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F I N A N C I A L S E R V I C E S , L L C
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JUNE 2021
IT’S TIME TO TALK ABOUT STEP-UP IN BASIS
Step-up in basis is the readjustment of the value of an appreciated asset for tax purposes upon inheritance.
As part of President Biden’s American Families Plan (AFP), the White House proposed two major tax increases on accumulated wealth, adding up to a whopping 61% tax on the wealth of high-earning taxpayers. In my opinion, this will be devastating to homeowners, the real- estate industry, farmers, and small-business owners who have all of their wealth tied into their businesses. The American Families Plan would tax unrealized capital gains at death for unrealized capital gains worth over $1 million. With home prices soaring, and a modest retirement account, many Americans will fall into this category. Second, Biden wants to tax the capital gains of millionaires at ordinary income tax rates, which would be levied at his proposed top rate of 39.6%. Added to the NIIT, it would mean a combined top tax rate on capital gains of 43.4%, compared to 23.8% today. In addition to taxing unrealized capital gains at death at ordinary income tax rates, large estates would also be subject to the current estate tax of 40% above an exemption of $11.7 million per person. With trillions of dollars of debt owed by the United States government, I feel we could be seeing these amounts rolled back to 1980 levels of $1.2 million per person or $2.4 million per estate. In 2012, the estate exemption went from $10 million estate down to $2.4 million estate, a decrease of $7.6 million exempted in one year’s time.
Wow, is that a mouthful or what? Let me explain.
How is Step-Up in Basis Calculated?
Let’s say a parent bought a second home in Florida in 2000 for $200,000. When it was inherited by the children as beneficiaries, it was worth $500,000. The beneficiary’s potential tax basis is $300,000 (the original cost minus the new present value). However, under the current tax code, the new cost basis is inherited at the value at the time of death of the parent — in other words, no taxable gain if sold at the new value at death. Now, when one spouse dies, the surviving spouse receives a step-up in cost basis on the asset. In other words, an inherited asset gets stepped up twice in a community property state: once for the surviving spouse and a second time for the ultimate beneficiary. There are assets that do not presently qualify for a step-up basis: 401(k)s, IRAs, and similar deferred retirement accounts like pensions, tax deferred annuities, and certificates of deposits (to name a few). Currently, long- term capital gains of high earners are subject to the highest tax rate of 20% plus the 3.8% net investment income tax (NIIT) when the gains are realized (sold).
The joke was if you had over a $10 million estate, you wanted to die in 2011 — not in 2012. There was even a “Law & Order” episode of family members sending their loved one to a certain hospital, as the hospital was run by a CPA of the wealthy and wealthy terminal patients were terminated in the so-called opportunity year so the taxes would not have to be paid in the following year. All of this means we will see higher tax rates and now higher inflation. These two together will decimate most wealthy individuals if not addressed earlier in life. I recently had a wealthy individual approach me and ask about her $7.9 million estate and to review where she was “tax wise.” There were many things we could do; however, she was 89 years old, and the items we needed to discuss would require us to share with her beneficiaries these tax strategies. She didn’t
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‘TOO OLD’ FOR MAR
Tell It to Mr. Miyagi
Martial arts get added to the list of activities we can’t do as we age, right? Unless you’re doing tai chi or aikido, most people think there’s no place in contact sports for aging folks.
today. The original movies showed us Pat Morita, an Okinawan expatriate and karate master who trains Ralph Macchio’s character, Daniel LaRusso. Morita’s Mr. Miyagi is no spring chicken, but he’s able to take LaRusso to new levels of karate expertise — and also beat down bad guy John Kreese in the process, despite Kreese being a much younger man. Mr. Miyagi is based on a “stock” character, or archetype, from traditional Asian martial arts culture. But there’s a grain of truth to it, whether you’re looking at real-life martial artists (Henry Plée comes to mind, who practiced well into his 80s) or fighting school founders in medieval Japan — who often viewed karate as integral to their understanding of Zen and other spiritual matters, and thus essential as they got older.
Except, as it turns out, there is.
From hip shows like “Cobra Kai” (and its basis, “The Karate Kid”) to centuries of tradition, older people and martial arts actually mix quite well — and they can be a great throughline for an active life.
Martial arts took off in the United States back in the 1980s with the “Karate Kid” franchise, which continues
CAN ‘DEFINING MOMENTS’ BE CREATED? According to ‘The Power of Moments’ by the Heath Brothers, Yes!
Why do we remember our best and worst experiences and forget pretty much everything else in between? Why are we most comfortable when things are certain, but we feel so incredibly alive when we plunge into the unknown? These are the moments that stick with us — the moments that define us. They’re an organic part of the human experience, and they can’t be purposely created. Or can they? In “The Power of Moments: Why Certain Experiences Have Extraordinary Impact,” brothers Chip and Dan Heath seek to answer these questions and ultimately discern why specific moments can define us. They also explore whether those moments can be purposely created. According to the Heath brothers’ research, positive moments share four characteristics: elevation, insight, pride, and connection. When you look for situations in which you can foster those characteristics, you can create moments that you and the people around you will remember for years to come.
“The Power of Moments” is great for anyone looking to leave a lasting impact on their employees or work team. Rather than have your next meeting
be about unity — and leave your team grumbling about how that information could have been sent in an email — create a meeting that has, in the words of the Heath brothers, “drama, meaning, and connection.” You can’t bring your team together for a defining moment by just talking about unity; they have to experience it.
