he owed you money. It could be a
sister or something, yea a sibling or.

Speaker 3 (07:47):
So from a lesson standpoint, again, the trust would have
been better because it would have avoided probated. In many
states only probate assets are at risk for creditors, so helpful.
What about drafting. Remember whenever your disinherit people and you're
leaving assets unequally, always put a no contest clause in
right would have been helpful here too. And no contest
clauses always is always helpful, and also be clear, right,

(08:10):
don't leave things open like you did here. Example, if
we're disinheriting a child, ask the I always ask, okay, well,
if you don't want to go to the child, do
you also not wanted to go to their kids?

Speaker 4 (08:22):
Right?

Speaker 3 (08:22):
You know, just because you had a bad relationship with
the child, are you going to penalize the grandchildren or
do you have a good relationship with them?

Speaker 2 (08:29):
Yep?

Speaker 3 (08:30):
Or even if you don't and they were sheltered, are
we going to blame them because of what the parents did?
You know, you have to think that through, so always
ask that. And really the bigger picture here is whenever
you're leaving assets up a generation, you always need to
consider where things go if they die first, right, which

(08:52):
they did.

Speaker 2 (08:52):
But even if they don't die first, they're going up
and then they're going to be taxed on the way
down again.

Speaker 3 (08:57):
And that was exactly right, Susan. That's exactly what was
next on my list here. It says you've got to
be careful because if you leave it up a generation,
then it's taxed on the way back down what you
don't want, and then it's taxed again at your generation,
right to go down to grandkids. But more importantly than that,
and it's okay to take care of parents. I'm not
saying not to, but do it right. If you leave

(09:18):
it up a generation, leave it in trust for them,
in which discretionary distributions can be made by the trustee
to or for their benefit. That way, they don't own.

Speaker 2 (09:31):
It, so like the inheritors trust that you like an
inheritor trust, right. I never thought of that for a generation.

Speaker 3 (09:36):
Up generation up that way. Not only do they not
own it, so it's not subject to a state tax
when they die, it's not subject to the nursing home
if they go into a nursing home. Now you've preserved
it for the kids and the grandkids down a generation.
If in fact you really want to make sure you
take care of your parents in advance of your family,
I mean, and there's nothing wrong with that, but just

(09:56):
be careful when you're doing it as to how you
do it and how you put it to Like anything, folks,
it's like making a gift. This is the new guide.
Be careful before you make the gift, figure out the
best way to gift, or maybe not to gift and
this guide gives you the estate tax, gift tax and
income tax issues with gifting eight six six eight four

(10:18):
eight five six nine to nine or Legal Exchange show
dot com.

Speaker 2 (10:22):
You've been listening to Todd Lutski, a partner with the
law firm of Cushing and Dolan. I'm Susan Powers, a
financial advisor with the Armstrong Advisory Group. We've got much
more to come when we return to the Legal Exchange
with Todd Lutsky.

Speaker 1 (10:36):
Cushing and Dolan want to help you avoid costly mistakes
when it comes to gifting assets to your children. Their
brand new guide Making the Most of Gifting Assets shares
crucial strategies to help you protect your legacy and your family.
Many people think gifting is always a good thing, but
if it's done the wrong way, they can create real headaches.
Even well intentioned gifts can cause complications if your children

(10:56):
are dealing with financial pressure or legal issues like a divorce.
The guide also explains how a major gift like a
home or vacation property could come with hidden tax consequences
that may impact your entire estate plan. Before you make
any big moves, arm yourself with the facts and this
new guide from Cushing and Dolan. Call eight six six
eight four eight five six ninety nine right now to
get your copy. That's eight sixty six eight four eight

(11:19):
five six nine nine, or request it online at Legal
exchainshow dot com. That's Legal Exchange show dot com. The
proceeding is paid for in The views expressed are solely
those of Cushing and Dolan. Cushing and Dolan and or
Armstrong Advisory may contact you offering legal investment services. Cushing
and Dolan Armstrong Advisory do not endorse each other and
are not affiliated.

Speaker 4 (11:36):
Are you wondering where the economy is headed? GDP is growing,
but Tariff's inflation and job numbers are making headlines. Interest rates,
housing costs, and policy changes are impacting all of us.
Even AI is changing how markets move. HI, this is
Chuck Zauta from the Armstrong Advisory Group. We're hosting two
financial seminars this fall to help you make sense of
it all. Join us at Margaritaville Resort, Cape cod on

(11:57):
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at Hill on October sixteenth. To reserve your seat, call
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and smart decisions are several of the keys to navigating uncertainty.
Registered today by calling eight hundred three nine three for

(12:19):
zero zero one or on our website Armstrong Advisory dot com.

Speaker 1 (12:23):
The proceeding was paid for by Armstrong Advisory Group, a
registered investment advisor. Nothing in the ad or in any
Armstrong guide to specific financial, legal, or tax advice. Consult
your own financial, tax into state planning advisors before making
any investment decisions. Armstrong may contact you to offer investment
advisory services.

