Client Estate Planning Concerns in Light of Current Tax Proposals

“Top estate planning concerns consistently pertain to creating a tax efficient multi-generational wealth preservation and distribution strategy.

This historically meant drafting durable powers of attorney, executing revocable trusts, having a pour-over will, incorporating giving, dying with expectation of stepped-up cost basis on non-individual retirement account assets, and ultimately leaving IRAs to non-spousal beneficiaries for distribution over their lifetimes.

However, as currently detailed in The White House Fact Sheet: The American Families Plan, with its intention to ‘…eliminate long-standing loopholes, including lower taxes on capital gains and dividends for the wealthy, that reward wealth over work,’ it seems prudent to re-examine contemporary estate plans to include a comprehensive process of tax-conscious living measures one should abide by to enhance distribution efficiency of accumulated means at death.

A formidable hurdle exists in the plan proposal by repealing step to fair market value and replacing it with a $1 million personal capital gains exemption. We advise high-net worth clients with significant capital gains tax exposure beyond this level to thoughtfully plan for a new tax paradigm through strategic giving and managing taxable income by realizing gains up to certain thresholds. Deferring gains and income may no longer be a panacea. Instead, properly sequencing and ordering taxable cash flows while living may become part of the new estate planning normal. 

An irrevocable life insurance trust with an associated paired policy may find new purpose in providing beneficiaries with liquidity to settle a grantor’s capital gains tax liabilities at death. Still, there is congressional pressure to limit common planning techniques within certain grantor trusts. Existing documents may need to be amended or new trusts executed before year’s end to grandfather in current provisions.

2019’s Secure Act requirement for non-spousal beneficiaries to deplete inherited IRA balances within 10 years makes multi-generational IRA income distribution planning key. Especially for pre-72 aged clients and up to certain income levels, yearly partial Roth IRA conversions could serve to reduce otherwise amplified non-spousal beneficiary tax loads. For the charitably inclined, IRA conversion income can typically be offset by funding a donor-advised fund.

Ensuring everything is in order for affluent clients remains tricky until law changes are known. Though estate and gift tax exemption level changes were surprisingly left out of The American Families Plan, we advise clients consult with qualified counsel to consider aggressively utilizing their transfer tax exemptions at today’s historically high levels. Expecting no retroactive 2021 tax impact in final legislation, fourth quarter estate planning attorney meetings will remain imperative, especially if enacted law negates the merit of certain conventional trust planning measures.

Rather than being delivered in advice silos, we are actively collaborating with clients’ other professional advisors to ensure their financial, investment, tax and estate plans complement one another and are comprehensively integrated. We should challenge our perspectives on wealth planning away from maximizing unrealized capital gains and deferring taxable income to better co-exist with these tax reforms. If enacted, incrementally realizing long term capital gains up to certain income thresholds through a calibrated multi-year wealth management approach should provide a beneficial tax reprieve in estate distribution.”

Published in Financial Advisor IQ June 2, 2021: Full Article Here

Chuck Cooper III, CFP®

Wealth Advisor, Managing Partner

StrongBox Wealth