The State of Your Estate: Planning Basics (Part 1)

Our 2 Cents – Episode #246

The State of Your Estate: Planning Basics (Part 1)

A fresh episode of Our 2 Cents is here! On today’s show, Steve and Gabriel give you the inside scoop on whether retiring overseas is really worth it and launch part 1 of their state estate tax planning series. Listen in now!

1. The Iran Conflict:
   • Quick comments on the economical impacts of this ongoing matter.
2. Retiring Outside the U.S.:
   • Retiring abroad can sound like a dream, but is the reality as simple as it seems?
3. State Estate Tax Planning Part 1:
   • How does federal estate tax differ from state estate tax?
   • What planning strategies can help minimize Illinois estate taxes?

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Podcast Transcript

Announcer: You’re listening to Our 2 Cents with the team from SGL Financial, Building Wealth for Life. Steve Lewit is the President of SGL Financial and Gabriel Lewit is the CEO. They’re here to discuss all the latest in financial news, trends, strategies, and more.

Gabriel Lewit: Well, good morning, good afternoon, good evening, everybody. This is Gabriel Lewit and Steve Lewit back here with you for another episode of Our 2 Cents.

Steve Lewit: Did you hear that thunder that just rang out?

Gabriel Lewit: I did. It’s a little stormy behind us here.

Steve Lewit: The skies have darkened. It looks like 6:00 PM.

Gabriel Lewit: 6:00 PM or 5:00 AM or-

Steve Lewit: Folks, it looks like the end of the world.

Gabriel Lewit: I don’t think it’s that bad.

Steve Lewit: Well, I don’t think it’s that bad.

Gabriel Lewit: It’s a little extreme.

Steve Lewit: It is extreme, but I like it.

Gabriel Lewit: Just looks like a cloudy day.

Steve Lewit: I like the dramatic.

Gabriel Lewit: You do have a flare for that.

Steve Lewit: I do. I do. I do.

Gabriel Lewit: Yeah. Well, yes, a little bit of a thunderstorm here. Fingers crossed we don’t lose power halfway through our show. That would be not good at all, but we hope you’re doing well. Spring is almost here.

Steve Lewit: 70 degrees today.

Gabriel Lewit: Should be warming up here. It’s been warming up a little bit. We’ve got March, of course, is here, and March Madness is on the horizon for you basketball fans. I’m always looking forward to that. Maybe I can win a few more bucks in our company office pool.

Steve Lewit: Yeah. We have a pool. I’m not entering because you’re going to win.

Gabriel Lewit: You know, that’s really untrue, but I guess-

Steve Lewit: Well, it seems to always happen, so I don’t know what lucky charm you have, but I’d like to have one.

Gabriel Lewit: This is not true at all. Well, let’s get on with the show here.

Steve Lewit: Okay.

Gabriel Lewit: Yeah. We’ve got obviously some geopolitical events to talk about here, namely what’s going on with Iran. So, I believe most of you out there have probably heard the news that the US forces as well as Israel forces have begun bombing Iran, I guess you could say it’s the start of a war, although in the administration, there’s a little bit of uncertainty of whether or not it’s considered a war.

Steve Lewit: Well, the president called it a war.

Gabriel Lewit: But the president called it a war.

Steve Lewit: That’s what he said, “We’re at war with Iran.” So, I would call that a war.

Gabriel Lewit: Yeah. Now supposedly, as we’ll talk through here, this is meant to be supposedly more limited. And of course, our goal isn’t to get into politics here, but from what’s been told, the goal isn’t to have this become a long, protracted, drawn out war, but the end objectives here are a little murky as to what the end goals are and how long this may last or not last.

Steve Lewit: Yeah. Without getting into politics, folks, the messages are mixed. We keep getting different messaging as what the end game of this war is about, which for me is very disconcerting. Not only from a moral point of perspective, because people will die, but from a financial perspective, it’s very hard to plan in the market, you can see the uncertainty in the market because it’s going back a little bit-

Gabriel Lewit: The last few days, the markets have dropped, not just US, global, as well.

Steve Lewit: Right across the board.

Gabriel Lewit: This is having impacts all across the world.