While the characteristics the Heath brothers describe may seem a little vague at times, rest assured that “The Power of Moments” will give you a fantastic playbook for creating moments that define your team and stick with them. Check it out today!
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RTIAL ARTS?
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Netflix’s “Cobra Kai” carries on the tradition, showing us a much- older LaRusso who takes on the Miyagi role, opposite his longtime “frenemy” Johnny Lawrence. LaRusso and Lawrence have both returned to karate in middle age, and even Kreese reappears, now in his 70s and as formidable as ever. Is that realistic? You bet! According to one study, the average karate practitioner is 55 years old, and the average martial artist is 46. Many in both groups report regular sparring and contact practice. If you’re a martial artist, you may have to make some adjustments as you get older, but you’ll never have to give up your discipline entirely. And if you’re new to the world of martial arts, it’s never too late to start — as long as you find the right teacher and school!
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want to bring them into the fold of information and learn how much wealth she had accumulated.
There was already family dysfunction and adding wealth into the mix would only worsen the situation for her. Remember what we always say, “Money makes people funny .” So, she determined her estate will probably pay the added estate costs, if the new rules go into effect, and she’ll pass the IRS tax burden to her dysfunctional family — $2.4 million dollars. If I told you the IRS has a plan in which you can pay the taxes at only 30% of the taxes normally due, and they will allow you to pay these taxes a little each year over your lifetime, would you be interested? Now is the time to review your trust and make sure everything is properly funded. Review what you will spend and give away in your lifetime. Then determine what taxes you are willing your estate to pay at the end of your life. Once you do the math, we can determine what the discounted rate of 30% would be and how we put that plan into place.
NADA’S
CLASSIC VEGAN DOUGHNUTS
Inspired by Tasty.co
June has many food-related holidays, and most include doughnuts! Try this vegan spin on a classic pastry to celebrate.
Ingredients
• • •
1/4 cup vegan margarine
• • • •
2 cups plain flour
1/2 cup soy milk
1/2 cup baker’s sugar, divided
2 tbsp sunflower oil, plus more for frying
1 tsp baking powder
1/2 tsp salt
Directions
Thanks for listening,
1. In a small pot, melt margarine over medium heat. 2. Once melted, stir in soy milk and sunflower oil. Once combined, take off heat and set aside. 3. In a large bowl, combine flour, 1/4 cup sugar, baking powder, and salt. Once mixed, combine with margarine mixture until thick. 4. Using your hands, roll dough into flat circles and press a hole through the center. 5. In a pan, heat more sunflower oil to at least 360 F and no more than 375 F. 6. Gently add doughnuts to the oil and fry for 3–5 minutes on each side. 7. Once fried, place doughnuts on paper towels to soak up excess oil. 8. Roll doughnuts in remaining sugar and enjoy!
–Gary Mattson
P. S. It’s called a life insurance policy that you buy now, it pays out on the second person’s passing, to pay the estate taxes due. And, if the terms of the tax rate go back down, your estate gets the added value. This maximizes and leverages your estate dollars to an even higher rate for those you love or charities you value, making you the best steward possible.
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F I N A N C I A L S E R V I C E S , L L C
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INSIDE THIS ISSUE
1 2
What Is the Deal With Step-Up in Basis?
‘Too Old’ for Martial Arts?
Understanding ‘The Power of Moments’
3
Classic Vegan Doughnuts
Mark Your Calendar!
4
Are ‘Resort Bubbles’ Safe?
**Reminder: If you have any changes to your financial situation, please notify us as soon as possible.
Investment advisory services are offered through Mattson Financial Services, LLC, a Registered Investment Advisor in the state of Michigan. Insurance products and services are offered through Lakeview Financial Group, LLC. Mattson Financial Services, LLC and Lakeview Financial Group, LLC are affiliated companies.
Are ‘Resort Bubbles’ Safe? What You Need to Know Before Booking Your Tropical Trip
As vaccination numbers continue to climb and experts gain a better understanding of COVID-19, more industries are adapting. Tropical resorts in Hawaii and the Bahamas have started to host visitors in “resort bubbles,” requiring travelers to complete a series of tests before full admittance. But are these travel options safe? That depends on your comfort level and a resort’s adherence to the rules. According to Forbes, each resort that offers this travel package may have different rules, but the gist of each experience is the same. Each resort still requires masks, unless the visitor is in their room, dining, drinking, sitting at the beach or pool, or swimming. Then, at check-in, sanitation and temperature checks are required. After the checks, tourists are directed to an on-site clinic, where nurses ask a few questions and perform a rapid
COVID-19 test. Guests are then sent to their rooms, where they must await the results. If the test comes back negative, the tourist will receive a key card and can commence with their vacation. (Some resorts set the price of lodging so that if test results are positive, then the required flight home is part of the original cost, so it’s already paid for.) Other resorts require visitors to wear tracking bracelets for 72 hours upon arrival and a negative test result. After 72 hours and a second negative test, the guest is then permitted to leave the hotel grounds. This allows the hotel chain to track potential COVID-19 cases. These resort bubbles offer a potentially safe alternative for travel, but they don’t come without risks. A traveler could potentially contract COVID-19 while en route to the destination, and resorts that allow guests to
leave the premises risk exposure. Furthermore, these precautions may not be 100% effective.
However, if you are vaccinated, have COVID-19 antibodies, or feel safe to travel, resort bubbles offer a travel alternative that can be safer than traditional vacation stays. Perhaps no industry was hit harder during the COVID-19 pandemic than the travel and hospitality industry, but with the addition of resort bubbles, the travel industry looks to return to a new normal.
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