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3 Tax Planning Strategies to Consider Now

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With less than six months left until the end of year and less than four months before a presidential election, now may be the perfect time for financial advisors to do some tax planning for the clients.

If former vice president Joe Biden wins the presidential election and Democrats take control of the Senate or even come close enough to wielding more power than they have now, federal tax policies are likely to change, and that could impact your clients’ estate and retirement planning, along with their investments.

1. Prepare for Potential Tax Changes

Biden has proposed raising the top marginal income tax rate from 37% to 39.6%, which was the rate in 2017; increasing the Social Security tax for incomes above $400,000 and raising the long-term capital gains tax rate for those with incomes over $1 million from 20% to their marginal income tax rate. His unity tax force platform, developed with Sen. Bernie Sanders, D-Vt., would lower the amount of assets exempt from estate tax, currently $11.58 million per person, “to the historical norm,” presumably somewhere between $4 million and $5 million.

“I’m saying to my clients, ‘Let’s be ready for a major change before the end of the year,” said Steven Siegel, one of several participants in a Best Planning Ideas panel. “This is the time to get an appraisal if you want to transfer your business.”

It’s also a good time for clients with $11 million or more as individuals or over $23 million as a couple to consider using their unified estate and gift tax exemption, according to Siegel, who expects Biden would reduce the exemption to $3.5 million to $5 million. “If you don’t use it you may lose it. Be aware of the sensitivity of those clients who want to make significant gifts.”

He suggested that instead of each member of a couple giving around $5 million now, which may leave no exemption in the future, one member of the couple gives $10 million now, leaving the other member of the couple to claim an exemption in the future, at whatever level that is. “If you have wealthy clients that have a significant desire to make a transfer, don’t take a wait-and-see attitude,” Siegel said.

2. Roth Conversions

Another move advisor clients may want to consider before year-end is converting their IRA to a Roth IRA. If income tax rates rise next year, a conversion will be cheaper this year. In addition, clients may have an even lower income now because of job or salary cuts during the current economic downturn, and they may have more assets to convert because required minimum distributions have been suspended for 2020 by the CARES Act. They can even add to those assets by rolling back any RMD distribution taken before the legislation was passed.

“To Roth or not to Roth is a big discussion out there,” said panelist Michael Kitces, head of planning strategy for Buckingham Wealth Partners and author of the Nerd’s Eye View blog.

3. Review Clients’ IRA Trusts

Trusts are another issue that advisors should be reviewing this year because of the pandemic, which has claimed some lives very suddenly, and recent changes enacted by the Secure Act. 

Under the legislation, some IRA distributions can no longer be stretched over the lifespan of a beneficiary and are limited to a 10-year distribution period. Only eligible designated beneficiaries can continue to stretch out the distribution over their lifetime. They include the IRA owner’s spouse, minor children, a disabled individual, individuals no more than 10 years younger than the decedent and a conduit trust if all the beneficiaries of the trust meet the requirements to be an eligible beneficiary.

If that’s not the case, the trust is automatically subject to the 10-year distribution rule. And if the language in the trust limits distributions to only the RMD, then the entire trust must be distributed all at once 10 years after the trust owner’s death, which could have serious tax implications.

“Advisors need to ask two questions: How fast does the money have to come out from the IRA to the trust and how fast does the money in the money in the trust go out to the beneficiaries?” Jeffrey Levine, director of advanced planning at Buckingham Wealth Partners, tells ThinkAdvisor.

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