Steve Lewit: Right. And then there are the economic repercussions because the Strait of Hormuz where I believe it’s… I can’t remember the number, what percentage of the oil flows through there. It’s a very high percentage.

Gabriel Lewit: A lot. Yeah.

Steve Lewit: A lot.

Gabriel Lewit: A lot.

Steve Lewit: And that is pretty much shut down at this point.

Gabriel Lewit: Yeah. Too risky to travel through.

Steve Lewit: Right. So, what that means economically, the prices at the gas pumps have already gone up. We just don’t know how high they’re going to go. And that puts an extra burden on all of us because the prices are already high of everything.

We came out of COVID. There was an overexpansion of money in the economy, prices went up. And then inflation has slowed, but the prices have not come down. So, a war exasperates all of the problems that we already have in the country. I think people are worried, more so than they were worried before, about what the future holds economically, forget politically, but economically for themselves.

Gabriel Lewit: Yeah. Of course, our goal here is to focus on how this impacts you as a retiree, as a investor, as a person with money, with your money specifically, not how does this impact your stress levels or things like that. We do care about that too, but we’re mostly focused here on the financial planning aspect of this, right? We’re not war strategists or political commentators or anything on that front.

Steve Lewit: None.

Gabriel Lewit: But we can talk about this, of course, having ripple effects on your finances, on the markets which we’ve seen. We did send out an email to all of our clients recently as well with a lot more data in there, if you’re a bit more interested in reading through this stuff.

Steve Lewit: Yeah. I thought we did a good job.

Gabriel Lewit: The best we could cobble together.

Steve Lewit: Thank you all for responding. Some of you sent thank yous, and it was very helpful for you. So, thank you for saying thank you.

Gabriel Lewit: Yeah. Well, we wanted to just touch on a couple of the key takeaways here in case you didn’t read the email and you prefer digesting your news through audio podcasts.

But number one is volatility is a normal reaction in the market. When we see things like this, geopolitical shocks almost typically always have short term market swings. Investors don’t like uncertainty. You were just talking about that, especially in energy and stock markets. So, this is going to be not surprising to anyone that’s seen geopolitical events play out in the past. It typically creates some turbulence in the stock market.

Steve Lewit: Okay.

Gabriel Lewit: So, that’s number one. Number two, the oil markets are of course a bigger area of concern. You mentioned gas prices are going up. There’s definitely issues with supply. There’s concerns about refineries being hit in these bombings or in the war here, if we’re going to call it a war yet.

And of course, higher oil prices can impact inflation because obviously lots of businesses rely upon oil prices to produce goods and services. And if their costs go up, then they pass those costs along and other costs go up.

Steve Lewit: Well, shipping costs go up, freight costs go up, flying goes up, everything goes up.

Gabriel Lewit: Exactly. Yep. Typically, after these initial market shocks, markets do often recover.

Steve Lewit: They do.

Gabriel Lewit: Certainly dependent on how protracted or where this thing goes, right? Over time here, we’ll know a bit more in the next coming weeks. Again, uncertainty can lead to overreaction. There can be this desire as an investor to make a move.

Steve Lewit: I was just going to say, “Gabriel-”

Gabriel Lewit: Okay. Let’s make a move.

Steve Lewit: “Should I sell now and wait for the bottom out? What should I do?”

Gabriel Lewit: Yeah. Our goal here is to encourage you not to make emotional overreactions. If you’ve built your plan properly out of the gate, then this should be just-

Steve Lewit: Just work.

Gabriel Lewit: Honestly, it’s just a stormy day outside the window, but doesn’t disrupt your long-term plan.

Steve Lewit: Yeah. Just work your plan.

Gabriel Lewit: Yeah. On the other hand, if you feel like your plan was shaky or rocky to begin with and not solidified for an upcoming retirement or whatever else the case may be, then it might be a good time to review that, just in case things do in fact get worse in the stock market.

Steve Lewit: Check in, folks, on your little inner peace of mind meter. If your inner peace of mind meter is going down to the negative, come on and see us because there’s no need to worry.

Gabriel Lewit: Yeah, yeah.

