Farmer's Pulls Out of Florida

[PrivClientSG]

$500k loan at 3% is $15k interest. For those relatively few that still itemize deductions & are in higher tax brackets, that $15k interest could generate $6k in deduction off of other income, bringing cost net loan cost down to $9k. $500k that can stay invested rather than pay off a mortgage only has to net 1.8% or better to cover the loan interest. Anything better than 1.8% is profit. So, even keeping the $500k in a bank CD or NQ MYGA at 5% is substantially better. Even me, a very debt averse person has to talk myself into keeping my mortgage as it is only 2.75% & I still itemize & relatively high tax bracket

When I refinanced and was able to get 3% -- while I knew the answer -- I couldn't help but ask the bank, "Would you loan me a billion at 3%?" LOL. Truthfully, I was surprised that early on in his term, Trump signed off on reducing the mortgage interest deduction cap from $1mm to $750k, and I get that it was all part of the SALT conversation, tax overhaul, etc. I also understand the work-arounds for mortgage interest deductions above 750k, and the real estate taxes, etc. -- but that's something that not only hits the taxpayer, but it hurts them as well. Hit them with a higher tax rate, but taking away, capping, etc., these two benefits -- well, it not only hurts, it hinders business, the economy, provides disincentive for business, larger homes and mortgages, etc. I am probably going to lose my wind/hurricane coverage again, next year, maybe the year after. Even if I meet all the requirements -- I still may not have coverage. My P/C group shopped 20 carriers and every surplus lines, not-admitted, or whatever you call it. CA is in turmoil, FL is second, LA is a very competitive third, and any Gulf state is up there in the running. Real problems here. Thanks.

 

[PrivClientSG]

$500k loan at 3% is $15k interest. For those relatively few that still itemize deductions & are in higher tax brackets, that $15k interest could generate $6k in deduction off of other income, bringing cost net loan cost down to $9k. $500k that can stay invested rather than pay off a mortgage only has to net 1.8% or better to cover the loan interest. Anything better than 1.8% is profit. So, even keeping the $500k in a bank CD or NQ MYGA at 5% is substantially better. Even me, a very debt averse person has to talk myself into keeping my mortgage as it is only 2.75% & I still itemize & relatively high tax bracket

More important for me is -- as you pointed out -- taking the dollars out of work and paying off the mortgage has a substantial cost. For me, it's a long term perspective and time frame. If I have that money at work for 20 years (and yes, I do refinance in order to "renew" the tax deductibility schedule), for me, it's a no-brainer. Period. Add in the tax savings. Win-win. I've seen some very creative work-arounds, for second homes, vacation homes, etc., and you have more potential options if the home is entity-owned (which my FL home is). Ironically, mortgage interest and the deduction is still done on "the honor system" so to speak, but that's a conversation for someone to have with their CPA, LOL.

 

[Allen Trent]

More important for me is -- as you pointed out -- taking the dollars out of work and paying off the mortgage has a substantial cost. For me, it's a long term perspective and time frame. If I have that money at work for 20 years (and yes, I do refinance in order to "renew" the tax deductibility schedule), for me, it's a no-brainer. Period. Add in the tax savings. Win-win. I've seen some very creative work-arounds, for second homes, vacation homes, etc., and you have more potential options if the home is entity-owned (which my FL home is). Ironically, mortgage interest and the deduction is still done on "the honor system" so to speak, but that's a conversation for someone to have with their CPA, LOL.

No worries, those tax codes sunset in just over 2 years. You may get your interest deductibility on more than $750k, but also get the higher tax rates & lower estate tax exemptions along with it

 

[PrivClientSG]

No worries, those tax codes sunset in just over 2 years. You may get your interest deductibility on more than $750k, but also get the higher tax rates & lower estate tax exemptions along with it

I hear you. I just finished writing a white paper with an accountant and an attorney on the potential sunset. We've seen the "shock" factor before, and while I think it's 50/50, I am less concerned about the lower estate and gift tax exemptions as I am about the remainder of the TCJA sunsetting.

Yes, the sunset of the current $12.92mm estate and gift tax exemptions are at the top of most people's list, and would be the biggest shock. However, moving to approximately $6.8mm the number of additional families this will impact is very small, and unless certain planning techniques are eliminated -- quality and great planning is still available. At $6mm, approximately $50mm of wealth can be efficiently and effectively "shifted" out of one's estate. I think most people in this strata will take advantage of today's numbers and not worry about the reduction.

On the income tax side -- the sunset will bring us back to the pre-TCJA levels, so at the top we will be back to 39.6% as opposed to today's 37%. The repeal of the personal exemptions hurt, and while they increased the standard deduction, the end result (vis a vis dependent exemptions vs. child tax credit) higher-income families did get increased income thresholds before the benefit of the phase out. They removed the phase out for the overall itemized deduction, which hurt taxpayers above AGI thresholds, but it also changed the structure of various itemized deductions (vis a vis SALT). The $10,000 number was a joke, LOL. The mortgage interest deduction rules will sunset, and that too will help a small number of additional families. But, I'll take it! LOL.

