It is remarkable to see how far the markets have come from their March 2009 lows. As I write this article, the S&P 500 has appreciated almost 80% from its lowest point during the economic crisis. Accompanying the recovery in equity prices is a renewed level of client confidence–and a desire to resume financial planning that had fallen by the wayside. Tax planning, in particular, is poised to be a source of fresh opportunities for wealth management practices during the recovery.
For many, tax planning in 2008 and 2009 was an exercise in determining which losses to harvest from positions that had been decimated. 2010, however, ushered in something that many of us hadn’t seen in some time–capital gains! Although we’re still in the first half of the year, it’s not too early to begin discussing strategies your clients can implement now to combat the tax changes looming in 2011. Higher capital gains taxes, higher income tax brackets, reinstatement of the estate tax, and additional surtaxes to fund government programs appear to be on the horizon. But prudent moves today can mitigate some of the expected tax pain of tomorrow.
Getting reacquainted with charitable planning
A year ago, it was difficult to engage clients in any discussion related to transfer tax planning. As their wealth plummeted, clients were more reluctant than ever to consider giving away assets in an effort to reduce potential estate and gift taxes. Wealth managers everywhere were imploring clients to transfer assets out of their taxable estates while asset values were depressed and interest rates were low. Those who took that advice last year did very well in reducing potential estate and gift taxes; those who did not heed it retained their wealth and enjoyed a feeling of safety.
Today, however, is a different story. Clients are realizing that personal wealth is rebounding and, along with it, the need to reengage in estate, gift, and income tax planning. It’s an especially opportune time to consider charitable planning, which offers an array of attractive features that no other type of planning can provide. By adding a charitable strategy to clients’ financial plans, you can offer them valuable benefits such as:
? Income tax deductions
? Reduction or elimination of estate taxes
? Reduction or elimination of gift taxes
? The ability to diversify appreciated assets in a tax-efficient manner
? An income stream for life or over a term of years
? The satisfaction of attaining charitable goals
You may be surprised to see clients who have never expressed any charitable intent suddenly become philanthropic when they learn of charitable planning’s many advantages.
The return of the charitable remainder trust
While there are a host of charitable planning strategies that clients and wealth managers can use to meet specific needs, the charitable remainder trust (CRT) appears set to regain its position as one of the most popular charitable planning strategies. The CRT’s resurgence is linked to the event I mentioned earlier, the return of capital gains. In a rocky period such as the one we’re emerging from, when asset values are depressed, the CRT loses one of its greatest benefits: the ability to fund the trust with appreciated assets. Now, however, clients can take advantage of the CRT to help diversify appreciated assets in a tax-efficient manner.
For example, many of your clients who recognized 2009 as a buying opportunity have met or are approaching the one-year anniversary of an asset’s capital gain. Assets with such built-in capital gains make perfect funding sources for a charitable strategy such as the CRT.
The CRT may also appeal to clients who fear another turn for the worse. With the memory of the financial meltdown fresh in their minds, many clients are beginning to worry that this rally has come too far, too fast. A CRT strategy may be perfect for clients who wish to protect themselves from the “double-dip recession” some commentators are forecasting.
Among its many benefits, the CRT:
? Allows clients to receive an income tax deduction through the contribution of long-term capital gains assets purchased in 2009
? Serves as a mechanism for diversifying the contributed assets in a tax-efficient manner
? Offers clients an income stream
The tax deduction generated from funding a CRT can provide further tax relief, as assets that are not contributed to the CRT are sold outside of the trust and further diversified. For clients who don’t currently need an income stream, the CRT can be designed to delay the beginning date of annual payments from the trust to some point in the future, such as the client’s retirement.
Plus, as a tax-exempt entity, the CRT allows trust assets to grow tax-deferred until paid from the trust–an excellent way to supplement a retirement income plan.
The impressive recovery in equity prices has presented planning opportunities that were not available prior to the financial turmoil of the past few years. Given the current economic and legislative environment, now’s the time for wealth managers and their clients to reacquaint themselves with charitable planning. Don’t put off the chance to enhance clients’ wealth management plans through charitable planning strategies such as the CRT.
Gavin Morrissey is the director of advanced planning at Commonwealth Financial Network, in San Diego, California. He can be reached at [email protected].