Steve Lewit: Probably.

Gabriel Lewit: And of course, discipline and strategy are generally going to be the most important things here, right? Having a plan, sticking to it. If you’re unsure, call us. We can help guide you through it, game planning the right strategy to take or what not to do. All these things can help ride out these uncertainties in the market and in the world.

Steve Lewit: Discipline is a word that most people feel… don’t really like the word discipline. What do you mean? When you say discipline is important, what do you mean by that?

Gabriel Lewit: It means don’t have that ice cream after dinner.

Steve Lewit: I mean, deny yourself. I love ice cream.

Gabriel Lewit: Not the right context here.

Steve Lewit: I love dessert.

Gabriel Lewit: That was just me thinking that last night, I shouldn’t have had it.

Steve Lewit: You shouldn’t have had it. I love dessert.

Gabriel Lewit: Anyway. Yeah, discipline in the sense of a market investor, right? A retirement plan, a investment philosophy is coming up with a plan that you are confident will work based on data, history, experience, expertise, and then sticking with it. Not letting yourself get distracted and going off course due to emotional whims or geopolitical events or things that just might make you a little bit nervous. Sticking with the plan that you came up with if you believe it is, in fact, a good plan.

Steve Lewit: Yeah. Stay in the lanes of your plan. You created a plan. Well, hopefully you created-

Gabriel Lewit: If you created a plan, yes.

Steve Lewit: If you created a plan. But if you haven’t created a plan, then you’re going to swing and swerve with the wind. But those of you that have a plan, which all of our clients do, it’s a matter of staying with the plan and staying in the lane of the plan. And if you’re not confident, this is what I said before, if you’re not confident in your plan, then we need to look at that plan and find out why you’re not confident about it.

Gabriel Lewit: Indeed.

Steve Lewit: Indeed.

Gabriel Lewit: You said it well.

Steve Lewit: I said it twice.

Gabriel Lewit: Well, that’s about what we wanted to cover. I’m sure you’re seeing nonstop coverage on the news. If you want to hear about this all day long, tune into MSNBC or CNBC or something. And I’m sure you’re going to get tons of market commentary about this and daily oil prices and Brent crude price per barrel updates and all sorts of fun stuff. But again, from a strategic planning perspective, if you’ve got a good plan, hopefully you’ve got some peace of mind.

Steve Lewit: And that kind of ties into the next topic that you’ve arranged for us.

Gabriel Lewit: Quotes of the month?

Steve Lewit: Nope. How many clients have you had this year or last year who said, “You know, this is a crazy country. I think I’m going to move to another country”?

Gabriel Lewit: A couple. I’m not sure how this directly ties in, but…

Steve Lewit: I retired outside-

Gabriel Lewit: No, no, I know, but how does the Iran conflict directly tie into whether or not somebody wants to move out of the country?

Steve Lewit: Because there’s more turbulence in the country. So, the more turbulence in America… Well, the war created a lot more turbulence, anxiety.

Gabriel Lewit: I’m just making you work for this one. I think it was a bit of a stretch.

Steve Lewit: I think it was-

Gabriel Lewit: I liked your idea of trying to connect them, but…

Steve Lewit: Well, that’s why you lead the show.

Gabriel Lewit: You’re very leading today.

Steve Lewit: I’m not a great connector. Actually, I thought that, guys, I want to vote a thumbs up or… Oh, I’m not getting a thumbs up.

Gabriel Lewit: We’re a rocking boat over here.

Steve Lewit: Folks, I didn’t get a thumbs up on that transition from the team here. They gave me, “Well, it was just okay, middle ground kind of thing.”

Gabriel Lewit: Well, that’s how I felt about the same on that one.

Steve Lewit: Hey Gabriel, what’s our next topic?

Gabriel Lewit: Well, they don’t all have to connect, but yes, we did want to talk about today switching gears, in other words, just one aiding. That was a little bit of real time market news for you, but back to normally scheduled programming, if you will, right? We wanted to talk about, you may have heard people, not necessarily even due to on rockiness in the US or anything like that. That’s a whole separate thing. We’re not getting into that, but just people that have thought about retiring overseas, out of country.

