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Mar9, 2023

Gifting Vs. Inheriting

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In this episode of the Great Retirement Debate, Ed and Jeffrey weigh the pros and cons of gifting versus inheriting.

Episode Transcript

[00:00:00] Intro: Hi, I’m Ed Slott. And I’m Jeff Levine. And we are two guys who just love to talk about retirement and taxes. Look, our mission is simple to educate you, the savers, so that you can make better decisions because better decisions on the whole lead to better outcomes.

[00:00:14] Intro: And here’s how we’re going to do that.

[00:00:15] Intro: Each week, Jeff and I will debate the pros and the cons of a particular retirement strategy or topic with the. Helping you keep more of your hard-earned money. Yeah, but we won’t know which side of the debate we’re taking until we flip a coin winner of the coin flip gets to pick which side of the debate they want to argue, and both of us will have to argue in favor of our respect positions, whether we agree with them or not.

[00:00:40] Intro: At the end of each debate, there’s going to be one clear winner you, a more informed saver who can hopefully apply the merits of each side of the debate to your own personal situation to decide what’s best for you and your family.

[00:00:52] Intro: So here we go. Welcome to the Great Retirement Debate.[00:01:00]

[00:01:02] Jeffrey Levine: Hello everyone, and welcome back to the Great Retirement Debate. I’m Jeff Levine, Ed, good to be with you today.

[00:01:08] Ed Slott: Yep. And we’re going to have another great episode of the Great Retirement Debate. That’s why it’s called Great.

[00:01:14] Jeffrey Levine: Yeah. Well, you know, I was, I was reading over the weekend and I saw an interesting quote, really reminded me of, uh, of why we do this episode.

[00:01:21] Jeffrey Levine: It was from, uh, a person named Joseph, uh, Juber, and hopefully I’m pronouncing that correctly. I suspect it’s French. Uh, someone’s gonna probably be listening and say, Jeff, that was terrible. But, uh, the quote was, it is better to debate a question without settling it than it is to settle a question without debating it.

[00:01:42] Jeffrey Levine: I thought that was great. You know, that really sums up why we’re doing this, is just to get that information out there to give everyone kind of two sides of the same coin as we always say. Right?

[00:01:51] Ed Slott: Yeah. Well, today we have a great topic, gifting versus inheriting.

[00:01:55] Jeffrey Levine: Ooh.

[00:01:56] Ed Slott: So just as a setup for this, [00:02:00] obviously, you have to be in a position to gift versus inherit

[00:02:03] Ed Slott: So, uh, and if you are the beneficiary, either one is good. So there’s no debate.

[00:02:09] Jeffrey Levine: That’s right. That’s, it’s a, it’s a win either way. So, to, to get this straight Ed, you’re, you’re saying the topic for today then is, someone who has money, are they better off gifting it while they’re alive versus letting it, like holding onto it and then passing it up upon death?

[00:02:25] Jeffrey Levine: Is that right?

[00:02:26] Ed Slott: That’s exactly it, and there advantages both way, personal and financial. And that’s why there’s two sides to this issue.

[00:02:33] Jeffrey Levine: All right, well, your topic. Uh, I get to pick the coin flip today. I’m gonna go with tails. I think I’m on a losing streak here lately.

[00:02:40] Ed Slott: So coin here.

[00:02:43] Jeffrey Levine: All right. What do we got, Ed?

[00:02:45] Ed Slott: Tails.

[00:02:46] Jeffrey Levine: Tails. All right. I am gonna go with, uh, I’m gonna go with gifting. I’m gonna, I’m gonna be the gifter, which means, Ed, you’re gonna argue you gotta inherit it. You leave it. Don’t, don’t use it until you die. [00:03:00]

[00:03:00] Ed Slott: All right. All right. Like I said, you know, if you are, uh, listening to this and you have issues, you know, you could have estate issues and uh, things with issues with your beneficiaries, and you just want both sides to see what’s best for you.

[00:03:13] Jeffrey Levine: All right. Well, I think, you know, I think the biggest reason I like gifting, Ed, is, and I, I think I’m gonna use a line straight from the Ed Slott playbook.

[00:03:22] Ed Slott: Oh, no. With the warm hand.

[00:03:23] Jeffrey Levine: That’s right. It’s better to gift with warm hands than cold hands, you know? And yeah, I, I think about, You know, uh, my, my grandfather, you know, is, is still alive today.

[00:03:35] Jeffrey Levine: And one of the things he always used to talk to me about was, you know, he could have held on to everything and never, never tried to do anything for his kids or his grandkids or, or, or now his great-grandchildren while they were alive. But, you know, he’s 94 now at the time when he passes away. Who’s gonna need any of that?

