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Tax Consequences of Death

Prepare yourself for the end of days with today’s Tax Hacker Tuesday! Matt Theriault and Tim Berry explain why passing down property to your offspring before you die is a terrible idea, how to use the tax consequences of death as a planning tool, and the downside of having appreciating real estate inside a C- or S-Corporation. 

Tax Consequences of Death

What You Will Learn About Tax Consequences of Death:

  • The tax consequences of death
  • How to use death as a tax planning tool
  • Why handing off property to your offspring before you die is a terrible idea
  • A better way to pass down your property
  • The downside of having appreciating real estate inside a C- or S-Corporation

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Transcript:

Matt Theriault: Hey, rockstars. Welcome back. Glad you’re here for another episode of Tax Hacker Tuesday. Real quickly, I don’t know if you listened to last week’s episode, but Tim put together something very special for the audience right here at Epic. He put together his Tax Hacker Blueprint. I mean a blueprint literally, a custom blueprint just for you on how to hack the tax code in your favor, ethically, honestly, legally, and even with Uncle Sam’s blessing. It comes with five specific elements to create this blueprint and it’s all custom just for you. He’s gonna give you a one-on-one consultation to establish where you are and where you wanna go. He’s gonna give you a customs tax action plan organized into easy to follow steps so you can keep all of the money that’s rightfully yours. He’s gonna give you an asset protection plan organized into easy to follow steps so you know how to protect everything that you want to be protected. As he puts it, “So the bad guys don’t come and get it.”

Then he’s gonna give you an accelerated retirement strategy so you can enjoy life while you’re still young enough to do so. This working 40 to 50 years, it doesn’t have to be that way and he’s gonna position your life and position your assets into a format that really will accelerate your retirement strategy so you can go kind of against the norm. Go against the grain and beat everybody there. Then he’ll also give you quarterly check-ins to keep you on track towards your goals. That’s the Tax Hacker Blueprint.

It’s normally $3,000 a year that he charges for this level of planning and consulting. The introductory offer is half off just for you here at Epic for $1,500 and if Tim and his team can’t save you at least double that, then it’s totally free. You pay nothing. Go to taxhacker.com, grab Tim’s free book on how to navigate the loopholes in Trump’s new tax plan, and then after you’ll have an opportunity to schedule some time with Tim and his team and just let them know you heard this on the Epic Real Estate Investing Podcast, no questions will be asked. That introductory offer will be yours and then tell him that you want your Tax Hacker Blueprint. Go to taxhacker.com and everything you need is right there. All righty? Now on with the show.

Speaker 1: This is Theriault Media.

Did you know that up to 50% of your lifetime income will be wiped out by taxes? What if you could stop this madness? Isn’t it about time you play on a level playing field with the wealthiest one percent? Now you can. Tim Berry, Attorney at Law, shares here each and every week current tactics and strategies that anyone can implement to hack the tax code. Protect your assets and keep what’s rightfully yours. It’s time for Tax Hacker Tuesday.

Matt: Welcome to the Epic Real Estate Investing Show. It is Tax Hacker Tuesday with my attorney and friend, Mr. Tim Berry. Here on Monday’s as you know, if you’ve been listening, we just started our ninth year and thank you so much for your support of the show and sharing it with your friends and family, and associates. Would not be here unless it was for you, but each Monday we show you new and creative ways as well as time-honored ways of making money using real estate. Then on Tuesdays, Tim shows up here to show you how to keep it. It’s not about how much you make, it is about how much you keep. If you have any questions for Tim he’ll be happy to answer them for you right here on the show. You can go to taxhacker.com/questions and post it there. All righty?

Tim, hello.

Tim Berry: Hey, Matt. How are you doing today?

Matt: I’m doing well. It’s been a long time since we’ve talked.

Tim: It has. It has. It seems like forever, huh?

Matt: Yeah, at least a week. Didn’t we just do this last week?

Tim: It seems like it.

Matt: Yep. All righty, so very exciting topic today. You had shared something with that and pretty much could eventually impact every single listener at some point, right?