And what prompted this is there’s an interesting article that’s titled here, “I retired outside the US and I regret it. Here’s why.” And so I thought this would be an interesting counterpoint for anybody thinking about, “Hey, maybe I should retire overseas. It’s going to be great.”

Steve Lewit: Yeah. And to your point, Gabriel, not everybody that retires overseas is running from the country.

Gabriel Lewit: Yeah, that’s correct.

Steve Lewit: Some people retire overseas because they really want to live overseas.

Gabriel Lewit: Well, they think healthcare may be cheaper. They think cost of living may be cheaper. They think it’ll be some great, exotic, permanent adventure, right? Or they’re just scratching an itch that they’ve had their whole life, that they want to experience another country or live there, immerse themselves in those cultures. Lots of reasons could pop up, and you hear a lot about the glamour of it. The idea on this segment here is to talk a bit about maybe the other side of that coin.

Steve Lewit: The reality of it.

Gabriel Lewit: Yes. Is it as glamorous as it may appear?

Steve Lewit: Well, you know what’s neat? We kind of get brainwashed into believing everything in Europe or overseas is coffee shops and parties and sitting there and drinking wine and smoking a cigar maybe, and everybody’s dancing around and there’s music in the background.

Gabriel Lewit: You’re painting a nice picture.

Steve Lewit: Well, that’s what they do. And it’s like, “Gee, I’d like-”

Gabriel Lewit: Straight off of a infomercial, commercial or something. Yeah.

Steve Lewit: Even I say to myself, “That’s great. Look at that.”

Gabriel Lewit: Ooh la, la.

Steve Lewit: Ooh la, la. Yeah. Let’s go.

Gabriel Lewit: Yes, the romantic canals of what? Venice?

Steve Lewit: Yeah. Venice or the cafes in Paris, and the cafes in the Tames.

Gabriel Lewit: All right. Pack the bags. Let’s go.

Steve Lewit: In Italy, we could have a great time. All right.

Gabriel Lewit: Well, let’s talk about this. Is it all it’s cracked up to be? Okay. So, let’s talk about this gal, I think it’s a gal, Toby?

Steve Lewit: Yep.

Gabriel Lewit: Gal or a guy.

Steve Lewit: It could be either.

Gabriel Lewit: I’m not sure, Toby. I hope I’m getting it right here. But anyways, Toby said here, who is the author of this article, “Why I Left the US. In my final working years, every bill was growing faster than my paychecks, especially housing, healthcare, and groceries.” So, this person had noticed colleagues delaying retirement, fearing they would outlive their savings. And so they thought that retiring abroad started to look like a financially-savvy move to help them quit and retire on their timeline, but to stretch their dollars a little bit further. So, that was the impetus here for this author having left the US, which I think on the surface you hear quite a bit.

Steve Lewit: That we do, yes.

Gabriel Lewit: Now, of course, if you’re going to move out of country, you must pick a destination to move to. I don’t recommend just hopping on a plane, walking to the airport, picking the first flight available. Yep, I would do this a little differently. So, where would you move to? That’s a great question. Actually, just for a little bit of fun, Steve, if you had to move to an out-of-state country because you really wanted to, what would be your top pick?

Steve Lewit: I was just thinking about that. I don’t know. Everyone, all of my buddies that I know overseas that know Europe inside and out, they say, “If you’re going to move to Europe, you got to move to Italy.” Everyone, they say Italy is just the greatest place to live. The people are great. The food is great. The wine is great. And I say, “What about Paris?” “No, no, no. Paris is wonderful, but you want to live in Italy.” And I have no idea why.

Gabriel Lewit: Well, yeah, I mean-

Steve Lewit: So, I would move to Italy.

Gabriel Lewit: You’re voting for Italy. Okay. Great.

Steve Lewit: Yep. How about you?

Gabriel Lewit: I’d love to do more international travel first before picking a destination. In fact, I was going to mention, I would encourage that too before you just hop on a plane.

Steve Lewit: Basically, that’s what Toby said.

Gabriel Lewit: Yeah. Yeah, I don’t know what comes to mind for me. England actually obviously seems very Americanized, but would be fun because I like castles and soccer.