[00:03:53] Jeffrey Levine: And what sort of, you know, if you, if you gift and you help earlier in life, first off, you get to enjoy, [00:04:00] uh, you know, the, seeing what it can do to help others. Whether it’s, you know, helping someone pay for college or, you know, even just a new bike for a kid. Right? And wouldn’t it be better to see that child ride the bike and enjoy that, get that enjoyment than it would be.

[00:04:15] Jeffrey Levine: To hold onto that money in your account until you pass away. I mean that, I think maybe that’s the biggest argument for gifting is you get to enjoy it. It’s, it’s a gift for someone else, but if you’re, if you’re doing it the right way, it may really be more of a gift for you.

[00:04:29] Ed Slott: Well, uh, you used my words and I’ve said that for years. It’s always better to give with warm hands than cold hands. So, uh, I, you know, there’s a lot to be said for that. But I’ve also worked with clients over the years. People, like many of you listening, that might say, you know, that sounds good. I’d love to see what it would do. But I’ve had people, you know, that you might say, oh, they have millions and millions.

[00:04:52] Ed Slott: But I tell you in today’s world, with so much uncertainty, many people are afraid, what if I need [00:05:00] the money? And it doesn’t matter how much they have. There’s always that feeling. And remember, gifting is a one-way street, especially for family. Mm-hmm. , once you give, it does not come back. That is a total one-way street.

[00:05:14] Ed Slott: Once you give, it’s gone. And you have to be okay with that. And if you give, now, you could control your gift, uh, better in certain ways. But some people want both control and they wanna be able to, and this is where some people get in trouble. They wanna gift. So they create these more complex structures.

[00:05:34] Ed Slott: And that’s not really what we’re talking about, where you kind of gift it, but you still have control, which the, you know, you still have strings attached and that probably won’t help you for estate planning purposes, cause it would go right back into your estate if you still maintain control. It wasn’t what we call a completed gift.

[00:05:52] Ed Slott: You didn’t really give give up control. That I think you mentioned one big issue on your end if, for gifting [00:06:00] is the feeling you get, but it could work, the, the emotion could work the same way, uh, by leaving money as an inherent, by not gifting, by saying, you know what? I want to keep control of my money.

[00:06:11] Ed Slott: I’ll do things when I can, but I worry about needing money, whether it’s health or medical, re whatever it is. And again, I’ve seen it with clients where you’d say, oh, they have millions. Matter of fact, I got a call over the weekend, uh, from a client who had, I, I think I forget the number, like 8 million in his IRA and he’s 92 and he’s still worried, what if I need it?

[00:06:35] Ed Slott: So that’s, that’s a mentality sometimes.

[00:06:38] Jeffrey Levine: Well, you know, that’s, that’s a really good point and I, I certainly understand that and, you know, again, that’s always where I say maybe a, a good financial advisor or, or some other sort of financial professional coming in and helping people understand how secure versus how not they are can, can empower someone to have the comfort to gift during life.

[00:06:57] Jeffrey Levine: But you know, the other thing that strikes me about one of [00:07:00] the best reasons to gift during life is you get to see a little bit what your kids or others are going to do with those gifts. Right? And that can maybe help you decide what you want to do when you pass away. Because when you pass away, once you, once you’re gone, Ed, you’re gone.

[00:07:18] Jeffrey Levine: There is no coming back from that either. Uh, and you know, you only get one shot at doing it correctly. And you talked about complex structures. Oftentimes people look and they say, well, you know, maybe I want to trust to control things a little bit more after I’m gone. But trust can be expensive to create, expensive to implement.

[00:07:36] Jeffrey Levine: There are tax consequences and that can make trust more costly. A lot of times the most, uh, the simplest way and the most cost effective way of leaving money to someone is leaving it to them outright, but if they’re just gonna spend it and on, on things that perhaps you wouldn’t approve of, and that’s a problem for you, well, knowing that before you pass away would allow you to help create your [00:08:00] estate plan and modify it in a way that would help reflect your wishes more. And so if, if, if you don’t gift during life, you may not have that opportunity. But if you start by gifting and you see that you’re, again, I’ll just use your children as an example. If you can see that they’re being responsible with that, you know, they’re taking that and using it to, to do things that you would approve of.

[00:08:20] Jeffrey Levine: Again, cause it’s your money, right? I mean, you could say on one hand, well, you know, what do you care? Once you give it to them, it’s gone. It’s theirs. But if you’re giving it, you’re probably giving it for a purpose. Whether that’s to help them with their own education, their own children’s education perhaps to, to be able to buy a house, to raise their family.

