Say what you will about 2020, this chaotic and trauma-filled coronavirus year. But between now its end, advisors have a rare opportunity to proactively engage our clients in tax and estate planning issues that will impact them and their families for decades to come.
The inciting event, of course, is the upcoming presidential election.
Although research suggests that whoever sits in the White House or the makeup of Congress has little bearing on capital markets’ long-term returns, there is a real possibility that current tax policy could be subject to significant change in 2021.
If you believe, as I do, that tax rates may rise in the wake of the government’s massive stimulus plans and that a potential Democratic political regime will divide up the economic pie differently, paying taxes now rather than later could save your clients and their families a lot of money down the road.
Taking full advantage of the tax code can be a matter of timing — but what exactly is that timing?
I would suggest the most relevant countdown date for advisors and investors is Dec. 31, which is how long we can be certain the U.S. tax laws will remain unchanged. Granted, the health crisis will continue to dictate policy agendas until the coronavirus is truly under control. I further concede that any tax law changes might be delayed next year over concerns that tax revenues increases might undermine our economic recovery.
But historically a political party in full control usually strikes while the iron is hot, and that may very well be the case in 2021. So with current polls pointing to a Biden victory, and Democratic control of both houses of Congress looking increasingly likely, the financial planner in me has been giving serious thought as to what our clients should be doing before the clock strikes midnight Dec. 31. With only a few months left in the year, preparing for this possibility is a discussion every advisor should be having with their clients.
With that in mind, here are a few opportunities your clients may be able to take advantage of:
- Consider converting assets held in a traditional tax-deferred IRA account to a tax-free Roth IRA. This is a play on longevity, so in my experience is best utilized for those under age 60 and done under the watchful eye and guidance of your client’s tax advisor.
- If realizing long-term capital gains plays a significant role in how your client will fund their retirement lifestyle next year, it may be cheaper to take those gains in the 2020 tax year rather than wait until 2021.
- Harvesting positions in the taxable portfolios of clients to help offset/reduce any realized gains they may have this year is prudent — try to keep excess losses to $3,000, as losses beyond that figure carried into future tax years may be less valuable.
- Suggest your clients make non-taxable gifts to their beneficiaries (maximum $15,000 per recipient.) They can also give an unlimited amount directly to health care or educational institutions on behalf of anyone they care about.
- If your clients welcomed a new child or grandchild into the world this year, Section 529 college savings plan rules allow them to front-load the equivalent of five years in annual gifts — or $75,000 ($150,000 per couple) — to this type of tax-free account. Even with escalating college costs, this kind of gift would fully provide for even the most expensive college education.
- Clients can establish trusts to benefit their beneficiaries or favorite charitable organizations while low interest rates make these strategies particularly attractive. Commonly referred to as GRATs and CLATs, these strategies will require the expertise of a qualified attorney.
- Help a loved one with a formal loan. While IRS lending rates sit at record lows the allowable loan rate in June was 0.18%. Some families can use this kind of loan as a tax-efficient way to transfer wealth.
- Maximize estate exemption thresholds, which in 2020 are $11,580,000 per individual and $23,160,000 per couple, as these amounts are likely to shrink with any tax legislation. Assets transferred by using these exemptions by year-end 2020 may not have much risk of a clawback.
This pandemic has disrupted all of our lives in meaningful ways and clients are overdue for a break from the everpresent “COVID fatigue.” Still, I remain hopeful that it also presents advisors with an opportunity to help their clients come out of this crisis financially healthier, in many ways, than they may have been when the year began.