Steve Lewit: And soccer. Yeah.

Gabriel Lewit: And beer.

Steve Lewit: You’d become a Manchester fan.

Gabriel Lewit: It seems like a great choice.

Steve Lewit: Oh, wait, wait. What would my-

Gabriel Lewit: I think Australia seems cool or New Zealand.

Steve Lewit: Oh, people love Australia.

Gabriel Lewit: Some place Down Under.

Steve Lewit: Too many bugs.

Gabriel Lewit: Right?

Steve Lewit: Yeah.

Gabriel Lewit: Lots of options that could exist, but I’m not sure if those would be cheaper. Unfortunately, either of those may not be cheaper. In fact, maybe more expensive.

Okay. Well, anyways, yes, the places that tend to be cheapest are some places in Europe, Spain, Portugal, I’ve heard are a little bit cheaper. Latin America, of course, could be quite a bit cheaper. I’ve had a client that wanted to retire in Panama, for example, and they were just going on about the benefits of how far their money would last, for example.

Steve Lewit: Well, I have a client in Mexico that’s a full-time resident in Mexico, just moved there and loves it. And in Spain, right? What’s that famous… I can’t think of this.

Steve Lewit: Barcelona, yeah, which just loves Barcelona.

Gabriel Lewit: Yeah. Well, what’s interesting in this article is the author doesn’t actually say where they moved to, but anyways, I guess that’s not super relevant here to the concept. But when they move, they have to sell their home, sell all their belongings, downsize, right? Find a new place to live, a lease or buy. Most of the time, if you’re first moving to a country, you might want to rent or lease first, navigate language barriers, right? And all sorts of other challenges for this author started to pop up.

Steve Lewit: Yeah. What happened, what he or she says is that the novelty of the coffee shops eventually wore off and it became the daily routine of shopping and cleaning and doing laundry and picking this up and that up, and finding close friends was very hard for her, for this person.

Gabriel Lewit: In their words, “Slowly the novelty faded and ordinary life replaced sightseeing. Instead of museums, the calendar was filled with errands, utility issues and repeated trips to various offices to sort bureaucratic details. And each interaction reminded them they were an outsider who spoke haltingly, often missing subtle points that mattered more than they realized.”

So, they were starting to feel a disconnect. And as you mentioned, they had friendly people around them, but they didn’t have, and found it difficult to, generate close friendships, missed family members, missed birthdays, missed all these things that you might take for granted, and it was starting to weigh on them more and more. Okay?

Steve Lewit: Yeah. And their healthcare also. They were very concerned because they couldn’t find, let’s call her a she, what did she say about the provider? She didn’t understand her healthcare instructions or something like that?

Gabriel Lewit: Yeah. So, basically managing money was difficult for her with banks and everything else being in foreign languages, the healthcare itself, finding the right doctors-

Steve Lewit: That spoke English.

Gabriel Lewit: … that spoke English, navigating the system. All of these things were much more challenging than they thought, right? How to manage copays and premiums. And all these different components that made it, as an older retiree, just felt more of a drain than it did an energy booster.

Steve Lewit: What that says is, look, if you go to a foreign country, there are all new systems, there are all new laws, and you didn’t grow up with them, so they’re not second nature. So, it could take two or three years to really figure out what’s going on, and that can be disconcerting.

Gabriel Lewit: Yeah. What this reminds me a lot, I think it was an Italian town once that was trying to attract people to move there, and you could buy a dilapidated home for $1 or something like that because they were trying to entice you. And so I think they tracked people that bought these, and then they had to commit to investing money to fix these houses up. And they interviewed one, I think, a year in and something, and they were like, “Yeah, it was a disaster.”

Steve Lewit: Disaster.

Gabriel Lewit: Because these were remote towns trying to find construction people, trying to coordinate this in foreign languages, deal with permits, and that’s obviously building a home, of course, there’s going to be a challenge even in the US, let alone a foreign country. But I think it goes to show key point here is if you were thinking about moving abroad, really make sure maybe you do a test run, okay? Six months.

Steve Lewit: Rent a place.

Gabriel Lewit: Yeah. Six months, go there.