[00:08:37] Jeffrey Levine: I mean, there are, there are things that just naturally we gravitate towards. Uh, and it’s not, you know, going out and spending it at the casino. Or, uh, you know, spending it on a Ferrari or look in some cases, Ed, you know, the sad reality is, um, there are so many people in this country who have some sort of health issue either with, with drugs or [00:09:00] alcohol.

[00:09:00] Jeffrey Levine: Uh, those things remain a challenge for so many people. And obviously having the means to, to purchase more of those things, um, or the means not to work as much, can give people more time to engage in those sorts of activities. And it is, Uh, you know, I mean, we have opioid epidemics. We have, you know, uh, uh, issues with other sorts of drugs and alcohol.

[00:09:22] Jeffrey Levine: Uh, these are things we don’t really like to talk about. But again, giving your, uh, your beneficiaries a chance with something during your lifetime can allow you to see what happens. And then you can modify your plans once you’re gone based on how they deal with that.

[00:09:41] Ed Slott: Yeah, I’ve had clients that, uh, have thought about that and what we’re talking about when we say gifting, making lifetime gifts versus leaving it at death.

[00:09:49] Ed Slott: There are a couple of issues here. We’re talking about personal, emotional, behavioral, but there’s also financial reasons too. Maybe you have a large estate and you have to [00:10:00] reduce it to avoid possible estate taxes. But a lot of those issues, Jeff, that you talked about, uh, some people don’t even want, again, I’ve had clients like that.

[00:10:10] Ed Slott: I said, should we bring your family? Nope. I don’t want them to know any of that. You know, they, they wanna stay close to the vest. They don’t like it to be known how much they have. A lot of the, I don’t know if a lot, but some people don’t even tell their children, which I don’t know if I agree with how much they have.

[00:10:26] Ed Slott: And they just said, look, they’ll deal with it when I’m gone. And this way I’ll control it. And if I see their behavior is bad, I can change my will and trust before I’ve given the money away and they’ll deal with it later. And I’ve had people that say, look, my kids don’t even get along. I don’t want to be in the middle of that.

[00:10:43] Ed Slott: After I’m done. Let, let them fight it out. I’ll do it either equally or how I see fit without disclosing it. And maybe for that reason, I feel better about it. But I have to say, and I hate to go on your side of the argument, uh, with gifting, you have a, a [00:11:00] better shot when you go to the financial and tax reasons, if you might have a taxable estate.

[00:11:06] Ed Slott: And right now the exemption is very high. As we’re talking, it’s 12 million going up to almost 13. But actually by the time somebody’s hearing this, it’ll be almost 13 million a person, but that’s not gonna last that long. According to tax, it’s supposed to get cut down in half. So you have to look at the planning reasons too.

[00:11:24] Ed Slott: Your estate value may go up and your exempt amount may come down by half. Now, uh, I said I, I jumped over to your side for the tax planning part of it, which we said we wouldn’t do, but it’s such a, a glaring item. But, uh, if there’s any reason to keep it and leave it as an inheritance, I think it’s the personal, uh, disclosure, keeping it, uh, personal to you and, uh, control keeping, uh, money in control.

[00:11:55] Ed Slott: People are living so long. Like I mentioned that 92 year old guy, you know, what, if I [00:12:00] last 10 years, I might need money. I might, I may want a special kind of healthcare. I’m not sure about the healthcare situation and I’m worried about needing it and I don’t wanna have to deal with this with my kids. Let ’em have what’s left when I’m gone and whatevers left, people tell me it’s gravy, whatever they get, it’s gravy. It’s always a plus. If I have anything left, they’re going to be in the up column, whatever I leave them, they’ll just have to wait longer for it.

[00:12:26] Jeffrey Levine: Well, that’s, I agree with all of that. And I would also add though, you know, you brought up the estate tax and right now, you know, 13 million per person, if you’re a married couple with portability, that gives you the ability to have almost, you know, $26 million passed.

[00:12:41] Jeffrey Levine: But even if we go back, as you mentioned, you know, at the end of 2025 here, we’re scheduled to see some changes that were implemented back in the Trump era. Uh, the Tax Cuts and Jobs Act, they’re set to, to sunset, and we’d go back to, uh, you know, roughly six and a half million dollar exemption in today’s dollars.

[00:12:58] Jeffrey Levine: That’s still more than enough for [00:13:00] most people, and this is $13 million for married couples without any sort of advanced estate planning. To me, it’s more of, uh, in some cases an income tax play. Right? If you’re thinking about gifting, you’re probably doing okay for yourself. And you, if you are keeping those assets, let’s say they’re revenue generating assets, uh, bonds or real estate or things like that, if you hold onto them, That income is going to be taxed at your tax rate.

