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Politics, Markets Create Super-Busy Tax, Estate Planning Season

Tom Burroughes, Group Editor , January 13, 2021

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Now that the Senate races are over, we take another look at the tax and estate planning landscape in the US, which has already been a busy one, given electoral shifts, market behavior, and very low borrowing costs.

Zero official interest rates, volatile asset prices and an upcoming Democrat administration/Congress – bringing possible tax hikes – are pressuring clients to get estate plans completed quickly. As already reported, the past few months have been among the busiest financial planning seasons in memory.

And last week’s victory for the Democrats in the Georgia run-offs, wresting control of the Senate from the Republicans, gives even more reason for clients to work on plans before any tax changes take place. If there is consensus on any topic, it is that taxes aren’t going down any time soon. (See here for another article about estate tax, and here for wealth managers' reactions to the Georgia results.)

Today’s tax and estate planning landscape is complex: the field is crowded with mind-bending acronyms and terms such as Spousal Lifetime Access Trusts, Irrevocable Life Insurance Trusts, Dynasty Trusts, Grantor Retained Annuity Trusts and Intentionally Defective Grantor Trusts. If these aren’t enough to digest, there are processes such as “Roth Conversions,” and various loans that can be used to manage cashflows and mitigate tax liabilities. 

Possibly the biggest topic this news service hears about is estate tax. In 2017, President Donald J Trump’s administration signed into law a near doubling of the estate tax threshold to $11.18 million (now up to more than $11.5 million) for a single person; and up to $22.36 million for married couples. The change runs until 2025, when the rates fall back unless new legislation is enacted. The 40 per cent top rate remained. Under the current system, the executor must file a federal estate tax return within nine months of a person’s death if that person’s gross estate exceeds the exempt amount ($11.58 million in 2020).

That estate generally includes all the decedent’s assets, both financial (stocks, bonds, and mutual funds) and “real” (homes, land, and other tangible property). It also includes the decedent’s share of jointly owned assets and life insurance proceeds from policies owned by the decedent. Tax rules allow an unlimited deduction for transfers to a surviving spouse, charity or to support a minor child.

Conversations with clients cover three broad lines: Large gifts and the use of the tax exemptions therein; various entities such as Spousal Lifetime Access Trusts (SLATs) and other structures, Jody King, director of financial planning at Fiduciary Trust Company, told Family Wealth Report in a recent call.

The SLAT is a popular entity; another commonly-used structure is the GRAT, or grantor retained annuity trust because the latter is attractive for assets that will appreciate or generate significant cashflow, she said.

Another notable area is what are called Roth conversions, she said.

“If an IRA [Individual Retirement Account] asset will be passing to or for the benefit of family members (either in trust or outright) and if someone’s estate will be subject to federal and/or state estate tax, then converting the IRA to a Roth IRA should definitely be considered,” King said. “Roth IRAs provide for tax free growth (as opposed to tax deferred growth with traditional IRAs) which can be very powerful over time. By converting an IRA to a Roth, the individual triggers ordinary income tax at the time of the conversion. The income taxes paid from non-converted assets reduce the estate of the individual by the amount of the tax, thus lowering the eventual estate taxes,” King continued.

“Conversion [to a Roth structure] also provides a better asset to inherit because the recipient receives an asset that they do not have to pay ordinary income taxes on when they inherit it. For those that don’t have the appetite to pay a lot of taxes in one year, they can do conversions over multiple years by converting some each year up to whatever tax rate or tax amount they are comfortable with."

Kind of blue
The Georgia Senate results last week add new impetus for tax planning, given the likely move at some point for Congress to tax HNW Americans more heavily. 

“The timing of changes is still unknown, but it seems improbable that any change would be made retroactive (although it is still a possibility). Individuals and businesses should prepare to continue their planning efforts early in 2021 to maximize the use of current low-rates before new legislation is enacted,” Joe Roberts, senior wealth strategist at Rockefeller Capital Management, told FWR. 

“With a 50-50 split in the Senate, Democrats can pass legislation through the Budget Reconciliation process, which calls for just 50 votes, and Vice President-Elect Kamala Harris as a tie-breaker. In a tight split, Democrat driven legislation might be less dramatic than previously anticipated as moderate Democrats could be averse to sweeping tax reform,” Roberts said. 

“The new Democratic Congress is most likely to address four tax-related revenue-raisers: an increase in the top marginal individual tax rate to 39.6 per cent (from 37 per cent), an increase in the corporate tax rate to 28 per cent (from 21 per cent), lowering the estate tax exemption level to pre-TCJA amounts (likely $3.5 million - $5.25 million per individual, adjusted for inflation), and an increase on the estate tax to 45 per cent (from 40 per cent),” he continued.

“Items like capital gains and the elimination of basis step-up at death seem less likely in a split Senate. There has been some discussion of a moderate increase in capital gains rates to 24.2 per cent (as presented in President Obama’s 2017 Budget), but much is still unknown. Provisions affecting the Social Security Tax will have more significant hurdles as they require a 60-vote majority and cannot be enacted using the Budget Reconciliation process,” he added. 

Giving it away
Fiduciary Trust’s King spoke about how philanthropy is being affected by the changing political climate – she stressed that it is important to have an overall set of goals rather than be pulled around by tax considerations.

Charity distributions have risen considerably. People can donate up to $100,000 from IRAs in a given year, she noted. “Someone over age 70½ can donate up to $100,000 per year from their traditional IRA to a qualified charity (not a donor advised fund). The benefit to doing this is the person does not have to recognize the amount distributed as taxable income and the amount distributed counts as part of their RMD (required minimum distribution),” she said. 

There are signs of more people wanting go give anonymously, and contributing to existing charities and organizations rather than setting up structures anew, she said. “We offer a Donor Advised Fund (DAF) that helps people with maximizing the tax benefit of their giving along with being able to give anonymously if they so desire.”




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