Steve Lewit: Don’t sell yours. Don’t sell out.

Gabriel Lewit: Don’t uproot everything. Lose all your connections.

Steve Lewit: Take a six-month vacation, go there and live. And if you love it, then go for it.

Gabriel Lewit: Yeah. I think that’s the idea here. Just be cautious about jumping into something, that’s that big of a lifestyle change, with two feet. Maybe dip a tow or two into the water, see if it’s for you. And you might find that it is, which is great. And you might find that it isn’t, which is also great as long as you figured that out before you just moved there all the way through.

Steve Lewit: Folks, just listen to Gabriel’s toe-or-two rule about moving to a foreign country.

Gabriel Lewit: Sure. Exactly.

Steve Lewit: I like toe-or-two rule.

Gabriel Lewit: Whatever you want to call it.

Steve Lewit: Okay.

Gabriel Lewit: Well, hopefully that gives you a little bit of food for thought, a little bit of… What do you want to call it? Anything you have a foreign language?

Steve Lewit: Toes to dip?

Gabriel Lewit: No, no. Anyways.

Steve Lewit: Food for thought. Something to think about. Yeah, food for though.

Gabriel Lewit: Yeah. I thought you’d come up with something exotic or Italian or foreign language to-

Steve Lewit: I don’t speak Italian.

Gabriel Lewit: … put an emphasis on this.

Steve Lewit: No speak Italian. No, I don’t know. Yeah, let’s go on to the next topic.

Gabriel Lewit: All right.

Steve Lewit: I’m done with this one. I think everybody else is too.

Gabriel Lewit: All right. It sounds like you’d like to move on. That’s no problem.

Steve Lewit: I have that feeling that we spent enough time on this one.

Gabriel Lewit: Yeah. All right. Well, let’s talk about tax smart moves and estate tax planning. That’s to round out our show here for you today. Well, what is estate taxes? What are estate taxes? They are taxes that are due when you pass away and you leave an estate to your beneficiaries.

Steve Lewit: Yep.

Gabriel Lewit: Okay? And depending on the size of that estate, the total amount of the assets that you own, and depending on what state you live in, there could be either a federal estate tax or a state estate tax, not a state tax, or both depending on the total level of your assets.

But the one that we’re going to focus on here today is the state estate tax. Believe it or not, if you are in Illinois and your assets are over $4 million, you will owe a state estate tax if you’re not careful.

Steve Lewit: Tax-friendly Illinois.

Gabriel Lewit: Yes.

Steve Lewit: Yes.

Gabriel Lewit: Where some states you have none. And if you are just thinking about federal estate taxes, typically that’s about $30 million of assets that you’d have to be-

Steve Lewit: For a couple?

Gabriel Lewit: For a couple to be above, $15 million for an individual, before you’d be concerned about paying a federal estate tax. But again, today we’re going to focus on the much lower state estate taxes. And in Illinois, here in particular, what can you do to eliminate these and prevent them from being a concern for you?

Steve Lewit: Interesting. I was talking about this last night at a seminar I was giving, and most people at the seminar did not understand that the $4 million exemption… First of all, everybody thought that if you’re married, each person, like the federal, gets the $4 million exemption, which is not true.

Gabriel Lewit: Yeah. So, you’re talking about this concept called portability of your estate tax exemption, which there is portability on the federal side, but there is not on the state side.

Steve Lewit: Yeah. So, if you’re married and both of you pass away, there’s only one $4 million exemption, not an $8 million together. There’s a way of getting the $8 million, which we’ll get to, but right now, let’s say it’s $4 million. And here’s what’s really funky that people don’t understand is that let’s say your estate is $3,999,000. You do not pay estate taxes, but let’s say your estate is $4,000,005, now you’re over the $4 million. Why are you smiling?

Gabriel Lewit: I’m shaking my head a little bit. Continue. I might have to update you here.

Steve Lewit: Well, then you are up to pay… The Illinois estate tax goes down to zero. There is no exemption once you go over the $4 million, and then there’s a tax. Now, I ran the numbers. It’s interesting. I ran the numbers yesterday. If you’re at $6 million, that tax is almost $600,000, give or take, because I ran funky numbers, but it is a pretty serious tax.