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Speaker 1 (13:37):
You're listening to the Legal Exchange with Todd Lunsky, an
expert in elder life planning and taxation. Need help with
your estate plan comptid right now and make an appointment
eight six six eight four eight five six ninety nine.
That's eight sixty six eight four eight five six ninety nine.

Speaker 2 (13:52):
Welcome back into the Legal Exchange with Todd Lutsky. I'm
Susan Powers, a financial advisor with the Armstrong Advisory Group,
and I'm joined by Todd lack Sky, a partner with
the law firm of Cushing and Dolan with a master's
in taxation. So we're not in Kansas anymore.

Speaker 3 (14:07):
You're right, perfect timing, We're not well played.

Speaker 2 (14:11):
We're in Missouri, close by, close by, don't make me
pointed out them, So head over to Missouri.

Speaker 1 (14:19):
Right?

Speaker 3 (14:20):
What do we got going on here? Something we don't
talk a lot about, but specific performance in a contract
and making it enforceable. And why is that an estate
planning issue? And how does lack of capacity and undue
influence even come into play here? M let's take a peek. Anthony,
an individual, began farming Kathy's farm in two thousand and seven,

(14:43):
and over the years they had developed a professional relationship
and actually over the years they became good friends with
each other. Anthony would even spend the holidays over there
and Kathy. As Kathy got older, Anthony even started helping
out with cutting the grass and picking up meds and
taking her to the doctor and you know, doing things

(15:04):
for her. So they professional and friends and he's running
the show, running the farm. In twenty sixteen, Cathy decided
to ask Anthony if he wanted to buy the farm,
and he said, yeah, I would love to, but I
can't afford it. I can never pay what you could
get even at auction for it. But Cathy said, you know,
I'd rather sell you the farm than have it go

(15:25):
to auction, and I don't care about the difference in costs.
So they continued to discuss this idea until about June
of twenty twenty two, when they agreed on a purchase
price of two hundred thousand dollars. Anthony prepared the contract
but wanted to wait to have it signed until Kathy's daughter,
Martha was actually present they could talk about it nice. Well.

(15:48):
In September of twenty twenty two, they did execute the contract.
Martha was there, and they did it right before Kathy
moved to Colorado to live with Martha, the daughter a
week later. One week later, Martha gets a text from
Kathy's neighbor to buy that farm for four hundred and
fifty thousand dollars. Remember they agreed on two hundred. Yeah,

(16:13):
Martha tells Anthony the agreements off. Anthony Sue's for specific
performance in breach of contract, which makes sense right well. Martha,
as guardian ad lightem which raises a red flag to
me guardian adlam for Kathy, says that there was undue

(16:35):
influence and lack of capacity as a defense when Kathy
signed this contract.

Speaker 2 (16:41):
But Martha was there, wasn't she.

Speaker 3 (16:43):
Martha was there. I remember this June of twenty two.
They agreed, September of twenty two, they executed and then
moved in a week later. So was their lack of
capacity at that time? Well, the court said judgment for Anthony,
which I agree with, yes, and they appealed. Of course,

(17:06):
the appellate court affirmed, basically stating that Cathy understood the
nature of what she was doing, the effect of entering
into the contract, and in fact, she's the one that
even asked Martha to invite Anthony over for the signing contract. Plus,
Catherine is the one who initiated the discussion way back
when to sell the farm.

Speaker 2 (17:27):
She knew what she was doing, She did.

Speaker 3 (17:29):
That back in twenty sixteen. So I'm pretty sure that's
a good outcome.

Speaker 2 (17:35):
But again, and that's what she would have wanted.

Speaker 3 (17:37):
It's all about. And again, at this point, she hadn't died, right,
She's still alive, So that's a whole other kettle of fision.
What are you doing here? You don't want to do
stuff when I'm alive. That's not good for you Martha
in general. But folks, again, I think what we learned
from this is, yes, we understand enforcement of a contract,
but you know, there might be better ways to get
a piece of property to Anthony then this way. And

(18:00):
we're gonna have to talk about this. We're gonna learn
stuff about part sale, part gift. What happened here? And
how does this work? From a tax perspective, Well, taxes
come into everything, folks, and the new guide we're giving
away this month also deals with taxes, gift taxes, income taxes,
and a state taxes. When how do we make the
most of giving assets? Ideas? Do we give them away outright?

Speaker 1 (18:24):
No?

Speaker 3 (18:25):
Maybe we use a gifting trust for our kids? Okay,
should we give we lose a step up in basis,
but we gain a state tax savings. Got to compare
the difference. Am I saving federally or just state a
state tax? Is it worth it to save ten percent
and lose a thirty percent step up in basis on
the capital gains front?

Speaker 2 (18:43):
Got to do the math.

Speaker 3 (18:44):
Gotta do the math? Should I?

Speaker 1 (18:45):
You know?

Speaker 3 (18:45):
From a medicaid perspective, jointly owned bank accounts versus investment accounts? Right?
Is it half protected? Is it fully protected? Does it
protect it at all, that's a protection question from a gift, right,
you got to really consider can we give it away
and decide to still enjoy what we gave away? With
slats for higher net worth clients. All of this is

(19:06):
in the guide folks, Learn how to make the most
of your gift and get the new Guide eight six
six eight four eight five six nine nine or Legal
Exchange Show dot com again eight six six eight four
eight five six nine nine or Legal Exchange Show dot com.