The other major area which was impacted was charitable donations, giving, etc. If sunset appears likely, you'll see a spike up in charitable gifts in 2025. Regardless, people who wait will be at risk and may end up running out of time. Your professionals may not be able to accomodate you so late in the game. For clients who do the work now, engage with the right professionals, and get ahead of the rush, they will have what they've always had -- great opportunities!!!

 

[Allen Trent]

I hear you. I just finished writing a white paper with an accountant and an attorney on the potential sunset. We've seen the "shock" factor before, and while I think it's 50/50, I am less concerned about the lower estate and gift tax exemptions as I am about the remainder of the TCJA sunsetting.

Yes, the sunset of the current $12.92mm estate and gift tax exemptions are at the top of most people's list, and would be the biggest shock. However, moving to approximately $6.8mm the number of additional families this will impact is very small, and unless certain planning techniques are eliminated -- quality and great planning is still available. At $6mm, approximately $50mm of wealth can be efficiently and effectively "shifted" out of one's estate. I think most people in this strata will take advantage of today's numbers and not worry about the reduction.

On the income tax side -- the sunset will bring us back to the pre-TCJA levels, so at the top we will be back to 39.6% as opposed to today's 37%. The repeal of the personal exemptions hurt, and while they increased the standard deduction, the end result (vis a vis dependent exemptions vs. child tax credit) higher-income families did get increased income thresholds before the benefit of the phase out. They removed the phase out for the overall itemized deduction, which hurt taxpayers above AGI thresholds, but it also changed the structure of various itemized deductions (vis a vis SALT). The $10,000 number was a joke, LOL. The mortgage interest deduction rules will sunset, and that too will help a small number of additional families. But, I'll take it! LOL.

The other major area which was impacted was charitable donations, giving, etc. If sunset appears likely, you'll see a spike up in charitable gifts in 2025. Regardless, people who wait will be at risk and may end up running out of time. Your professionals may not be able to accomodate you so late in the game. For clients who do the work now, engage with the right professionals, and get ahead of the rush, they will have what they've always had -- great opportunities!!!

Definitely seeing high net worth farmers & business owners filing to use lifetime exemption of the current $26M & discounting business values as closely held business in anticipation of 2025. All the legal work has brought with it many nice ILIT cases of 2nd to die, etc.

Did your white paper address the IRS recent ruling that assets gifted to irrevocable trust don't receive step up in basis as they would have at death if they wouldn't have been placed in an irrevocable trust. Thoughts? https://www.kiplinger.com/retiremen...This new ruling by the,up in basis any longer.

 

[PrivClientSG]

Definitely seeing high net worth farmers & business owners filing to use lifetime exemption of the current $26M & discounting business values as closely held business in anticipation of 2025. All the legal work has brought with it many nice ILIT cases of 2nd to die, etc.

Did your white paper address the IRS recent ruling that assets gifted to irrevocable trust don't receive step up in basis as they would have at death if they wouldn't have been placed in an irrevocable trust. Thoughts? https://www.kiplinger.com/retirement/irs-changed-rules-on-your-childrens-inheritance#:~:text=This new ruling by the,up in basis any longer.

Yes, the smart HNW clients are, and have been taking action. For those that have used all their exemption, note sales are still extremely powerful. Don't worry about the AFR rate! LOL. Don't worry about the premium attached to a SCIN! LOL. Integrating life insurance into this type of planning creates numerous synergies and exponential benefits!

No, I didn't want to touch that issue -- primarily because it was Jonathan Blattmachr who was making the case for the step up in basis. While the revenue ruling was new, the methodology was not. It has been very widely excepted, and very known, that those assets would NOT receive a step up in basis. Absent creative planning, powers of appointment, etc., it just ain't gonna happen. Jonathan is an absolutely brilliant guy, and very creative. He came up with a creative way, and an interpretation, where he felt you could get the step up. Not many people agreed with him. While I am not a practicing attorney, I am a big believer in powers of appointment and using them to get a step up in basis on previously gifted (in trust) assets. It works there! Without question! But the way Jonathan portrayed in, no, I am not so sure about that, LOL. Thanks and all the best!

 

[Allen Trent]

Yes, the smart HNW clients are, and have been taking action. For those that have used all their exemption, note sales are still extremely powerful. Don't worry about the AFR rate! LOL. Don't worry about the premium attached to a SCIN! LOL. Integrating life insurance into this type of planning creates numerous synergies and exponential benefits!