Gabriel Lewit: Yeah. So, it depends. I mean, if you’re $1 over, you’re not going to be paying much at all-

Steve Lewit: Not much, not much.

Gabriel Lewit: Hardly anything. I think if you run the calculator, it’s incredibly small. But yes, when you get to $4,500,000-

Steve Lewit: It jumps.

Gabriel Lewit: $5 million.

Steve Lewit: It jumps all of a sudden.

Gabriel Lewit: $6 million, $8 million. So yes, these numbers, I mean, imagine it this way, right? If you were going to leave $6 million to your beneficiaries, you might say, “Well, they’re fine, right? Who cares if they leave them $5.4 million instead of $6 million?” But I would argue the opposite is $600,000 is a lot of money to leave to the state if you could avoid leaving that 600,000 and couldn’t it provide a lot better value to a charity or to your children? Most people-

Steve Lewit: Grandchildren.

Gabriel Lewit: Most people, if I were to ask you listeners out there, would you rather give this $600,000 to your kids, charity or the State of Illinois, which would they pick?

Steve Lewit: Let me think. But here’s what I said this last night. I said all these state taxes are really… People think they’re mandated. They’re actually optional. Like you said, if you had a choice… Well, you do have a choice. There are things you can do in your estate to get below that $4 million or to get to $4 million.

Gabriel Lewit: Yeah. Perhaps a better word I would say is avoidable, right? If you didn’t do it right and you owe the money, they’re not optional.

Steve Lewit: Well, yeah. Well, they’re optional in the sense that they are avoidable.

Gabriel Lewit: Yeah. Yeah, so you can’t avoid them, but if you just sit your plan car, if you want to call it that on autopilot, on cruise control, and you just do absolutely nothing different, chances are you’re going to be subject to a very large… Not you, your beneficiaries will be subject to a very large estate tax payment, and that might not be what you would want.

The first step I think here, Dad, is being aware of where you stand. If you are listening to the show and you’re 75 years old, and you and your spouse have $2 million, this topic most likely won’t impact you, but it could in later years if your assets continue to creep up because currently the four million Illinois State exemption hasn’t been growing for inflation. So, it is something to keep tabs on.

Now, if you’re at $3.9 million today, this is something that you want to pay attention to. This isn’t just your investible assets either. It’s the sum of all your assets, real estate properties as well, okay? If you’re at $4.5 million, definitely a concern, $7 million, $8 million, obviously clearly concerns here. So, what do you do about this first and foremost? What are the most common strategies that someone can use to start to avoid paying an Illinois State estate tax, Steve?

Steve Lewit: Well, first you want to get two exemptions, Gabriel. And to get two exemptions, you need to create a trust where you and your spouse each have a trust. And what happens is when one spouse dies, you take, let’s say $4 million, you fund the deceased spouse’s… This is hard to say, the deceased spouse’s trust and that become… Now, the living partner can use all the funds in that trust, but that’s now out of the estate, and that has the exemption. So, you got one $4 million. Now the living spouse, if they are under $4 million, then there’s no Illinois estate taxes on that.

Gabriel Lewit: Let me use an example that may help.

Steve Lewit: Okay.

Gabriel Lewit: Okay? Number one step is, let’s say you and your spouse are married, you have $6 million. Let’s just say it’s all taxable money that can be split any way we want to, for the moment.

Steve Lewit: Can I interrupt you one second?

Gabriel Lewit: You could.

Steve Lewit: Hold that thought.

Gabriel Lewit: I think you’re going to.

Steve Lewit: Yes, I’m going to. I want everyone to understand that you may have $3 million today and you’re 65 years old. Let’s say you live to 95, that’s 30 years. It’s not beyond thinking that you would have $6 million… Because a lot of people might be saying, “Oh, I don’t have $6 million,” but 30 years from now you might.