Speaker 2 (19:25):
So when you have a guardium ad item, is it
only when you're incompetent? I'm just wondering.

Speaker 3 (19:30):
Yeah, yeah, Usually some kind of incapacity is where you
can't make decisions yourself. There's no power of attorney. Remember,
if you got a power of attorney, you can likely
act on behalf of at least with regard to money
and monetary decisions and paying bills. You might need you know,
a healthcare proxy to deal with power over the person. Right,

(19:51):
But yeah, pretty much some kind of incapacity. So you
know what I like to see here is our tips
and lessons are Look, contracts are like trusts. They're enforceable, right,
we follow them, right, there's a sense to carry out
the wishes of the individual, whether it's a contract, whether
it's a trust. You know, clearly here there was no

(20:13):
undue influence. I mean, I don't see it, right, But again,
what I do think about is, you know, when she
moved to Colorado and became guardian, why did she have
to become guardian? You know in June of twenty twenty two,
she was competent to sign in September of twenty twenty two,

(20:36):
So suddenly she's under guardianship.

Speaker 2 (20:38):
Right.

Speaker 3 (20:38):
So I'm a little strange, a little concerned really about that.
And so maybe if there's any undue influence, maybe it's
Martha who's unduly influencing Mom and saying, Mom, you got
to avoid this contract because.

Speaker 2 (20:54):
It'll mean a bigger inheritance for me.

Speaker 3 (20:56):
It'll mean a bigger inheritance for me, so I'm going
to be better off if you do. That's exactly right, Susan.
So I worry, you know a little bit about that,
But that didn't come up and it didn't matter because
the judge gave the right decision. What about taxes here?
That make I always think about taxes, right, That's what
I do. So what's going on here? Can you sell
the property for less than fair market value? Do people

(21:18):
do that all the time to their children? Do we hear, child,
I want to sell you the property. I'm going to
sell it to you for a half price because I
love you. Okay, can you Yeah? Well, what does the
government think about that? Well, it's a part sale, part gift,
which is okay. So that means that the piece you buy.
So in this case, the two hundred thousand dollars that

(21:38):
he's getting would be his basis, but it's really worth
four fifty because we got a willing buyer, willing seller
telling us that it's worth four to fifty. So it
would seem to me that we've made a two hundred
thousand dollars purchase and a two hundred and fifty thousand
dollars gift. So then you have to the numbers and say,

(22:00):
really I have. So from a tax perspective, there'll be
a capital gain on whatever the two hundred thousand dollars
piece is worth. Let's just say it's close to half,
but then there'll be a taxable gift. And this is
all by all by Kathy.

Speaker 2 (22:17):
Well it's a big it's a big domino effect.

Speaker 3 (22:20):
Yeah, so Kathy's going to have the taxable gift of
the two fifty and a capital gains tax, which will
be less because the gain will be less. It's only
on on the two it's only on a portion of
the overall amount. So that's what's happening on her side.
But on his side, he's now got a low basis
because he's got a two hundred thousand dollars cost basis

(22:42):
that he paid for it, and a carryover basis for
the two fifty piece. So if it's if there's fifty
percent was purchased and fifty percent was a gift, well,
then fifty percent of the cost basis is his basis
plus the fifty percent paid, So his basis is lower,
which is going to result in capital gains tax liability.

(23:05):
You know down the way when.

Speaker 2 (23:06):
He sells it to the neighbor for four.

Speaker 3 (23:08):
Fifty exactly exactly right. That's a really good point. But
in any event, the step up. A better way to
do it might have been to use a trust folks,
but in most cases, think about it, think about planning,
think about gifting. Get the guide making the most of
gifting your assets. Please learn how to do it before

(23:28):
you do it. Or maybe it'll tell you not to
do it eight six six eight four eight five six
nine nine or Legal Exchange show dot com.

Speaker 2 (23:37):
You've been listening to Todd Leutski, a partner with the
law firm of Cushing and Dolan. I'm Susan Powers of
financial advisor with the Armstrong Advisory Group. Todd will be
answering your listener questions when we return to the Legal
Exchange with Todd Lutsky.

Speaker 1 (23:51):
Cushing and Dolan want to help you avoid costly mistakes
when it comes to gifting assets to your children. They're
brand new guide Making the most of Gifting Assets share
crucial strategies to help you protect your legacy and your family.
Many people think gifting is always a good thing, but
if it's done the wrong way, they can create real headaches.
Even well intentioned gifts can cause complications if your children

(24:12):
are dealing with financial pressure or legal issues like a divorce.
The guide also explains how a major gift like a
home or vacation property could come with hidden tax consequences
that may impact your entire estate plan. Before you make
any big moves, arm yourself with the facts and this
new guide from Cushing and Dolan. Call eight sixty six
eight four eight five six ninety nine right now to
get your copy that's eight sixty six eight four eight