No, I didn't want to touch that issue -- primarily because it was Jonathan Blattmachr who was making the case for the step up in basis. While the revenue ruling was new, the methodology was not. It has been very widely excepted, and very known, that those assets would NOT receive a step up in basis. Absent creative planning, powers of appointment, etc., it just ain't gonna happen. Jonathan is an absolutely brilliant guy, and very creative. He came up with a creative way, and an interpretation, where he felt you could get the step up. Not many people agreed with him. While I am not a practicing attorney, I am a big believer in powers of appointment and using them to get a step up in basis on previously gifted (in trust) assets. It works there! Without question! But the way Jonathan portrayed in, no, I am not so sure about that, LOL. Thanks and all the best!

I honestly cant argue with the IRS position on not getting step up in basis when giving appreciated assets to irrevocable trusts. It was transferred during life, not at death. really not that different in my novice opinion of people putting kids names on deeds, brokerage accounts, stocks, etc. The basis & gain is transferred during life. in my opinion, step up in basis at death isnt likely here forever either. Government misses out on any taxes on the gain, unlike other assets like NQ annuity or qualified plans that dont get any step up in basis, etc....time will tell I guess

 

[Markthebroker]

I honestly cant argue with the IRS position on not getting step up in basis when giving appreciated assets to irrevocable trusts.

I have no idea what's going on right now, but those are a lot of big words.

 

[PrivClientSG]

I honestly cant argue with the IRS position on not getting step up in basis when giving appreciated assets to irrevocable trusts. It was transferred during life, not at death. really not that different in my novice opinion of people putting kids names on deeds, brokerage accounts, stocks, etc. The basis & gain is transferred during life. in my opinion, step up in basis at death isnt likely here forever either. Government misses out on any taxes on the gain, unlike other assets like NQ annuity or qualified plans that dont get any step up in basis, etc....time will tell I guess

I agree, and believe your thinking is correct. IRD assets are a completely different story however. Look at what is being done with qualified plan assets now. Perhaps they will be treated more like annuities, although the so called "NQ stretch" is permissible -- yet, why would the IRS not "accelerate" the speed at which they collect tax revenue. The so called "lifetime" or "intergenerational" stretch (with Q assets) has been done away with.

That said, step up in basis at death and doing away with it has been attacked numerous times before. At one end, you have the simply just doing away with it. On the other you have tax due on gift or on death, and IMO, except for the ultra, uber, HNW (100mm and above at the lowest), that won't happen. It might, but not that black and white. Many years ago, during one of the attacks on the step up in basis at death, what came out was that calculating basis over the course of time even less than a lifetime was simply not feasible.

At that time leading trust and estates attorney testified before a Congressional committee that the largest mutual fund company at the time did not calculate and maintain basis (records) prior to a certain date (which was about 15 years before or so). Keeping basis records for an entire lifetime on financial assets is very, very difficult, bordering on impossible. Think about the just the reinvestment of dividends and capital gains, covered and uncovered shares, etc. All this and reported gains -- without basis -- being reported is on the honor system. I just had a client, who sold $6mm of a position (with losses elsewhere, and a tax deduction from another transaction) with no basis being recorded by the financial institution. We tried to establish and set the basis before the sale, but the institution would only accept it with the "not reported/represented" disclaimer upon sale.

 

[PrivClientSG]

Definitely seeing high net worth farmers & business owners filing to use lifetime exemption of the current $26M & discounting business values as closely held business in anticipation of 2025. All the legal work has brought with it many nice ILIT cases of 2nd to die, etc.

Did your white paper address the IRS recent ruling that assets gifted to irrevocable trust don't receive step up in basis as they would have at death if they wouldn't have been placed in an irrevocable trust. Thoughts? https://www.kiplinger.com/retirement/irs-changed-rules-on-your-childrens-inheritance#:~:text=This new ruling by the,up in basis any longer.

https://register.gotowebinar.com/register/3124308903086563671

Allen -- just an FYI -- you can hear about this issue straight from the horse's mouth. Jonathan, Marty Shenkman, and Mitch Gans, are doing a free webinar on this for InterActive Legal and Peak Trust Company. While Revenue Ruling 2023-2 clearly states that the Service's position is that there is no basis step up for assets in a grantor trust that are not included in the grantor/settlor’s estate -- and the IRS has justified why, apparently there are still some issues at debate. I guess what means Jonathan is not giving up! LOL.

The Rev. Rul. does say that the ruling is not applicable if there is debt between grantor and the trust at death. I don't know if that makes a difference, the difference, etc. My question would be -- would "gain" be triggered at death if there was a note (still) outstanding? Does that preclude the use of a SCIN? Would a SCIN count because it existed at death but was canceled due to death? I am very interested and will attend this webinar because these are three of the most brilliant minds in our industry, and if Jonathan has a good idea, I want to hear it! LOL.