[00:13:27] Jeffrey Levine: If you gift an asset that is generating income, well now all of a sudden that income is taxed to the individual who you gifted it to who may be in a lower bracket. That may be while you’re gifting because they’re not as financially secure as you are. And so there can be not just estate tax benefits, but also income tax benefits.

[00:13:45] Jeffrey Levine: And just based on where we are today in the current regime, again, even if we go back to half of today’s exemption, so instead of 99.9% of people not having estate tax, it’ll be 99.7, right? It’s still gonna be the overwhelming majority of people, but [00:14:00] everyone still has to worry about income tax.

[00:14:03] Ed Slott: Yeah, that’s true.

[00:14:04] Ed Slott: Those points are all well taken, but we never really talked about what kind of property we’re we’re talking about. I think we both agree we’re talking about straight cash, because if we’re talking about appreciative

[00:14:15] Jeffrey Levine: What are you? Randy Moss? Remember Randy Moss? Straight cash homie.

[00:14:18] Ed Slott: Oh yeah?

[00:14:19] Jeffrey Levine: Yeah, straight cash.

[00:14:21] Ed Slott: Alright. Straight cash in a bank. Um, we’re not talking about, just to be clear, I don’t think we’re talking about, but I’ll mention it anyway. Appreciated assets. Let’s say you bought stocks years and years ago for, I don’t know, 10,000, a hundred thousand. Now it’s worth 15 million. Those are the assets you wanna hold until death to get a step up in basis and have your beneficiaries actually do a lot better by eliminating the potential capital gains tax you would’ve paid if you sold out and get and, uh, sold out that property during your life, you’d pay capital gains on that appreciation. All of that is eliminated if you have highly appreciated property, so for [00:15:00] highly appreciated property, I think even you may have, like I did for you where I came onto your side of the argument, you’ll have to come over to my side for this one for highly appreciated property including real estate and stocks and things like that.

[00:15:13] Ed Slott: You do wanna hold them to death, especially the older you are and the closer hate to say it, but the older you are, uh, you know, the less you’ll, they’ll have to wait for it.

[00:15:23] Jeffrey Levine: Yes. That’s a, well, look, I think that is certainly the strongest financial argument or the strongest argument period. For, for not giving away things during your lifetime.

[00:15:33] Jeffrey Levine: Because if you do, you know, as you mentioned, the, the step up and basis is probably, uh, the biggest, if not certainly one of the biggest glaring gaping loopholes. And I say loopholes, it’s not really a loophole because it’s intentional, but, uh, it is a gaping hole in the tax code that allows assets, not just to delay taxation, but to avoid taxation forever.

[00:15:57] Ed Slott: That’s gone. Yeah. I mean that the tax on [00:16:00] all that appreciation goes, uh, by the wayside at death, beneficiaries can pick up that property at its fair market value the data death and pays z sell it, and zero income tax. So you talked about an income tax play, uh, leaving it that kind of property at death and letting them inherit it rather than gift it, you’re in way better financial shape.

[00:16:20] Ed Slott: But, so there’s two kinds of property and the decision might be different for different types of property.

[00:16:26] Jeffrey Levine: That’s true. I’ll throw one more out there for you, Ed, in terms of gifting then I’ll, that maybe be my final argument here. I mean, we could always go on forever, but I think I’ll make this my final argument and that is, you know, Ed, what is, what is the, uh, from a financial perspective after maybe running out of money, right, running out of money, before running out of life, uh, what is perhaps, retirees most significant concern?

[00:16:51] Ed Slott: I think that’s it. We’re living too long and running out of money or, or health reasons.

[00:16:55] Jeffrey Levine: Ah, there you go. That’s the one I was looking for at health. And, and, and part of the [00:17:00] reason health is such a concern is obviously everyone wants to be healthy from a physical perspective, but there are also tremendous financial costs to being, you know, to, to, to being ill, to being, uh, if you need to be hospitalized, or even worse from a financial perspective, if you need extended care in some sort of skilled facility, you know, that can be easily upwards of six figures a year. And that’s if you’re paying out of pocket now. The nice thing, when I say nice, of course it’s all, all relative, right?

[00:17:32] Jeffrey Levine: It means you still need, uh, care. But from a financial perspective, if you cannot afford it, kinda like that old attorney thing, right? If you cannot afford one, one will be provided for you. Well, if you cannot afford care, care will be provided for you. Now under medicaid, medicaid is a federal, state partnership program that provides, uh, healthcare to those who have, um, neither you know, who both have assets and income below certain levels.