(24:34):
five six nine nine, or request it online at legal
exchange show dot com. That's legal exchange show dot com.
The proceeding was paid for in The views expressed are
solely those of Cushing and Dolan. Cushing and Dolan and
or Armstrong Advisory may contact you offering legal investment services.
Cushing and Dolan Armstrong Advisory do not endorse each other
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Speaker 4 (25:52):
Inflation, housing costs and rising interest rates are putting pressure
on families everywhere, from higher insurance and taxes to volatile markets.
Today's excomic landscape is changing fast. This is Chuck Zada
from the Armstrong Advisory Group. We're hosting two financial seminars
this fall, first at Margaritaville Resort, Cape cod on October ninth,
and next at the Showcase super Lux and Chestnut Hill
on October sixteenth. Call eight hundred three nine three for

(26:15):
zero zero one to reserve your spot. We'll discuss how
to manage risk, protect your retirement and create a plan
that can handle economic ups and downs, whether it's core inflation,
market volatility, or policy changes. You'll learn about strategies that
may help you plan smarter. Registered today by calling eight
hundred three nine three for zero zero one or on
our website Armstrong Advisory dot com.

Speaker 1 (26:38):
The proceeding was paid for by Armstrong Advisory Group, a
registered investment advisor. Nothing in the ad or in any
Armstrong guide a specific financial, legal, or tax advice. Consult
your own financial tax into state planning advisors before making
any investment decisions. Armstrong may contact you to offer investment
advisory services. You're listening to the Legal Exchange and it's
time for Ask Todd, the segment where Todd will answer

(26:59):
your questions about anything and everything that's included in the
estate planning process. Once again, here's Todd Lutsky and Susan Powers.

Speaker 2 (27:08):
Welcome back, Todd. We have a few questions from listeners.
First question comes from Barbara and Newton Mass and Barbara writes,
my father is on hospice and not expected to live long.
Is there a benefit to gifting any assets to the
family now to bring his estate down? His total net
worth is two and a half million, and he has
a lot of cash in the bank that he could gift.

(27:29):
Should he give away five hundred thousand to get below
the Massachusetts two million dollar exemption amount. Interesting, weave your
magic wand here wish you.

Speaker 3 (27:39):
So this is a great analysis that has to be
run right because it's not a lot over the two
million dollar exemption. It's only five hundred thousand over the
two million dollar exemption. So my initial gut reaction would be,
why am I trying to save approximately twelve percent on

(28:01):
five hundred thousand dollars if in fact doing that would
result in a capital gains tax with a carryover basis
of what I give at twenty eight point eight percent.
The answer is, I wouldn't do that, But your facts
are a little different. Your facts say he's got plenty

(28:22):
of cash to gift.

Speaker 2 (28:24):
We like cash. Cash is kingly yes.

Speaker 3 (28:26):
Right, If we gift away the five hundred thousand dollars
of cash, there is a zero capital gains tax problem
because it's cash. So we don't have to worry about
the twenty eight percent loss of step up in basis,
and we can reduce the estate down to two million.

(28:46):
And in Massachusetts there's no under the new rule, we
are still going we don't have to worry about that
Cliff rule anymore. Remember if you go a little bit over,
then they pay tax on everything, yea, and they reduce
the exemption. So in this case, we under the new
rule that it's two million dollars, they will take the

(29:07):
two point five lower it to two. So now your
estate is two and yes, your exemption is technically one
point five. Right, So for filing purposes, we now have
to file in a state tax and mass because our
exemption is one point five and our estate is two million. Yep, okay,

(29:29):
we're we gotta fi pay tax, we gotta file. Let's
make it two million one dollars. We got a file.
So we got a file. But the new calculation under
the mass estate tax would be okay, what's the tax
on two million dollars? The tax on two million dollars
about ten percent. It's ninety nine six hundred dollars. Call

(29:51):
it ninety nine six. That's exactly the tax on two
million dollars. But the new calculation gives us a credit
of ninety nine six. Remember the two million dollars is
the threshold. Well, the tax on two million is ninety
nine six, and we get a credit for ninety nine six.

(30:11):
So even though we had to file because they lowered
the threshold by five hundred thousand dollars for the taxable
gift that you made. YEP, it doesn't matter because you'll
calculate the tax on two million, it's ninety nine to
six and then you get to apply a credit of
ninety nine six, so your tax do is zero, so.

Speaker 2 (30:31):
Zero on that. So if they didn't have money in
the bank, and let's say they had low cost basis
stocks that they decided to gift away because they didn't
get good advice.

Speaker 3 (30:42):
And you have to think about it, so then it
would have.

Speaker 2 (30:45):
Been you know, let's for easy massly, it's a third
of that five hundred, right, that they're going to pay
tax on.

Speaker 3 (30:51):
Because so you would say, if I've got five hundred
thousand of built in GAINEP and I give that away,
there's twenty eight point eight percent of built in gain
that would be so object to tax on five hundred thousand.
So you know, five times street one hundred and fifty
grand close. If I die with two point five million
in Massachusetts, the tax is probably one hundred and fifty thousand,

(31:14):
but I get one hundred thousand dollars credit, so I'm
paying fifty grand way better.

Speaker 2 (31:19):
So you cause yourself to pay one hundred grand extra
by just giving away those.