Gabriel Lewit: Yeah. Well, yes, I was just using an example just to try to give a sense of what you were talking about here. Yes, if you grow to this, it’ll apply to you. If you don’t, it won’t. But the example here would be if you have $6 million, you set this up in a way… We’ll get into something called equalizing your estate later, maybe on a follow-up podcast here, because we’ll run out of time today, but the idea of setting up trust is so that when the first spouse passes away, $4 million of that $6 million will then go to the irrevocable trust and use up that first deceased spouse’s Illinois state tax exemption.

And to your point, that $4 million is now in a trust accessible by the surviving spouse, and the surviving spouse now has $2 million in their estate. Now, as long as that $2 million that remains in the estate for the surviving spouse doesn’t grow past four, then when the surviving spouse passes away, they’re going to leave the $4 million from the irrevocable trust that was created from the first spouse, and then they’re going to leave their $2 to $3 to $4 million personally. And voila, you’ve avoided the estate taxes.

Steve Lewit: Yes.

Gabriel Lewit: So, that’s called using a credit shelter trust or a bypass trust to utilize a state estate tax exemption, but this must be set up properly. It goes beyond just having a trust. Sometimes people say, “Gabe, I have a trust. I’m all set.” Well, not necessarily. Your trust-

Steve Lewit: Maybe, maybe.

Gabriel Lewit: … may not have the provision that you need. They may not be set up properly to set up two joint trusts. The language in here can be very important. And also, you have to fund the trust properly and title them for accounts properly and beneficiaries need to be titled properly for this to be executed the right way. And many times, people might even have the right trust, but they don’t have the right setup on their beneficiaries or account titles to implement this properly.

Steve Lewit: Exactly.

Gabriel Lewit: Okay? It also becomes challenging if it’s not all non-qualified, non-IRA money. If a lot of money is in one spouse’s name and it’s heavily weighted towards one asset, one client versus the other, and you can’t split those up evenly because you can’t just… While both spouses are living, you can’t just take three million from your IRA and give it to the other spouse. It’s got to stay in your name. So, there’s a lot of nuance to estate tax avoidance planning. That’s very hard to navigate on your own. And unfortunately, a lot of estate planning attorneys, they don’t do it either.

Steve Lewit: They don’t. In fact, well, I don’t want to get into estate planning in detail, but a lot of attorneys say that you can’t leave your IRA to the trust, when you really can. But okay, Gabriel. So, one way of avoiding the $4 million is to have a trust. What’s another way?

Gabriel Lewit: Well, we might have to punt on that for a part two.

Steve Lewit: Really?

Gabriel Lewit: Yep. For our show.

Steve Lewit: Oh my gosh. The time has flown.

Gabriel Lewit: Yep. So, sometimes we’ll do part ones, part twos, depending on where the win takes us here on the show.

Steve Lewit: Let’s do part two.

Gabriel Lewit: Yeah, because today we just wanted to introduce this concept of a state estate tax. On our next show, we’ll talk a little bit more. We’ll spend 10 minutes or so talking about some of the other ways that you could avoid paying this. We talked about one of them today, which is setting up trust properly, but we’ll talk about the other strategies that you can employ and get you a little bit more familiarized in this world of estate tax planning.

Steve Lewit: Don’t you love it?

Gabriel Lewit: I love it.

Steve Lewit: Don’t you love it?

Gabriel Lewit: All right, everybody. Well, we hope we were able to entertain you and give some education for you here today on our show. We would love to speak with you about anything we can help answer or give you peace of mind about, whether it’s the Iran conflict, the state tax avoidance strategies, living overseas or domestically, whatever it is that’s on your mind that you’re concerned about, give us a call. We’re here to help.

Our number is 847-499-3330, or you can go to sglfinancial.com, click Contact Us and set up a time to talk with us at no cost at your convenience, anytime.

Steve Lewit: I have nothing to add other than stay well everybody. It’s a pleasure having you listen to us.

Gabriel Lewit: Indeed. Have a wonderful rest of your day, week or weekend. We’ll talk to you on the next show.

Steve Lewit: See you all now.

Announcer: Thanks for listening to Our 2 Cents with Steve and Gabriel Lewit. For any questions about your finances, give SGL a call at 847-499-3330 or visit us on the web at sglfinancial.com and be sure to subscribe to join us on next week’s episode.

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