[00:17:59] Jeffrey Levine: [00:18:00] You can gift away assets. Now you do need to, to worry about time periods and all that sort of stuff, which we won’t get into today just cuz it’s, it gets very complicated to make a great episode of its own. Uh, but if you effectively give away money to make your. Uh, look or appear, uh, to be you. Uh, uh, needing of care from the federal government and the state.

[00:18:24] Jeffrey Levine: In other words, you’ve gifted away enough of your assets that you’re below the means testing guidelines, which are pretty low. Then Uncle Sam and your estate will actually come in and pay for that care for you, potentially, again, saving you upwards of six figures a year in some situations. Well, that’s a pretty strong, um, yeah, that’s a pretty strong argument for potentially gifting away those assets.

[00:18:49] Ed Slott: Yeah, I don’t, uh, that may be true financially, but again, I’ve got a lot of experience with clients and every time that subject come up, oh, so you want me to give away everything, uh, in the [00:19:00] hopes that one day I’ll be poor enough to qualify for Medicaid? And the, you know, they just look at you. Are you kidding?

[00:19:07] Ed Slott: No, I’m not giving, I worked too hard for this money. Back to the original issue. I had, the control. Most people are just not going to wind down and give it all away. And like you said, there’s time periods. They’re not gonna do that in the hope that one day they get sick enough and poor enough to get all these government benefits they won’t even know they’re enjoy.

[00:19:27] Jeffrey Levine: That’s fair. That is fair. Yeah. No, and, and I think we really covered a, a, a broad cross section today, and this is one of those topics that, you know, for, for, for those who have been successful enough in life, to reach a point where they do feel comfortable enough that they can gift, is often still a, a struggle as to what should they do. And I think we’ve given people a lot to think about today, both between the financial and the non-financial elements of gifting versus inheriting, wouldn’t you say?

[00:19:56] Ed Slott: Yeah. And, uh, just so we, you know, we’re clear, we say this on [00:20:00] every one of our episodes. We just took a, uh, coin toss and we took different sides of this argument. Uh, I am not Mr. Scrooge. I love giving and all of that stuff. It was just the argument.

[00:20:10] Jeffrey Levine: Don’t don’t believe him. No, don’t, don’t no.

[00:20:12] Ed Slott: The side of the argument. Leave it to them, you know, uh, keep it till the, you know, out of my cold, dead hands.

[00:20:18] Ed Slott: That’s the argument I’m taking. What are the, I’m not, you know, giving a dime till I, I get outta here, but there are some benefits and some people will say, you know what? I wanna hold onto it. But I think we hit all the big issues. And now you, this is something, as you said, Jeff, you have to speak to your advisors and how you feel emotionally, uh, about letting go of money. And that’s a tough thing for people.

[00:20:40] Jeffrey Levine: It is, it is. Well, we’ve given people a lot to think about and that’s always the mission here. So I would say, you know, hey, there are two sides, as we always say, Ed, to every coin, we covered both of them. But your life and your decisions are too important to leave up to that coin flip.

[00:20:55] Jeffrey Levine: And that’s why the one thing Ed and I will always agree on is that, [00:21:00] you should make sure you’re talking through any big decision like this, whether it’s gifting assets, whether it’s creating an estate plan that we’ll see your legacy through with a knowledgeable financial advisor or tax professional so that you can weigh the pros and the cons of different options against your specific set of goals and objectives.

[00:21:17] Jeffrey Levine: If you’d like to continue the discussion with Ed and I, we’d love to hear from you. You can reach out to us on Twitter. You can reach Ed @TheSlottReport. Again, that’s @TheSlottReport where you can reach me @CPAPlanner. Once again, that’s @CPAPlanner. We’d love to hear from you. So what do you wanna do?

[00:21:34] Jeffrey Levine: Do you wanna leave your assets to your heirs when you pass away, or are you looking to make lifetime gifts? How are, do you have a suggestion for a future topic? We’d love to hear it from you so that we can debate it there. Ed, as always, this was a lot of fun and uh, some really good arguments here. I’m looking forward to our next debate.

[00:21:52] Ed Slott: Yeah, me too. So join us next time for the next episode of The Great Retirement.

[00:21:58] Outro: Jeffrey Levine is Chief Planning Officer [00:22:00] for Buckingham Wealth Partners. This podcast is for informational and educational purposes only, and should not be construed as specific investment accounting, legal or tax advice.

[00:22:07] Outro: Certain information mentioned may be based on third party information, which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but it’s accuracy and completeness cannot be guaranteed. The topic discussed in corresponding arguments are those of the speakers and may not accurately reflect those of Buckingham Wealth partners.