Speaker 3 (31:23):
Exactly that's exactly right. I don't want to give that
away because then I'd rather just pay Massachusetts.

Speaker 2 (31:28):
So you got to be careful and do the math.

Speaker 3 (31:30):
You really do, folks, And that's exactly what this guide does.
It gives you the whole tables, It gives you the calculations.
It says, here's how what you gift, how you gift
when you gift. Think about it from do I want
to give away you know assets and still retain control?
So for higher net worth people, slats are available and

(31:51):
you can actually figure out a way to gift and
retain control. We just discussed whether to give away and
give up a step up in basis or pay the
estate tax. From a medicaid perspective, maybe you think you
own things jointly, like an investment account or a bank account,
and you somehow protected half because you made a gift
of half. Maybe not learn how it is From that perspective.

(32:12):
Then it also talks about it from you know, what
about a rental property? Oh, I probably don't want to
give that away with a whole bunch of depreciation built in, folks.
So many things to think about. Get the guide brand
new Making the most of Gifting Assets eight six six
eight four eight five six nine nine or Legal Exchange
Show dot Com again eight six six eight four eight

(32:36):
five six nine nine or Legal Exchange Show dot Com.

Speaker 2 (32:40):
Well you're going to be able to talk about that
rental property, Todd, because Dawn from Boylston has a question
for you. Oh excellent, And she writes, now that Massachusetts
has increased the estate tax exemption to two million, couldn't
I just give my largest assets away while I'm living
and die owning less than two million, I am worth
around three and a half million, and I could gift
a one million dollar vacation home in a one million

(33:02):
dollar rental property to each of my children.

Speaker 3 (33:05):
Wow. So if she did that, let me see if
I'm doing the math right, that would take her three
point five million down to one point five million. Yeah.
I'm not jumping up and down about this one. So again,
compared to Barbara's question, which we were jumping up and
we had cash on here, we don't.

Speaker 1 (33:23):
Right.

Speaker 3 (33:24):
So here we've got a vacation home which let's assume
it wasn't even rented, but maybe bought thirty years ago,
which is not uncommon. So I mean, maybe she's got up.
Maybe she paid for that million dollar home. Maybe she
paid one hundred grand. It's now got nine hundred thousand
of gain you know, built in it just and that's

(33:44):
not uncommon, No, it's not. And more importantly, the bigger
issue is what about this rental property. If she's been
renting this property for more than twenty seven and a
half years, it's very possible that the basis is zero
because you folks, what depreciation is when you rent it,
you get a deduction. You take the value of whatever
it was you paid for it. So if you paid

(34:05):
five hundred thousand over the next twenty seven and a
half years, you will take that five hundred thousand dollars
basis and reduce it to zero by taking incremental parts
of it as a deduction each year against your rent.
So you pay less income tax because of this phantom deduction.
But they come back and get you later because the
basis has been reduced, and so when you go to

(34:28):
sell it, they recapture that depreciation. Okay, so very important
that we understand that, especially if you're gifting. Yeah, so
if for whatever reason we wanted to give away. There's
just a million dollar rental. Well, let's say we get money.
But it says both, let's do both. And let's say
there's a there's a million dollars built in gain in

(34:49):
the rental and nine hundred thousand built in gain on
the vacation home.

Speaker 2 (34:54):
See, you have one point nine million.

Speaker 3 (34:56):
Of built in gain.

Speaker 2 (34:57):
Of gain and one hundred thousand cost base.

Speaker 3 (35:00):
Yeah, so you're looking he.

Speaker 2 (35:01):
Did this in a vacuum without any legal advice at all.

Speaker 3 (35:04):
That's got to be five hundred and fifty thousand dollars
of capital gains tax somewhere around.

Speaker 2 (35:09):
There easily, because you've got the depreciation recapture.

Speaker 3 (35:12):
And if you took two hundred, if you took two
million times thirty percent, that's six hundred thousand. I'm using
thirty which is a little higher than twenty eight point
eight because of depreciation. The other trick with depreciation, folks,
is depreciation piece of the gain is taxed as ordinary income.
It's not capital gains tax.

Speaker 2 (35:32):
Got it.

Speaker 3 (35:33):
So when they recapture that that piece is taxed as
ordinary income. The appreciation is taxed as gain. Right, so
it's higher, but.

Speaker 2 (35:43):
At that level, it would be in the twenty percent.

Speaker 3 (35:45):
We're looking at six hundred thousand dollars.

Speaker 2 (35:47):
Easily, probably conservatively.

Speaker 3 (35:50):
So okay, you need to know that. All right, I'm
giving my family a six hundred thousand dollars tax bill.
If I do that, then I'm going to have no
mass tax. We just went through the calculation on the
last one where you get the credit. Yeah, there's no
mass tax.

Speaker 2 (36:06):
No mass, no federal easypasy.

Speaker 3 (36:09):
But if I don't do it and I die owning it,
I get a full step up and basis eliminating the
six hundred thousand dollars in tax, and I gotta pay
tax and MASS on one point five million. So on
one point five million, the tax is about one hundred
and fifty.

Speaker 2 (36:25):
Thousand versus six hundred thousand.