Tim: I tend to think it will impact them.

Matt: Yeah. Yep. I’m gonna let you just step into that introduction and smooth it out for me.

Tim: All right. Everybody, we’re gonna talk about the very uplifting subject of death today. I guess I shouldn’t be so glib about it because some of you may be being affected by this recently, but I’m gonna be a little bit tacky and talk about the tax consequences of death and how you can actually use it as a tax planning tool. How’s that for a neat and uplifting intro, Matt?

Matt: Yeah, I think we’ve leveled it all out and we’re in a nice, free safe space again.

Tim: Cool. Cool. It’s all about the safe space, isn’t it?

Matt: Yeah.

Tim: All right, let me tell you what kind of triggered this conversation if you will. I was talking to somebody and what has happened is their father is up in years in their 80s and their father wanted to do some estate planning and gave them some property right now today. We’re talking a substantial chunk of property. Well over a million dollars. Their dad gave them property that dad’s had since the 40s or 50s to do some estate planning. Now, in a normal world that would make all the sense in the world. Give the property to the kids right now, let the kids enjoy the income, et cetera, so on, so forth. Whenever this guy told me about this my warped mind, my tax mind things, “Oh, no, what a disaster.”

Here’s why I said, “What a disaster.” If dad would have held onto that property during his lifetime, and they would have died owning that property, that property would get a complete step up in basis. The phrase, “Complete step up in basis,” is a fancy way of saying, “Junior could have sold that property without paying a single dime in taxes later on down the road.” Now because dad gave the property to Junior during dad’s lifetime there’s no step up in basis, and now they’re looking at taxable gains in the hundreds of thousands of dollars, which is gonna translate to probably tens of thousands if not more in capital gains taxes.

Matt: Got it. Got it. All right, so he buys the land for $500. Over the years it appreciates to one million and that’s when gives it to his son.

Tim: Yeah.

Matt: If his son sells it a few years down the road for $120, or $1.2 he’s gotta pay the gains for the half a million to the $1.2?

Tim: Probably worse. It’s probably a worse situation because if it was a rental property if there are improvements on the property that means dad’s depreciated it over the years. That’s probably been depreciated to just the land so that’s now $100,000, so now we’re gonna have a $1.1 million gain on that hypothetical you just gave.

Matt: Got it. If dad holds onto it and passes it onto his son after he passes then the cost basis, right? Or the tax basis adjusts to one million and then if he sells it for $1.2 he only pays on the $200?

Tim: Only pays on the $200, and also Junior is able to re-depreciate the property whenever there is a step up in basis, whereas right now Junior isn’t able to depreciate it and it’s just full cashflow hitting him in the chest.

Matt: Okay. When Junior inherited the property did he not have to pay taxes on it then?

Tim: Whenever dad gifts it there’s no taxes due. The person who receives the property, there’s something called gift taxes but dad would have had to pay that, and fortunately, right now you can gift up to $10 million during your lifetime and there’s no gift taxes due. Dad didn’t have to pay any taxes, Junior doesn’t have to pay any taxes, but it was just a very inefficient way of doing things. Well, it was an inefficient way of doing things.

Matt: But wait, can you gift it after you pass away?

Tim: Oh, absolutely. That’s what a will is.

Matt: Oh. Got it.

Tim: Little Junior gets this property whenever I kick. Quite honestly-

Matt: Well, isn’t that like an estate tax or a death tax when you inherit stuff?

Tim: Yeah, but once again, you’re allowed to inherit up to $10 million from each person … or, let’s rephrase that. Someone’s allowed to give $10 million of either gift throughout their lifetime, and/or through an inheritance tax-free.

Matt: Got it.

Tim: The much better solution to this scenario, easy. Dad could have set up a trust, he could have had the trust allocate all the income to Junior, but we could have made the trust such that whenever dad dies the property still gets the complete step up in basis. Then also by utilizing the trust, we get all the asset protection for Junior and dad on that property. That would have been the smart thing to do, but unfortunately, most people don’t know of all these stupid little nuances in the tax codes and asset protection codes, and they didn’t do it, and now they’re really gonna throw away a few hundred thousand dollars in taxes.