Speaker 3 (36:28):
I'm good. Don't gift folks, learn how to gift or
not gift eight six six eight four eight five six
ninety nine.

Speaker 2 (36:37):
If you have a question you would like to ask Todd,
visit his website Legal Exchange Show dot com and click
on the ask Tod tab. Maybe I'll be able to
read your question on the air, and hopefully his answer
will stop you from becoming one of his next real
life stories. You've been listening to Todd Lutsky, a partner
with the law firm of Cushing and Dolan. I'm Susan Powers,

(36:58):
a financial advisor with the Armstrong Advisory Group. We'll be
back with more after this quick break on the legal
exchange with Todd Lutsky.

Speaker 1 (37:06):
Cushing and Dolan want to help you avoid costly mistakes
when it comes to gifting assets to your children. Their
brand new guide Making the Most of Gifting Assets shares
crucial strategies to help you protect your legacy and your family.
Many people think gifting is always a good thing, but
if it's done the wrong way, they can create real headaches.
Even well intentioned gifts can cause complications if your children

(37:27):
are dealing with financial pressure or legal issues like a divorce.
The guide also explains how a major gift like a
home or vacation property could come with hidden tax consequences
that may impact your entire estate plan. Before you make
any big moves, arm yourself with the facts and this
new guide from Cushing and Dolan. Call eight sixty six
eight four eight five six ninety nine right now to
get your copy. That's eight sixty six eight four eight, five, six,

(37:50):
nine nine, or request it online at Legal Exchange Show
dot com. That's Legal Exchange Show dot com. The proceeding
was paid for. The views expressed are solely those of
Cushing and Dolan. Cushing and Dolan and or Armstrong Advisory
may contact you offering legal investment services. Fishing and Dulan
Armstrong Advisory do not endorse each other and are not affiliated.

Speaker 6 (38:07):
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(38:30):
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(38:51):
on our website Armstrong Advisory dot com.

Speaker 1 (38:54):
The proceeding was paid for by Armstrong Advisory Group, a
registered investment advisor. Nothing in the ad or in any
Armstrong guide a specific financial lindgular tax advice. Consult your
own financial tax into state planning advisors before making any
investment decisions. Armstrong may contact you to offer investment advisory services.
The US Virgin Islands aren't just stunning, they're thriving and
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(39:17):
and a sharper focus on cultural experiences are putting the
islands back on the map for travelers seeking something special.
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shopping in the world famous Megan's Bay. Saint John is
pure escape with national parkikes, secluded beaches and tropical tranquility.
Saint Croix brings the history with colonial architecture, old sugar mills,

(39:38):
and vibrant coral reefs. Visit one island or all three
and get plenty of pampering, undisturbed nature, and a vibe
like no other, all jammed into one vacation with easy
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(39:59):
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Speaker 7 (40:08):
I'm Michael Valila, adjunent of the Disabled American Veterans Department
of Massachusetts. The DAV of Massachusetts provides thousands of hours
of voluntary services at our VA medical centers and soldiers homes,
and is the only DAV department in the country to
lead a veterans housing initiative for both single veterans and
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(40:28):
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Speaker 1 (40:39):
Your tune to the Legal Exchange with Todd Lutsky. If
you are a loved one needs a nursing homestay. Call
Todd right now at eight six six eight for eight
five six ninety nine and let him make sure your
assets are protected. That's eight sixty six eight for eight
five six nine nine. Or visit him online at Legal
Exchange Show dot com.

Speaker 2 (40:58):
Welcome back into the Legal Exchange with time. I'm Susan Powers,
a financial advisor with the Armstrong Advisory Group, and I'm joined,
of course by Todd Lutsky, a partner with the law
firm of Cushing and Dolan with a master's in taxation.
So Todd, this month we're talking all about gifting those assets,
getting ready for you know, the gifting season.

Speaker 3 (41:18):
Yes, it's coming before you know it.

Speaker 2 (41:21):
Can't even believe it, I know. So it can be
an important tool that you use with your higher net
worth clients, yes, in their estate planning process. So how
do you actually go about reducing your estate taxes by gifting?
Because I've heard you say a million times, don't just
give it away? So you're not recommending that your higher

(41:43):
net worth clients transfer and just put their assets in
their kids' names for example, correct.

Speaker 3 (41:49):
Right, Yeah, I would never do that. And in fact,
when we're talking about higher net worth clients, they're probably
not interested in giving it away and not haveing. So
I think we've got two issues to talk about here, right.
So your first question, I think is, you know, when
we talk about higher net worth gifting in today's world,

(42:12):
where in January one, under the big Beautiful Bill, the
exemption is going to be fifteen million, okay, so we
can shelter thirty million as a married couple.

Speaker 2 (42:24):
So you're talking about reducing federal estates, you're not on
the state level when you're doing this type.

Speaker 3 (42:30):
Of generally speaking, we're not using spousal lifetime access trusts
for people when they're just dealing with state estate tax.
I would say, never got it, okay, But yeah, these
higher net worth clients, and again they would be thinking
about in terms of giving away you know, ten million,

(42:50):
twenty million, right, I mean big numbers. And when we
give away these big numbers, those are the kind of
people that are saying, yes, we want to get it
out of our estate. I get it. But wait a minute.
You know I want to have a nice right, I
want to have a nice life when I do it.
So a couple of things to think about, you know.

(43:12):
And so when we talk about giving away ten or
twenty million and moving it out of the estate. Why
am I not worried about the basis? Right, I'm not worried,
So I still am. I always worry about basis. If
I can do both, I want to. I want to
save the step up and or give away highly appreciated

(43:32):
assets if I can. But here you're dealing with a
federal and likely a state estate tax here in Massachusetts. Anyway,
the two combined to put you at darn close to
fifty percent.

Speaker 2 (43:47):
Yep.

Speaker 3 (43:47):
Well, if I'm saving fifty percent on a gift, then
I no longer care about the twenty eight point eight
percent that I'm trapping.

Speaker 2 (43:55):
Because you're still half as much ballpark right as it
would be if you kept it in your estate.

Speaker 3 (44:00):
Yeah, so that's a way better savings. And really there's
another thing to think about with that, And that's just
one piece, and I know we have more to talk about,
but that's You're right, there's a no brainer. I'm saving
it that way. But also remember, even though I'm trapping
the capital gains when I do this, even though I
save fifty percent on the death tax, yep, that fifty
percent of the death tax. If I didn't give it away?

(44:21):
Is do hard stop nine months after death? No planning,
You got to pay it capital gains tax. On the
other hand, that I've trapped for the kids, they can
have some wiggle room, right, They don't have to pay
that capital gains tax till they actually sell. So maybe
they can say, well, I've got some losses this year.
Maybe I'll sell some and I can offset my sale

(44:43):
my gain with my losses. I can. You know, there's
a little bit of tax planning that can be done
on the capital gains front, whereas on the estate tax
nine months, hard stop, pay the bill. Okay, So things
to think about like that. Now that's gets you bet
to the guide, folks. This is in here. We're talking
this time about spousal lifetime access trusts, giving away and

(45:07):
retaining control. There's other kinds give away, as you said, Susan,
but not to the kids. To a gifting trust for
the kids. That's different than slats.

Speaker 1 (45:17):
Right.

Speaker 3 (45:18):
We need to think about what we give away, like
we talked about rental properties, vacation homes. Maybe not from
a medicaid perspective, right, do I want it? Do I
think you know? If I give it away? Am I
protecting it from the nursing home. But what are the
tax ramifications if I own property jointly? You know, how
is that affected from a medicaid perspective? So there's there's

(45:38):
nursing home perspectives in here, there's gift to state and
income tax perspectives. Learn How to give Away your Assets
or not eight six six eight four eight five six
nine to nine or Legal Exchange Show dot Com Making
the most of gifting your Assets eight six six eight

(45:58):
four eight five six nine or Legal Exchange Show dot
Com New guide for the month.

Speaker 2 (46:04):
So the espousal Lifetime Access trust, Todd, you said that's
the type you would use to I mean the primary
goal is to reduce the estate taxes, correct, Yeah.

Speaker 3 (46:15):
Pinmar really a big issue on this one.

Speaker 2 (46:17):
But you also said that you're giving it away, so
you're locking in that cost basis, which leads me to
believe that they don't have access to these assets. Right,
So how are you using these trusts and still making
Mom and Dad, who've given away ten or twenty million,
right feel okay about it?

Speaker 3 (46:35):
That's exactly right, because that's the first thing they're going
to say is, yes, I'm psyched about giving it away
to save estate taxes. But hold on, I want to
live hould the boat. Yeah, I want to live. I
want to live comfortably. So how do we do that?
And remember, folks, a lot of gifting, when we're talking
about higher net worth, gifting is not just about the
amount you gift today. It's the future growth on that

(46:58):
amount that really matters, right, don't forget that.

Speaker 2 (47:02):
Right?

Speaker 3 (47:02):
So I give away ten million today and I live
twenty years and that doubles two times. That's the power
of gifting. So I just wanted to bring that to
yours without forgetting your question, which now I forgot. Oh
how do we get to keep control?

Speaker 2 (47:19):
Take control? Yeah?

Speaker 3 (47:20):
Got it?

Speaker 2 (47:21):
I want to play with that money.

Speaker 3 (47:22):
So so here's how you do it. If you give
something away to a spousal lifetime access stress. So let's
say we've got the Susan trust and the Todd Trust.
And I know this is tough. Let's just assume for
the moment that we're married. I know it's hard, so
and now what, well, I can make a gift to
the toddsplat yep. But remember, in order for it to

(47:45):
be a completed gift by me, I have to give
up complete control over it. If I give something away
and I either retain the right to enjoy what I
gave away, like income interest of it, or I'm trustee
and I retain the power to control the beneficial enjoyment

(48:07):
of what I gave away. The government says, hold the horses.
You didn't give it away, You pull it back into
the estate when you die under this Code section twenty
thirty six, that most heavily litigated code section. So you
got to really cut that string, got it?

Speaker 1 (48:26):
So?

Speaker 3 (48:26):
Okay, Todd, how am I going to do that and
still enjoy it?