Matt: I see. Planning is everything, isn’t it?

Tim: Oh, it really is. It really is. I gotta try it sometime.

Matt: Those trust things, they can just do magic.

Tim: In my humble opinion, yeah, they can do absolute magic. They’re just phenomenal. I’m a little bit biased mind you, but they are magical.

Matt: No, I mean the stuff that I’ve heard here on the show and stuff that we’ve talked about off the show. It’s just like, wow, it’s pretty amazing what those trust things can do. You can write in anything.

Tim: Yeah. You really can.

Matt: So you can give over your lifetime $10 million in gifts?

Tim: Yeah, you can give up to $10 million in gifts. Hint hint, Matt. Over here.

Matt: I’m approaching my limit. I better squeeze it in before I go over that. All right. Awesome. Well, that was a good show. Yeah, it’s all about planning, being proactive.

Tim: Yeah, and let me throw in another follow up on this thing too. This is the downside also of having appreciating real estate inside of a C-Corporation or an S-Corporation. If I had that real estate inside a C-Corporation or S-Corporation, and I die, the real estate doesn’t get a step up in basis, whereas if I had it in my own name or inside of a partnership, or an LLC, it would get a complete step up in basis. By having it inside the C-Corp or S-Corp, eh, I don’t get that step up in basis.

Matt: Mm-hmm (affirmative). You want the step up.

Tim: Yeah.

Matt: Yeah… that’s a good thing, and then you want the ability to re-depreciate as well.

Tim: Yeah.

Matt: That’s a hidden one under there.

Tim: Yeah, that’s a big one is the re-depreciate. Let me give you another war story since we’re just rambling here for a little bit. I had a doctor, his wife had passed away and she had passed away before the big drop in the value of real estate. She passed away in about 2005 or so. Well, he had a warehouse that was worth about two million dollars. He sold that last year and he thought he was gonna have to pay all sorts of taxes on the gain because they’ve had that for a century or so. I said, “No if anything you’re actually gonna get a tax loss on this because it was worth two million and you just sold it for, I think it was $900. You should get a 1.1 loss.” He couldn’t believe that and that’s another big benefit of these step up in basis. Now, if there’s a big real estate crash afterwards, they’re gonna be able to utilize the loss on the real estate as well.

Matt: So you kind of make money if it goes up or down.

Tim: There it is. Yeah.

Matt: More money in your pocket, less to Uncle Sam.

Tim: Yeah. Mo money, mo money, mo money.

Matt: Yep. Legally. Honestly. Ethically. I mean, Uncle Sam wrote the rules, right?

Tim: We’re just following the rules they’ve put out there.

Matt: We’re just following the rules. We’re just playing the game that he gave us to play.

Tim: That’s it.

Matt: I love it. All righty so if you’d like to download Tim’s free book. What did we re-title it last week? Make Money?

Tim: Get Your Free Money Now.

Matt: Get Your Free Money Now. How to take advantage of the five loopholes in Trump’s new tax plan. You can go to taxhacker.com. That book will be there waiting for you, and then after you’ve done that you’ll then have the opportunity to schedule some time, some one-on-one time with Tim and either he or one of his professionals is gonna get on the phone with you for a short five to 10 minute call to assess your situation. If it is a good fit they’ll go ahead and they’ll take the next step and schedule a Tax Action Plan for you. If there’s not a good fit they’ll share some alternative resources to where a better fit for you can be made. Either way, Tim and his team are committed to you that you’re better off after the call than you were before. That’s just Tim, that’s what he does, it’s why I invite him back every single week to take care of you. All righty. So, Tim any last bit of advice?

Tim: I can’t think of any.

Matt: Okay. Well, good. That’s it for Tim and myself. We’ll see you next week for another episode of Tax Hacker Tuesday on the Epic Real Estate Investing Show.

Speaker 1: That’s it for today as we dream of a tax system that works just for you, but until then you have Tim Berry. See you next Tuesday for another episode of Tax Hacker Tuesday.