Speaker 2 (48:29):
Then that's a tall order in control of your trust.

Speaker 3 (48:32):
Right, that's a really tall order. So I'm going to
contribute ten million to my slat. I am not a
beneficiary and I am not trustee. But guess who is
trustee Me Susan. I'm going to spend your money, and
the beneficiaries are Susan and the kids. Yeah. So now

(48:55):
there's language in there that allows distributions to come out
to the kids or Susan, and hopefully, if we're getting along,
we can enjoy that money once it comes out of
the trust. So well, I can't directly enjoy it, I
certainly can indirectly enjoy it because it got into the pot.

Speaker 2 (49:13):
Wow, this just seems crazy to me because it just
seems like a giant loophole.

Speaker 3 (49:18):
Well it's not really, it's actually there.

Speaker 2 (49:20):
No, it's with the codes and you're following all the rules.

Speaker 3 (49:22):
Now, remember they have to be a little different. So
we would probably have you and a kid serve as
trustee on your trust and to make them a little
different on my trust rather on your slat. You contribute
and I would be the sole trustee and then I
can take money out directly.

Speaker 2 (49:37):
For me spend my money too.

Speaker 3 (49:38):
Well, if you're nice, we'll take you out to dinner.
But you see how that arrangement works. And again, folks,
there is this thing called the reciprocal trust doctrine that
it is very important that these two trusts are not identical, right,
they got to we put a few differences in there.

Speaker 2 (49:53):
So if you did this, let's say it gave way
ten million dollars, you're saving an incredible amount of taxes.

Speaker 3 (50:00):
It's it's absolutely phenomenal. What can be saved againworks, it's
generational tax free building growth. That's really what wealth is,
really what it is, and so people need to understand.
That's how it works, and it works for everybody. It works.
And even if you're not giving it away and you
use smaller estates and you still shelter it for kids

(50:21):
and grandkids. Folks, it can be done even at that level.
So don't think it's just for high high net worth.
But you need to learn how to plan. Are we
doing a state planner? Are we making gifts? The Guide
Making the Most of Gifting Assets? Learn which one's right
for you eight six six eight four eight five six
nine nine or Legal Exchange show dot com.

Speaker 2 (50:42):
You've been listening to Todd Lutsky from the law firm
of Cushing and Dolan. Todd, thank you so much.

Speaker 3 (50:47):
Thank you, Susan, always a pleasure.

Speaker 2 (50:49):
I'm Susan Powers, a financial advisor with the Armstrong Advisory Group.
We thank you for joining us today and we'll be
back again next week on the Legal Exchange with Todd Lutsky.

Speaker 1 (50:58):
Cushing and Dolan want to help you avoid costly mistakes
when it comes to gifting assets to your children. Their
brand new guide Making the Most of Gifting Assets shares
crucial strategies to help you protect your legacy and your family.
Many people think gifting is always a good thing, but
if it's done the wrong way, they can create real headaches.
Even well intentioned gifts can cause complications if your children

(51:19):
are dealing with financial pressure or legal issues like a divorce.
The guide also explains how a major gift like a
home or vacation property could come with hidden tax consequences
that may impact your entire estate plan. Before you make
any big moves, arm yourself with the facts and this
new guide from Cushing and Dolan. Call eight sixty six
eight four eight five six ninety nine right now to
get your copy. That's eight sixty six eight four eight

(51:41):
five six nine nine, or request it online at Legal
exchange show dot com. That's legal exchange show dot com.
The proceeding was paid for in The views expressed are
solely those of Cushing and Doolan. Cushing and Dolan and
or Armstrong Advisory may contact you offering legal investment services.
Cushing and Dolan Armstrong Advisory do not endorse each other
and are not affiliated HI.

Speaker 6 (51:59):
This is Mike arms Strunk from the Armstrong Advisory Group.
Turning seventy isn't just another birthday, It's when the clock
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(52:20):
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Speaker 1 (52:46):
The proceeding was paid for by Armstrong Advisory Group, a
registered investment advisor. Nothing in the ad or in any
Armstrong guide is specific financial, legal, or tax advice. Consult
your own financial tax into state planning advisors before making
any investment decisions. Armstrong may contact you to offer investment
advisory services. The US Virgin Islands aren't just stunning, they're
thriving and continue to be one of the hottest spots
for vacationers in the Caribbean. New cruise poured upgrades, better

(53:08):
air connections, and a sharper focus on cultural experiences are
putting the islands back on the map for travelers seeking
something special. Saint Thomas is your cruise hub, known for
duty free shopping in the world famous Megan's Bay. Saint
John is pure escape with national parkikes, secluded beaches and
tropical tranquility. Saint Croix brings the history with colonial architecture,

(53:30):
old sugar mills and vibrant coral reefs. Visit one island
or all three and get plenty of pampering, undisturbed nature,
and a vibe like no other, all jammed into one vacation.
With easy travel from New England, no passport required and
no money to exchange. Paradise is closer than you think
this fall. Plan your getaway and fall naturally in rhythm

(53:51):
with the heartbeat of the islands in America's Caribbean. Visit
USVII dot com and book your trip today. That's visit
USVII dot com.